Wednesday, February 25, 2015

Key points of Article on ABA Webcast on Offshore Accounts (1/25/15)

Tax Notes Today has an article on a webcast yesterday on the offshore account initiatives.  Andrew Velarde,  No Acknowledgment of Filing Coming for Streamlined Process, 2015 TNT 37-4 (2/25/15) (no link available).  The article is principally devoted to comments related to the Streamlined procedures.  The key points that interested me are:

1. There is and will be no acknowledgment of filing following entry into the Streamlined procedures.  The cashing of checks is not an indication that the IRS has accepted the certification of nonwillfulness.  If the taxpayer desires closure, the OVDP program can be used.  JAT comments: Of course, the OVDP requires income tax beyond years that would be open if the taxpayer is nonwillful and requires a higher offshore penalty for those joining OVDP after announcement of the Streamlined procedures, so the cost of getting closure through OVDP is pretty great.  The taxpayer could opt out of OVDP and take an audit, in which case if the taxpayer is nonwillful, the opt out audit should produce a result perhaps even more beneficial than even the Streamlined result.  But it will be a hassle.  So, those wanting the benefit of Streamlined are probably better off to just do the Streamlined and just accept the uncertainties involved.

2. There is no benefit to requesting pre-clearance in OVDP and then pursuing the streamlined treatment.  The notion apparently is that, if the taxpayer is non-willful, he does not need the placeholder benefit that pre-clearance might offer.  JAT comments:  My understanding was that practitioners were using the OVDP pre-clearance followed by streamlined to have an argument that they should get streamlined if some event occurred between the pre-clearance and the submission of the streamlined documents.  But, if the taxpayer really is nonwillful, ultimately bad results would not obtain even with that interim event.  And, if the taxpayer is willful, the bad result can still obtain anyway.

3.  The article does have this from Kathryn Keneally, former DOJ Tax AAG:
Keneally also warned practitioners they could be sending the wrong message when they use pre-clearance for their clients when it isn't needed. 
"If there's a pre-clearance and then there isn't an OVDP filing, that's also saying something to the government," Keneally said. "If . . . there are treaty request responses that actually disclose those accounts, or there's a whistleblower, and that information comes forward, you're at least risking some investigation into why you tr[ied] the pre-clearance and then [did] not come in, because we have this mismatch," she said, adding that "it is not a free pass" to take such action.
JAT comments: I am not sure that is inconsistent with the point in paragraph 2.  I would think that the more immediate risk is that the IRS might use the pre-clearance with failed OVDP submission (nothing further done in OVDP) as a basis to do at least preliminary work for an audit.  And, of course, the IRS could use information from other sources to start an audit.  But, if the taxpayer is really nonwillful, an audit should not be feared, however, the IRS gets information.  And, if the IRS gets information that indicates willfulness, then the taxpayer should have joined and completed the OVDP program.


  1. Jack, what in your opinion, is the threshold between doing a simple quiet disclosure or going for streamlined domestic. I have a client originally from India who moved to the US in 2006 and recently became a US citizen. He sent some money to India (around 120K) in 2008/2009 and then another amount ($260K) in 2011/2012 with the intent of purchasing property but could not close the deal. He also had some previously earned savings in India This money was left in bank accounts and some was invested in Indian mutual funds. He also has a small rental income from a jointly held property in India ($3000/year) He was not aware of including this India income in his US tax returns (which he has been filing regularly) or about filing FBAR and 8938. He has been filing tax returns in India for this income. his total holding in India is around $450K. If he opts for streamlined he would have to pay the 5% penalty which for him could be considerable (around $23K). What, in your opinion, is the potential audit/penalty risk for him to pursue a quiet disclosure amending tax returns for the last 6 years and filing the delinquent FBARs.

  2. Is there any info on how often and under what circumstances the IRS does apply multiple non-wilful penalties, both in terms of accounts and years? The only publicised case seems to be the offshore gambling accounts last year.

  3. Thanks Jack. From my reading of the streamlined program, anyone filing under this program should also be prepared for an audit since there is no acknowledgment or closure. Is there any data yet on how the streamlined program is faring so far in terms of acceptance and/or audit requests. Similarly is there any directional data on the volume QDs being audited. Your points are perfectly valid because on the one hand this persons case seems to be very straightforward. On the other hand due to the number of accounts (6 bank accounts plus mutual funds) the penalty calculation would be harsh as well.

  4. I am not aware of any other publicly available data. I am aware of one case where the IRS insisted on it as a way to get something out of a failed willful penalty.

    Jack Townsend

  5. I've been saying for a long time that the OVDP was a boldfaced lie, sort of like the witch with the candy house seducing the little children into her oven. It was never an amnesty program, prosecution was never off the table. You waive all of your constitutional rights, agree to things that under the law, the government has no right to go after and in exchange you what do you get again? The OVDP documentation (at least the old programs before 2014) said very clearly that criminal prosecution was still on the table. So by fully cooperating you hand them the rope and they decide whether or not you're juicy enough to actually string up. Problem is, you don't know if you're juicy or not, that's for them to decide and quite frankly, the risk is far to great. We already know their threshold for "willfulness" is a low bar that basically encompasses everyone. Did you have a foreign account and check no on your tax return? Congratulations, that was enough to be willful! Case closed.

    The problem with these initiatives is that they aren't about justice or the law, its about shaking people down and scaring all the little sheep. We know this because the government has never given people a true "way out", a real way to actually get into compliance and get back into the system. From the information above and other things I've read, the supposed "streamlined" version doesn't change anything. Taxpayers who for whatever reason didn't get their documentation correct, are still just as screwed as ever because the government has left them with no decent alternatives. The closest thing to a way out is probably a quiet disclosure, but in doing so the act of filing amended returns and back FBAR forms is inherently an admission of guilt that can be used in a prosecution. It's the closest you get though to coming clean without forfeiting your rights as an American.


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