IRS Documents On OVDI/P From FOIA Request (11/17/14)

Dennis Brager, an outstanding tax practitioner active in the offshore financial account practice, has posted to his web site the documents he received from a FOIA request.  The web site with links to the documents is titled Previously Unreleased IRS Guidelines for FBAR Audits, here.

Brager's firm posted an article about the FOIA request and documents titled Brager Tax Law Group Obtains Over 6,500 Pages in Freedom of Information Act Request for Offshore Voluntary Disclosure Program Documents (Yahoo Finance 11/12/14), here.

I haven't had time to review the documents.  A reader requested that I post a blog entry so that readers who do have the opportunity to look at the documents can comment.  I will post my comments when and as I have time to read the documents.

Time for an IRS Ass Kicking? Herein of Lack of Honor and a Dumb Decision in OVDI/P and Streamlined (7/28/14)

I have said  before that the IRS has, in broad concept, a general program (within the program some variations) to get taxpayers back into the system with some cost.  The problem has always been is whether the cost is appropriate.

I won't go through the IRS's implementations of the program since it started in 2009.  Readers of this blog know that.  Of course, what the IRS did not tell from the beginning so that the ordinary lay reader or, let's say, the ordinary taxpayer (who is the customer the IRS claims it serves) could understand that the OVDI/P inside penalty was really meant for the bad actors -- those who intended to violate known legal duties (FBAR and income tax).  What does intend to violate a known legal duty mean?  Actually, the IRS customer would not really know that, at least to the extent required to take the legal risk that the IRS was claiming they might suffer -- criminal prosecution, multiple year FBAR willful penalties, etc.  So, the design of the program forced these intimidated customers to seek legal counsel at great expense, when even most legal counsel could only make somewhat better analyses of the situation, but not perfect because of the uncertainties in application of the concept of willfulness in conjunction with the IRS threats of dire consequences.  Who knows what willfulness is except in the eyes of the beholder, and the IRS was threatening, threatening, threatening?

So, a lot of innocent (well, clearly on the innocence side of the continuum) joined OVDI/P, but because of the IRS continual saber rattling (aka threats), many of those innocents were afraid to opt out, and many lawyers were afraid or unable to counsel them as to their real risks on opt out.  (I have to admit that I have not been reticent to recommend opt out in appropriate cases, but the dicey nature of this exercise is the fact that, in my absolute -- on any scale -- best opt out case, the IRS asserted multiple year FBAR willful penalties; the IRS won't prevail, but the IRS is hell-bent to force angst and processing costs to force my client into litigation that, in my best judgment, the IRS can't win.)  The point though is that the IRS forced through threats an exercise that innocent taxpayers should not have to endure.

Now, as best I understand the recent iteration of the Streamlined program, the IRS realized that it had forced through fear taxpayers into the OVDI/P when they could opt out and get better results.  Why force them to join in the first place when a shortcut implementation such as Streamlined can get somewhat close to the right result?  Well, now the IRS seemed to be finally talking to their customers in a language they could understand.  So, one could ask, why wouldn't it be an easy decision for the IRS to let taxpayers in OVDI/P who had not yet signed a Form 906 to proceed fully under Streamlined.  Well, it appears, that the IRS wanted to keep all of the income tax, penalties and interest for closed income tax years and penalties for open years that it was not entitled to, while giving a partial benefit of the Streamlined program (the 5% penalty applied to innocents, many of whom should owe no penalty).  Basically, the IRS wanted something that it was not entitled to.

Oh, sure, the IRS says that, well, the taxpayer / customer unhappy with its lesser Streamlined benefit via transition, can opt out and get a better result if he or she is entitled to a better result.  That sounds well and good but seems to me to be bullshit, of the same genre smoke that was hawked by tax shelter promoters promoting bullshit tax shelters, but in reverse.  Basically, the message the IRS is sending -- intentionally or unintentionally, but by now knowingly -- is that those people who got into the program early to get right with the IRS will be treated more harshly and subjected to greater processing costs, time, angst, etc., than those who sat back and waited on straight Streamlined or proceeded otherwise (quiet disclosure, etc.).

Taxpayer Advocate Report on OVDI/P's Burden on Benign (Relatively) Taxpayers (1/18/14)

In the recently issued Taxpayer Advocate FY 2014 Objectives Report to Congress and Special Report to Congress, here, the Taxpayer Advocate included a report titled OFFSHORE VOLUNTARY DISCLOSURE: The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Made Honest Mistakes, here.

Key Excerpts (footnotes omitted):

Definition of the Problem: 

* * * Designed for “bad actors,” these programs burdened “benign actors” who inadvertently violated the rules by requiring them to “opt in and opt out” to get a fair result. The programs were punitive, charging average penalties of more than double the unpaid tax and interest associated with the unreported accounts. Because those opting out faced prolonged uncertainty and a risk of even more severe penalties, some agreed to pay more than they should, as described in prior reports. 

Unlike those who remain in the programs, those who opt out are audited, which essentially penalizes them for coming forward. On average, the IRS assessed penalties of nearly 70 percent of the unpaid tax and interest in the audits of those who opted out. Thus, while those who opt out generally face smaller penalties than those inside the OVD programs, they still face very significant ones. 

For those who remained in the 2009 program, the median offshore penalty applied to those with the smallest accounts (i.e., those in the 10th percentile with accounts of $87,145 or less) was disproportionate — nearly six times the median unpaid tax. Among unrepresented taxpayers with small accounts it was even more disproportionate — nearly eight times the unpaid tax. It was also disproportionately greater than the median penalty paid by those with the largest accounts (i.e., those in the 90th percentile with accounts of more than $4.2 million) who paid about three times the unpaid tax. Given the harsh treatment applied to those with small accounts, some have made “quiet” disclosures by correcting old returns and others have begun to comply prospectively — in each case without subjecting themselves to the lengthy and seemingly-unfair OVD process. 

While 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements,8 the IRS received only 807,040 FBAR submissions in 2012.9 Yet the FBAR audit rate is less than one quarter of one percent. Thus, the IRS has likely failed to address significant information reporting noncompliance.

Reader Question on Temporary Fund Deposit and IRS OVDI/P Penalty (9/25/13)

I recently posted on this blog a series of examples that I think highlight some perhaps unintended consequences in the inside (miscellaneous or in lieu of) penalty in OVDI/P, particularly as a result of interpretations that result in inequity.  See Elimination of Duplications and Short Term Deposits in Miscellaneous Penalty Base - FAQ 37 and Extrapolations (Federal Tax Crimes Blog 9/10/13), here.

A reader has asked that I posit a question to fellow readers who hopefully will offer some feedback either by way of comment or by emailing to me (jack@tjtaxlaw.com) and I will forward the email to the person making this request.  The question is:

Have you been able to exclude from the OVDI/P penalty base temporary funds parked in a foreign bank account?  By temporary, I mean that the funds are in the account only for a day or two and did not earn any interest.  The funds came from fully U.S. tax compliant sources and went to a fully U.S. tax compliant destination after the temporary stop in the noncompliant foreign account.

Readers who can and will answer that question, please do so in the ways indicated above.  If possible, the reader asking this question would prefer to be able to establish contact with the readers providing answers (via emailing me), but if the authors desire anonymity, they can still provide meaningful feedback by making comments to this blog.

Article on Real People Consequences of the Rigidity of OVDP/I (7/16/13)

Tax Notes has a great article on the plight of Marie Sapirie, The Personal Impact of Offshore Enforcement, 140 Tax Notes 187 (July 15, 2013), here.  I offer only the opening excerpts to grab readers' attention if interested in this area.

They often refer to themselves as minnows. They are -- or, in some cases, were -- Americans who reside abroad and who had undisclosed bank accounts in their local jurisdictions. In an attempt to become compliant, some found themselves entangled in the offshore voluntary disclosure programs (OVDPs) that were intended for larger and more culpable taxpayers. 

Some were U.S. taxpayers who intentionally hid money from the IRS in foreign bank accounts. Some continue to hide assets. But not everyone who entered the 2009 or 2012 OVDPs or the 2011 offshore voluntary disclosure initiative (OVDI) was intentionally concealing large sums and purposely evading tax. 

The stated objective of the offshore disclosure programs was to bring taxpayers "that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax" into compliance. However, the language in the FAQs for the programs appeared to apply generally to anyone with an undisclosed foreign account, regardless of circumstances. 

U.S. citizens who have moved abroad and have bank accounts there often may not fit the profile of a tax evader. This set of taxpayers typically faces unique and diverse filing and reporting challenges. Those who wish to be compliant frequently have limited access to professional assistance and have difficulty determining the appropriate tax treatment of specific foreign accounts. Since the UBS scandal opened the floodgates of offshore enforcement in 2008, those taxpayers have sometimes lived in fear of owing large, and perhaps financially devastating, penalties for unwitting compliance mistakes. Some taxpayers have legitimate reasons for owning foreign bank accounts, and their failure to declare them was merely negligent, as National Taxpayer Advocate Nina Olson has pointed out.

After that, the author presents some real world taxpayers who have journeyed through the process, often with many twists and turns, but usually with what appears effort and angst which, in my view, are not compelled by systemic revenue imperatives.  The IRS has appeared slow to correct as these glitches in the offshore initiatives began to present themselves.

I hope the IRS is listening / reading.  I also hope that readers encountering similar situations will find some hope and strategies for action.

P.S. I have not had time to read the article in sufficient detail to collect my thoughts and present more detailed analysis succinctly here.  I will be back later.

A Stupid -- At Least Unfair -- IRS OVDI/OVDP Trick; Denying Overpayment Credit for Barred Years (8/13/12)

I write to rant about a practice inside the OVDI/OVDP civil penalty structure.  I start with the relevant Code sections, 6501, here, and 6511, here.  Section 6501(a) provides a 3 year statute of limitations for assessments.  Section 6501(c) provides certain exceptions to the 3 year limitations on assessments.  The key exception for present purposes is the Section 6501(c)(1) "a false or fraudulent return with the intent to evade tax," for which there is no statute of limitations.  (I ignore the 6 year statutes of limitations that might apply, and assume for present purposes they do not apply.)  Section 6511(a) provides a statute of limitations for refunds.  Basically, the taxpayer filing a timely original return and paying the tax has 3 years in which to file a claim for refund of the tax.

The OVDI/OVDP programs have involved a lookback window from 2003 forward.  (I ignore the possibility of a later starting date under 2012 OVDP but even if a later starting date were involved, the concepts discussed in this blog would still apply.)  The taxpayer is required to file amended returns during that lookback period and pay all applicable taxes.

Commenters to other blog entries have noted that, if there are refunds due for years for which refund is barred under the above rules, the IRS will not give the taxpayer credit for those refunds against taxes reported on the amended returns for years in the lookback window.  Here is an example:

2003 – additional tax reported on the OVDP/OVDI amended return - $1,000.
2004 – refund of tax paid with original return but claimed for first time on OVDP/OVDI amended return – ($1,000)
2005 – additional tax reported on the OVDP/OVDI amended return - $1,000.

Assume the years 2003-2005 are closed for assessments and refunds.  As to assessments, assume that the IRS has not made a specific finding of fraud as to the taxpayer and, should it investigate, could not prove fraud by clear and convincing evidence so as to invoke Section 6501(c)(1).   In this case, the IRS will not give the taxpayer credit for the $1,000 overpayment for 2004, even though it collects the underpayments for 2003 and 2005.

National Taxpayer Advocate Report to Congress (6/27/12)

The IRS has published the National Taxpayer Advocate Report to Congress (6/30/12), here.  Here are some excepts related to the NTA's issues with the IRS Offshore Voluntary Compliance initiatives (Report pp. 26 -29 (footnotes omitted)):

G.  TAS Will Continue to Advocate that the IRS Modify the Offshore Voluntary Disclosure Program so that People Who Made Honest Mistakes Can Correct them Without Fear of Excessive Penalties 

In the past few years, the IRS actively promoted the 2009 Offshore Voluntary Disclosure Program (OVDP) and the 2011 Offshore Voluntary Disclosure Initiative (OVDI) . These initiatives allowed people who failed to file a Form TD F 90—22 .1, Report of Foreign Bank  and Financial Accounts (FBAR), reporting foreign accounts and the income from those accounts to settle with the IRS by paying a single “offshore” penalty instead of several other penalties that the IRS might seek to apply, including severe civil and criminal penalties designed for willful violators.  However, these initiatives were not promulgated through issuance of published guidance in the Internal Revenue Bulletin or even in the Internal Revenue Manual (IRM) .  Instead, the IRS published and then often updated and revised the terms of these initiatives on its website.   In the 2011 Annual Report to Congress, the National Taxpayer Advocate discussed her concerns about the “bait and switch” approach the IRS took in administering the 2009 OVDP and recommended several actions to restore IRS’s credibility among taxpayers and practitioners and promote fair tax administration based on the generally accepted concepts of due process, transparency, and procedural fairness.

Specifically, the IRS announced that “[U]nder no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes,” prompting those whose violations were not willful to enter the program.  On March 1, 2011, more than a year after the 2009 OVDP ended, the IRS issued a memo suggesting it would no longer consider whether a taxpayer would pay less under existing statutes .  Those with inadvertent violations could either agree to pay more than they should or “opt  out .”  Given the confusion surrounding what penalty would apply outside of the program, many agreed to the offshore penalty.  Continuing concern that the IRS may apply excessive penalties for inadvertent violations has generated public outrage among those with foreign accounts, such as U .S . citizens living in Canada. 

Rettig Article on OVDI 2012 (6/7/12)

Charles P. Rettig, here, has produced another worthy read.  Charles P. Rettig, The 2012 IRS Offshore Voluntary Disclosure Initiative (Journal of Tax Practice and Procedure (February-March 2012), here.  I apologize to readers for the overdue posting.

The article is mostly a review of the history of the offshore initiative with a peek into where it is going.  Excerpts from the peek into the future are (emphasis supplied in bold by JAT):

Since the 2012 OVDI asserts an offshore penalty based on foreign financial accounts and asset valuations, for many with smaller financial account values the aggregate offshore penalty determination, even for multiple years, may likely be less outside the OVDI. Indications are that those opting out will be treated fairly, based upon any unique factual scenario. For those participating in the OVDI, is an “opt out” based on a unique factual scenario a viable alternative to the OVDI? 

There are rumors regarding ongoing “John Doe” summons activity seeking to force foreign financial institutions to deliver account-holder information to the U.S. government as well as possible indictments of foreign financial institutions. Recently, several foreign institutions have advised their account holders to consult U.S. tax advisors regarding the IRS offshore voluntary disclosure program and their U.S. tax reporting relating to their foreign financial accounts. It is reasonable to assume that such institutions will take whatever action is necessary to avoid being indicted, beginning with the delivery of information regarding account holders to the U.S. government.

IRS OVDI: Holding the IRS to Proper Payment Application (4/19/12)

The following is a guest blog written by Asher Rubinstein, Esq., whose web site is here and his bio information is here.

IRS OVDI: Holding the IRS to Proper Payment Application

by Asher Rubinstein, Esq.

It has been said that the 2011 Offshore Voluntary Disclosure Initiative (OVDI) corrected many of the hiccups of the 2009 Offshore Voluntary Disclosure Program (OVDP).  For instance, midway during the 2009 program, the IRS began to enforce PFIC tax methodology, required taxpayers to sign new and revised Powers of Attorney, required taxpayers to sign statute of limitations waivers, and transferred and re-transferred case files to IRS agents across the country, all of which caused confusion and delay in the resolution of OVDP cases.  In addition, the IRS revoked OVDP FAQ 35, to the detriment of many taxpayers who entered the OVDP in reliance upon FAQ 35.  By the time the 2011 OVDI program was introduced, the IRS seemed to have standardized and centralized its voluntary disclosure procedure, building upon the lessons learned during the OVDP.

However, as more OVDI cases now head toward resolution, it appears that the IRS is again wavering in certain policy decisions, again to the detriment of taxpayers.

Under the 2009 program, there were months of back-and-forth communications between IRS agents and taxpayers, as the IRS issued multiple Information Document Requests (IDRs) for the same case.  Once the taxpayer answered the questions in the IDR and provided the documents requested, the IRS would process the answers and documents, and then issue a new IDR, with additional questions and requests for documents.  This pattern was often repeated again and again, causing months of delays in the case.

Thus, under the 2011 OVDI, all documents were due in the initial submission, reducing the likelihood of a back-and-forth.  Along with the complete OVDI package (consisting of amended returns, FBARs, OVDI forms, etc.) taxpayers had to include payment of back taxes, interest and accuracy penalties.

Accordingly, for our OVDI clients, we submitted payment for each year on a separate check, noting the applicable year on each check.  Our cover letter also included a year-by-year itemization of tax, interest and penalties being paid, and corresponding check numbers.  We addressed tax liability, interest and accuracy penalty on a year-by-year basis and requested that the IRS apply the payments as we specified.

Open Forum Comments to Congress and IRS Regarding Tax Administration for Offshore Accounts (4/9/12)

This blog will offer a forum for readers of this blog to offer their comments regarding the administration of the the tax laws for offshore accounts, and specifically the IRS's offshore voluntary disclosure programs.  The hope is that some Congress members (or their staffs) and the IRS policy makers will read the comments and, to the extent that they state legitimate concerns, address those concerns.

Readers of this blog have made a number of comments that are worthy of consideration.  Unfortunately, they are scattered in various earlier blogs.  I do not have the time and patience to try to collect and repost those earlier comments.  So, I urge readers to restate their comments here.  Hopefully, with reflection, the comments can be stated more compellingly now.

I urge readers posting comments to consider them very carefully.  My goal is to offer readers an opportunity to post comments that have been well considered and well presented.  Please consider the intended audience for the comments -- policy makers who can affect the future administration -- and how best that the comments can be received and considered by that audience.  Your job is to persuade them that you are raising legitimate concerns that they should consider and should go out of their way to redress.  Polemics and ad hominens are not persuasive; indeed, as I note in the Rules for Comments, I will not approve intemperate comments.  Please moderate your comments for maximum effectiveness.

Please feel free to express the angst you have felt in considering your circumstances and what options to take, as well as the angst you have felt as you were processed through the voluntary disclosure program.  If you feel you have been treated unfairly, please state that.  For example, many of the persons who joined one of the programs are persons who many refer to as minnows and who should opt out of the program they joined for purposes of the civil cost results, but the IRS had made the obtainable results on opting out a black box where the prospect of draconian costs and uncertainty strike fear in taxpayers.  Angst about this  should be expressed to let these decision makers know that much of this is really counterproductive.

Thank all of you for your interest in this blogs and your comments to the various blog entries.

Jack Townsend

Shulman Recounts His Tenure and Comments on Offshore Initiatives (4/6/12)

IRS Commissioner Shulman has announced that he will not accept a second term.  See  Richard Rubin, IRS Commissioner Says He Doesn’t Want Second Term (Bloomberg 4/5/12), here.  In a speech, he recounted the IRS's achievements during his term.  Prepared Remarks Commissioner of Internal Revenue Douglas H. Shulman before the National Press Club (IR-2012-42 4/5/12), here.  Among the comments were the following regarding the IRS's foreign accounts initiatives:

Both corporations and individuals operate in the global economy. For example, many individuals have global exposure through their investments and 401Ks. Yet, this fundamental shift to a more global economy has created a real set of challenges for the IRS. On the individual front, we have made putting a big dent in offshore tax evasion a major priority. 

We view offshore tax evasion as an issue of fundamental fairness. Wealthy people who unlawfully hide their money offshore aren’t paying the taxes they owe, while schoolteachers, firefighters and other ordinary citizens who play by the rules are forced to pick up the slack. 

Over the past four years, we have significantly increased our resources and focus on offshore tax evasion, and the results have been substantial. We upped the ante in a meaningful way with our work on Swiss financial institutions – where for the first time in history, a bank secrecy jurisdiction turned over thousands of names and account numbers. 

As we increased our enforcement efforts and gained significant momentum, we gave taxpayers a chance to come in voluntarily and avoid going to jail. In a typical year, we used to get 100 or so taxpayers who used our voluntary disclosure program. For this program, we thought that figure would rise to maybe 1,000.

Experiences Inside OVDP / OVDI #2 (4/4/12)

I am creating a new blog for this subject because the first one is getting overloaded (over 300 comments) which means that, depending upon browser and speed of connection, some people are unable to view all comments.

The original Blog, titled Experiences Inside OVDP / OVDI (9/14/11), is here.

Just a reminder, this blog subject for users to share, by their comments, their experiences inside the OVDP / OVDI programs.  I know the IRS touts that there is little flexibility inside these iterations of the voluntary disclosure program, and that has concerned the practitioner and taxpayer communities.  However, I suspect that, in extreme cases, accommodations may be made inside the program without the necessity of opting out to obtain the just and fair result.

So, I encourage readers to post their experiences here to help persons in the program, particularly those who are not represented, to take affirmative steps, to avoid pitfalls or just to obtain some comfort from others' experiences.  Or even some amusing anecdotes "inside the program," if any, could be helpful.

Thanks,

Jack Townsend

Addendum 4/5/12:  In the first comment to this version # 2 blog immediately below, Just Me shares a link to an excellent and lengthy discussion of his journey in OVDP.  The link to that discussion at the Isaac Brock Society page is here. I strongly recommend that discussion.  As Just Me says in the comment, a lot of the story has been told in multiple threads on comments to various blog entries here.  Thanks to Just Me for pulling all this together and making it available.

Addendum 4/19/12; as amended on 4/21/12:  I previously had a link to a blog that offered information about the IRS's application of the non-willful penalty on audit.  I have subsequently determined that the information was not materially different from the IRM provision and felt that it would be better to link to the IRM provision rather than to the secondary source.  The IRM provision is Exhibit 4.26.16-2  (07-01-2008) Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004, here.  (See the table named Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004 - Per Person Per Year.  Readers should remember that, upon a showing of reasonable cause, the FBAR penalty may be avoided altogether.  See my prior blog titled IRS Guidance on U.S. Persons with Foreign Assets and, Coincidentally, Quiet Disclosures on FBAR Delinquencies (12/9/11), here.  I should also note that, based on anecdotal information I have received from some practitioners, this Guidance is not rigid.  Persons with compelling stories to tell can get substantially less than the Guidance suggests or even no penalty.

"Opting Out" #3 (4/4/12)

At the request of readers who having difficulty accessing the comments and replies because of the large number of them, I start up another in the series on "Opting Out."

The two earlier posts with comments and replies in this series are

1. "Opting Out" of OVDI and OVDP; What is Really Happening? (12/12/11), here.
2. "Opting Out" #2 (3/2/12), here.

If readers use this new blog to comment or reply to comments on either of the first two blogs, it will be helpful if you cut and paste the material that you refer to so that the reader can understand the current comments and replies.

I also include below the following from #2:

Addendum 4/19/12; as amended on 4/21/12:  I previously had a link to a blog that offered information about the IRS's application of the non-willful penalty on audit.  I have subsequently determined that the information was not materially different from the IRM provision and felt that it would be better to link to the IRM provision rather than to the secondary source.  The IRM provision is Exhibit 4.26.16-2  (07-01-2008) Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004, here.  (See the table named Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004 - Per Person Per Year.  Readers should remember that, upon a showing of reasonable cause, the FBAR penalty may be avoided altogether.  See my prior blog titled IRS Guidance on U.S. Persons with Foreign Assets and, Coincidentally, Quiet Disclosures on FBAR Delinquencies (12/9/11), here.  I should also note that, based on anecdotal information I have received from some practitioners, this Guidance is not rigid.  Persons with compelling stories to tell can get substantially less than the Guidance suggests or even no penalty.

IMPORTANT ADDENDA

1.  A reader has posted opt-out documents here;  I think the author -- with the pseudonym of Moby -- has done a particularly good job with his opt out request.  Accordingly, I have bookmarked it for easier navigation and post it here.  I encourage readers who are considering opting out or are in the process of making submissions in support of lesser penalties in audits (whether on opt out or otherwise) to look at this document.  (Note that the bookmarks are in the pdf file which can be viewed by downloading the pdf document.)

2. Many of the comments posted on this blog and its related earlier blogs (see above) are worthy of being posted (perhaps with some moderation) to the blog titled Open Forum Comments to Congress and IRS Regarding Tax Administration for Offshore Accounts (4/9/12), here.  I would like to consolidate appropriate readers comments there if possible, so encourage the commenters to consider doing that.

"Opting Out" #2 (3/2/12)

I posted an earlier blog, "Opting Out" of OVDI and OVDP; What is Really Happening? (12/12/11), here.  Apparently the number of comments is causing  browser and easy access issues for some readers.  A reader suggested that I start a new blog on the same subject, so that readers can more easily follow the current discussions.  Accordingly, I created a new blog (this one) to offer a more accessible place for further comments.  This phenomenon has resulted in a series, identified here:

1. "Opting Out" #1 (3/2/12), here. 
2. "Opting Out" #3 (4/4/12), here.

NOTE: PLEASE POST COMMENTS ON THIS TOPIC TO THE NEWEST BLOG ENTRY IN THE "OPTING OUT" SERIES.  

IMPORTANT ADDENDUM ON 3/10/12

A reader has posted opt-out documents here;  I think the author -- with the pseudonym of Moby -- has done a particularly good job with his opt out request.  Accordingly, I have bookmarked it for easier navigation and post it here.  I encourage readers who are considering opting out or are in the process of making submissions in support of lesser penalties in audits (whether on opt out or otherwise) to look at this document.  (Note that the bookmarks are in the pdf file which can be viewed by downloading the pdf document.)

National Taxpayer Advocate Report Critical of IRS Implementation of Offshore Voluntary Disclosure Programs (1/12/12)

The National Taxpayer Advocate who has intervened for participants in OVDP and perhaps OVDI as well has issued her annual report to Congress.   The web page with links to components of the report is here.

Among the items discussed are the problems she and her staff perceive with respect to the IRS's implementation of the voluntary disclosure programs for offshore accounts.  Most of her specific angst appears directed to the IRS's "bait and switch" on OVDP 2009 FAQ 35.  Readers of this blog already know of the bait and switch and the NTA's disapproval.  See particularly Tax Notes Discusses Dispute Between the Taxpayer Advocate and the IRS About OVDP 2011 (1/6/12), here.

The NTA's comments in the report are contained in the International Issues section here.  The key portions of the International Issues section that I picked up on quick search are:

IRS Re-Opens Offshore Voluntary Disclosure Program (1/9/12)

In IR 2012-5, here, the IRS announces that it is "Reopening" its Voluntary Disclosure Program.  For now, I will just refer readers to the Notice and make comments later if appropriate.  The key features of the program (IRS puffing omitted).

Issue Number:    IR-2012-5 

IRS Offshore Programs Produce $4.4 Billion to Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens 

WASHINGTON — The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs. 

 * * * * 

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point. 

 * * * * 

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program. 

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category. For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011. 

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. 

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

Protecting the Refund Statute of Limitations for those in OVDI (1/4/12)

I state the issue of this blog in layman's terms first.  The issue is whether the statute of limitations for refund claims might upset the normal expectations of persons entering the OVDI program.  The answer to that question is perhaps.  I will try to explain more detail below, but the problem is the way the tax statutes of limitation work.  Just as the statute of limitations may prevent the IRS from assessing tax that might have otherwise been due for a year barred for assessment, so the statute of limitations prevent the IRS from refunding a tax paid for a year barred from filing a refund claim.  The protective fix for the potential problem -- and it really may only be a potential problem rather than a real one depending upon future administration of OVDI and the opt out procedures -- is for the taxpayer to file a written protective refund claim (formal or informal) within the normal statute of limitations for refunds of any taxes paid pursuant to the programs or the opt out  procedures.

Let me illustrate the problem in an example.  Taxpayer A joined the OVDI program on August 1, 2011.  Taxpayer A submitted the OVDI package on September 9, 2011 (the extended due date for submission).  Along with the package, the taxpayer calculated and remitted by check the income tax, income tax penalty and interest on the income tax and income tax penalty for the years 2003 through 2010.  Pending further processing, the IRS posts the payments as calculated to the respective years pursuant to the taxpayer's calculations.  (I have some anecdotal evidence that the IRS may be doing an interim posting to the year 2007 for all amounts paid, even  if according to the taxpayer's calculations they relate to years other than 2007; let's set that aside for later consideration and just assume that the IRS posts to the years 2003 forward as the taxpayer has indicated.)  That means that some portion of the tax, penalty and interest gets allocated to tax years beyond the normal three year statute of limitations on assessment.  Although we are talking here about refunds, the statute of limitations on assessment is important because, although, inside the programs, the statute of limitations is irrelevant, if the taxpayer opts out of the program, the IRS will only be able to assess tax for the years that are otherwise open.  That means any tax allocated to years that are otherwise closed for additional assessments is, under the law, an overpayment of tax that should be refunded.

For Taxpayers and Practitioners Who Cannot Make the 12/8/11 OVDI Deadline (12/7/11)

Most readers of this blog know that there is a 12/8/11 deadline for submissions of the OVDI 2011 package if an extension was requested.  The question is what to do if you can't submit a complete package by that date?  There seems to be a lot of concern among taxpayers and practitioners that taxpayers might be kicked out of OVDI 2011 if the package is not submitted in substantially complete form.  (Whether being kicked out is such a bad thing is something concerned taxpayers should discuss with their practitioners; that is a fact intensive inquiry that I can't address here, other than to identify the issue.)

The purpose of today's blog entry is to offer to readers of this blog only some anecdotal indications of what to do if a reasonably complete package cannot be posted by tomorrow.  Readers must understand that these are only anecdotal indications of what to do and in no way binds the IRS.

First, and probably the most direct way to get some indication from the IRS is to call the OVDI Hotline or some other person associated with the process.  At the recommendation of a fellow practitioner, I yesterday called Carl Barkow, OVDI Supervisor in Austin (512) 460-8953.  Basically, he said that, in the event that despite due diligence, the taxpayer is unable to submit a reasonably complete package, the taxpayer should  submit whatever he or she could submit, along with a cover letter explaining why the package is not reasonably complete and then submit the other items no later than 12/31/11.  I gave him my name, but I don't think he recorded it, and he did say that he was getting a number of calls on this and was giving this advice / suggestion.  So, I think this advice was intended to be generic and not specific to me or my client.

IRS Will Give Canadians Some Breaks!!! (12/2/11)

There is breaking news that the IRS will give some breaks to Canadians in the application of the penalty regimes.  I have not had time to assimilate the information, so just now link to some news items as they come in.  I will later add such summaries and comments as appropriate,'

Addendum 12/3/11:

As reported, the relief is only for U.S. / Canadian dual citizens living in Canada.  I can understand why such dual citizens living in the U.S. would be excluded, but what about such dual citizens whose center of gravity was in Canada but they resided outside both the U.S. and Canada?

The second test they must past is that they owe no U.S. taxes.  Under the two initiatives to date, U.S. persons (regardless of dual nationality) could be penalized even if they owed no U.S. tax (usually because of foreign tax credits or related deductions that might have offset any offshore income); if they failed to report the income even though owing no additional tax, they were subject to penalty.  So this is some relief that would be available.

Finally, this is from an article published to on Tax Notes Today (Kristen A. Parillo, IRS to Minimize Penalties on Dual U.S.-Canadian Citizens Unaware of U.S. Tax Filing Obligations, 2011 TNT 233-9)):

While the IRS spokesperson didn't provide any details on what that guidance will provide, Jacobson said in the Globe and Mail interview that the IRS will make it clear that if a dual citizen living in Canada files a U.S. tax return late and owes no taxes, there will be no penalties for failure to file. The guidance also will provide that those who were unaware of the FBAR filing requirement will be able to file previous reports now, along with a statement explaining why they're filing late, and that no penalty will be imposed if the IRS determines that there is reasonable cause. Finally, individuals who took part in the IRS's 2011 offshore voluntary disclosure initiative or in the 2009 special offshore voluntary disclosure program will be able to get back penalties already paid, according to Jacobson. 

Jacobson said in the interview that it is unclear how many years of back taxes will be covered or what would happen to people who owe relatively small amounts of tax to the IRS.

The news items are:

Barrie McKenna, U.S. taxman to go easy on American residents in Canada (The Globe and Mail 12/2/11), here.

Kristen A. Parillo, IRS to Minimize Penalties on Dual U.S.-Canadian Citizens Unaware of U.S. Tax Filing Obligations, 2011 TNT 233-9)

TIGTA Report on IRS Offshore Accounts Initiative Administration (10/27/11)

TIGTA has a new report on the IRS's administration of the offshore account initiatives.  The full report, titled The 2009 Offshore Voluntary Disclosure Initiative Increased Taxpayer Compliance, But Some Improvements are Needed (TIGTA Report 2011-30-118  9/21/11), is here.  Here are  the "Highlights:"

HIGHLIGHTS
THE 2009 OFFSHORE VOLUNTARY DISCLOSURE INITIATIVE INCREASED TAXPAYER COMPLIANCE, BUT SOME IMPROVEMENTS ARE NEEDED
Highlights
Final Report issued on September 21, 2011
Highlights of Reference Number: 2011-30-118 to the Internal Revenue Service Deputy Commissioner for Services and Enforcement.
IMPACT ON TAXPAYERS
Taxpayers with undisclosed foreign accounts or assets who do not submit a voluntary disclosure run the risk of detection by the Internal Revenue Service (IRS). If caught, these taxpayers face the imposition of substantial penalties, including the fraud and foreign information return penalties, as well as an increased risk of criminal prosecution. By making an offshore voluntary disclosure, taxpayers can become compliant, avoid substantial civil penalties, and generally eliminate the risk of criminal prosecution.
WHY TIGTA DID THE AUDIT
This audit was initiated to determine whether the IRS’s voluntary disclosure practices were effective, especially with the high volume of cases received, and to determine whether all cases have been appropriately assigned and worked. The audit is included in our Fiscal Year 2011 Annual Audit Plan and addresses the major management challenge of Globalization.
WHAT TIGTA FOUND
The IRS’s voluntary disclosure practices were effective, and cases were being appropriately assigned and verified even with the unusually high volume of disclosure requests received and accepted. However, some improvements are needed.
Our review of 60 closed voluntary disclosure cases showed that 18 cases had no evidence of the taxpayers reconciling the unreported income in their offshore accounts to their amended or newly filed delinquent tax returns. In 28 cases, information from the taxpayers’ financial accounts and promoters either was not captured or was incorrectly transcribed on the data collection system used for current and subsequent data mining efforts. In 31 cases, voluntary disclosure agreements were not printed on IRS watermarked paper or initialed by revenue agents on each page to ensure no alterations to the original document were made by taxpayers.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the Commissioner, Large Business and International Division, implement a requirement for taxpayers to provide a detailed reconciliation of unreported income. The Commissioner, Large Business and International Division, and the Commissioner, Small Business/Self-Employed Division, should develop a quality review process to ensure all data relating to voluntary disclosures are properly transcribed for future data mining and require revenue agents to initial each page of the voluntary disclosure agreement before submitting it to taxpayers for their signature.
In their response to the report, IRS management agreed with two of the three recommendations. Management stated that a reconciliation of all unreported taxpayer income from offshore accounts is already a requirement of the 2011 Offshore Voluntary Disclosure Initiative. In addition, management plans to implement procedures to conduct a 100 percent review of inputs to the E-Trak Offshore Voluntary Disclosure Program system. However, management disagreed with our recommendation to require revenue agents to initial each page of the voluntary disclosure agreement before submitting it to taxpayers for their signature.