Interesting Motion to Dismiss Government FBAR Willful Penalty Collection Suit (2/6/23)

In United States v. Lisenby (N.D. Ga. Case number 1:22-cv-04579), CL docket entries here, on November 17, 2021, the Government sued Lisenby for recovery of FBAR willful penalties for multiple years. (Dkt entry 1.) On January 31, 2023, Lisenby responded with a motion to dismiss. (Dkt entry 9, here.)  I write here about the memorandum in support of the motion to dismiss.

The memorandum seems to provide a well-written summary of the Government’s claims. The motion to dismiss makes the following claims:

1. The original FBAR assessments were based on the method of calculation that the 11^th Circuit rejected in United States v.  Schwarzbaum, 24 F.4th 1355 (11th Cir. 2022). As explained in the motion (p. 6):

The Government alleges that at some unspecified time following the Eleventh Circuit’s decision in United States v. Schwarzbaum, 24 F.4th 1355 (11th Cir. 2022), the IRS determined it would sua sponte recalculate the penalties assessed against Mr. Lisenby based upon that decision. (Compl. ¶ 61). Despite determining that the Government’s initial assessment was not in compliance with the law (Compl. ¶¶ 61-62), the Government has not alleged that it ever reassessed Mr. Lisenby or gave him an opportunity to pay based upon what it now asserts is the correct assessment.

The motion makes further arguments based on that claim (pp. 7-8). My sense is that the best that can come from this claim is to put Lisenby in the position of Schwarzbaum that, once having made an invalid assessment, the statute has expired on making a recalculated assessment. I think that, while that may be a good argument in Schwarzbaum on its current appeal, the 11^th Circuit is unlikely to accept it because it will certainly know that it screwed up the original Schwarzbaum opinion that they did not realize would give Schwarzbaum an opportunity to escape the penalty. Two mistakes may do rough justice. I have no idea what the court will do in the Lisenby case.

2. The motion claims (pp. 9-11) that, in any event, the assessments (original or recalculated) are out of time. Lisenby’s argument is that the Government's reliance on consents/waivers to extend the time for assessment are invalid because key consents/waivers were signed at some point after the statute of limitations had expired. Lisenby seeks to morph the clear statutory text of § 6501(c)(4) requiring that consents for tax purposes be signed while the statute is still open. The problem Lisenby must overcome is that there is no such statute applicable to the FBAR penalties, so the general rule applies that waivers to statute of limitations defenses can be made at any time. See Court Rejects Government Summary Judgment Motion in FBAR Willful Penalty Collection Suit (Federal 8/28/19), here, on a rejection of a similar defense in the district court Schwarzbaum.

FBAR Willful Penalty (with Collection Suit) after OVDP Drop Opt-Out (9/1/22)

The Government filed an FBAR collection suit in United States v. Leeds (Idaho No. 22-cv-00379-BLW), see TaxNotes copy of complaint here.  The defendant “is the surviving spouse of Richard Leeds, named in her capacity as a potential successor-in-interest to the Estate of Richard Leeds “(Estate”) and/or as a potential personal representative or administrator of the Estate and/or distributee of the Estate.”)

The complaint is about what one would expect in an FBAR collection suit, with slight variances in facts.  However, the following caught my attention:

36. In December of 2014 Mr. Leeds applied to participate in the IRS's Offshore Voluntary Disclosure Program and was initially accepted.

* * * *

39. In April 2018 Mr. Leeds opted out of the OVDP and an IRS examination commenced.

The IRS then proposed a willful FBAR penalty, eventually resulting in this collection suit to collect the penalty.

That is all I know about the facts, but I have these questions, with some speculation as to answers:

1. Since Mr. Leeds knew what the OVDP cost would be going into the program, why would he opt out?  I can only speculate that he wanted to get the benefit of the criminal prosecution protection OVDP offered.  Otherwise, going into OVDP knowing the civil cost would be unacceptable makes no sense.

2. In any event, why would someone with his facts (from the complaint) opt-out of OVDP after he had disclosed his behavior by the OVDP filing?  I can’t even speculate about that other than perhaps he had some vague hope that the IRS would drop the ball in his case.  Remember, that if he had a good nonwillful story, he could have made a Streamlined Filing; I assume he entered OVDP because he (or his counsel) thought he did not have a good nonwillful story.

Third Circuit Sustains FBAR Willful Penalty (6/7/22)

In Collins v. United States, 36 F.4th 487, (3rd Cir. 6/6/22), CA3 here and GS here, the Court affirmed the district court’s holding that Collins was liable for the willful FBAR penalty.  See United States v. Collins, 2021 U.S. Dist. LEXIS 23260, 2021 WL 456962 (W.D. Pa. Feb. 8, 2021), GS here.

The steps in the Court of Appeals reasoning were:

1. Collins had unreported foreign accounts.

2. Collins joined OVDP, apparently in 2010.  After filing his “amended returns for 2002 to 2009, which yielded modest refunds stemming from large capital losses in 2002,” Collins opted out of OVDP, presumably hoping to pay less on opt-out.  The IRS audited and found that the amended returns failed to report PFIC income, which generated additional tax of “$71,324 for 2005, 2006, and 2007, plus penalties.”  Further, by opting out, Collins subjected himself to potential willful FBAR penalties rather than the mitigated miscellaneous penalty in OVDP.  The IRS proceeded to asset the FBAR penalty, although the IRS mitigated the penalty substantially under the IRM mitigation rules and agent discretion.

3. The District Court, on trial, “found a ‘decades-long course of conduct, omission and scienter’ by Collins in failing to disclose his foreign accounts” and held that the penalty determination (as mitigated) was “neither arbitrary and capricious nor an abuse of discretion.”

4. On the willful determination, The Court of Appeals articulated and applied the “civil standard of willfulness, which encompasses recklessness * * * * The dispositive question here is whether “Collins knew or (1) clearly ought to have known that (2) there was a grave risk that he was not complying with the reporting requirement, and if (3) he was in a position to find out for certain very easily.”  (Cleaned up.)

5. The Court of Appeals handily affirmed the district court’s holding that “Collins’s failure to disclose his foreign accounts was willful—not just reckless, but with ‘an actual intent to deceive.’”

Grand Jury Indicts Alleged Offshore Willful Actor Who Should Have Entered OVDP But Attempted SFCP (9/24/21; 9/27/21)

DOJ Tax announced here the indictment of Mark Anthony Gyetvay.  Basically, as  I  understand  it on  quick review, Gytevay made  mega million in Russian related adventures and failed to (i)  pay tax and (ii) file appropriate FBARs.  A fair inference on the facts claimed in the  Press Release (and presumably the indictment) is that those failures were willful.  Then, Gyetvay tried to enter “Streamlined Filing Compliance Procedures in which he attested that his prior failure to file FBARs and tax returns was non-willful.”  Bad moves.

The opening  paragraph says:

A federal grand jury in Fort Myers, Florida, returned an indictment on Sept. 22 charging a Florida businessman with defrauding the United States by not disclosing his substantial offshore assets, failing to report substantial income on his tax returns, failing to pay millions of dollars of taxes and submitting a false offshore compliance filing with the IRS in an attempt to avoid substantial penalties and criminal prosecution.’ 

There is no mention in the opening paragraph of wire fraud.  But  later, the press release  says (emphasis supplied):

If convicted, he faces a maximum penalty of 20 years in prison for each wire fraud count, five years in prison for each failure to file FBAR count, five years in prison for tax evasion, five years in prison for making a false statement, three years in prison for each count of assisting in the preparation of a false tax return and one year in prison for each willful failure to file a tax return count.

I am in travel status now and so only post this for information purposes now.  I  probably will add some detail later after reviewing the indictment and thinking more about it.  In short, though,  for now, this guy has to be incredibly stupid and greedy (or some combination thereof) to forego the regular OVDP  and attempt the  SFCP.

JAT Comments (added 9/27/21):

Court Denies APA Attack on SDP Transition Denial Allegedly Forcing Taxpayers to Accept OVDP Penalty Structure (3/16/21)

In Harrison v. IRS, 2021 U.S. Dist. LEXIS 45582 (D. D.C. 3/11/21),* here, the taxpayers entered the OVDP program prior to the IRS offering the Streamlined Domestic Procedures (“SDP” program in 2014.  The SDP penalty requirements were less than the OVDP’s penalty requirements and required taxpayers to certify nonwillfulness and provide support for that certification.  Incident to the SDP, the IRS permitted taxpayers then in OVDP to “transition” to SDP.  The transition required (just as the SDP required) that taxpayers certify nonwillfulness and support the certification.  The IRS (through its Central Review Committee, determined that the taxpayers had not established their nonwillfulness and therefore left them in OVDP where the options were (i) accept the OVDP penalty structure which was more than SDP but less than the law could impose outside OVDP or (ii) opt out of OVDP and take their chances on audit.  Rather than take the risk of higher penalties on audit, the taxpayers chose to accept the OVDP penalty structure.  Accepting OVDP required that the taxpayers enter a closing agreement which provided, in part, that the taxpayers would not file a claim for refund of any amounts paid pursuant to the closing agreement.  They did and paid the resulting tax, penalties and interest, including the miscellaneous offshore penalty in lieu of an FBAR penalty in the amount of $519,943.44.

Two years after entering the closing agreement, the taxpayers brought what was in effect a refund suit but, apparently realizing that the closing agreement might be a bar, couched the suit under a mélange of legal theories:  (i) APA claims that the transition rules were adopted without notice and comment and, in any event, were arbitrary and capricious under APA section 706(2)(A); (ii) Due Process claim based on the alleged purported absence of procedural protections; and (iii) duress claim that the Closing Agreement was invalid.

The Court rejected their claims.  The Procedurally Taxing Blog has a good discussion of the APA aspect of the case.  Leslie Book, APA Offers No Avenue For Relief For Challenge to Offshore Transition Rules Penalty Regime (Procedurally Taxing Blog 3/15/21), here.  Basically, the Court held that a refund suit would be an adequate remedy thus precluding subject matter jurisdiction of the APA claims.  I encourage readers to read that blog and will only address here some nuances on the APA claims.  

 In the blog, Professor Book states:  “The needle can still be thread: if someone else  has fully paid and is not subject to a closing agreement they could bring a refund suit in federal court and get a court to consider the merits of the APA challenge.”  That is the part I want to thrash upon further.

Let’s posit that a taxpayer in the situation in the case did not accept the OVDP settlement but instead took their chances on audit and the general maximum 50% penalty was imposed.  No closing agreement is required.  So, in that case, I suppose Professor Book’s statement is that the taxpayers could then pursue their APA claims in the refund suit; alternatively, and more likely, the government would have pursued a collection suit and the taxpayer’s APA arguments could be pursued there (recall that the government must bring that suit within two years of the assessment of the FBAR penalty).  (In considering a refund suit possibility, recall also that full pre-litigation payment may not be required (James R. Malone, Half a Loaf Might Suffice: FBARS, Flora and Federal Jurisdiction (Post & Schell Tax Controversy Posts 2/13/17), here.) and in the collection suit, no pre-litigation payment is required.)  I suppose both of those potential options to present the APA claims might be deemed sufficiently adequate to preclude stand alone jurisdiction to present the APA claims.

 What exactly are those APA claims?

 Failure to adopt with notice and comment rulemaking

Summons Enforced Against Prominent U.S. Director, Producer, Writer and Convicted Felon After OVDP Termination for Not Disclosing Foreign Indictment (12/7/20)

In United States v. Agrama, 2020 U.S. Dist. LEXIS 226136 (C.D. CA 2020), CL here, the Court enforced a summons issued with respect to an IRS investigation commenced after the taxpayer was terminated from the 2009 OVDP because the taxpayer failed to notify the IRS that he was under criminal tax indictment by Italy.  

Some background which I have drawn (sometimes by inference) from the Agrama opinion and from Agrama’s Wikipedia page, here:  Wikipedia opens with a summary description of Agrama as “an American director, producer, writer, and convicted felon.”   The Wikipedia page says that the Italian tax evasion indictment was issued in 2006 and led to Agrama’s conviction in 2012. Agrama did not serve time because of an Italian amnesty law to reduce prison overcrowding.  I think that is enough background for now, but the key point is that Agrama was under Italian criminal tax indictment when he sought 2009 OVDP and was terminated from OVDP because of failure to advise the IRS of the indictment.

Apparently incident to the Italian investigation leading to the 2006 indictment, the Italian prosecutor sought assistance from the U.S. and some other countries (Switzerland, Hong Kong and Ireland) pursuant to each of those countries' respective MLAT treaties with Italy.  The U.S.  obtained and executed a search warrant at Agrama’s home and business in Los Angeles.  Italian authorities, including a forensic expert, were present during the executions of the search warrants.  After some commotion about whether the U.S. agents executing the search warrant exceeded the scope of the search authorized, the U.S. withdrew the warrants and returned all of the property seized.  Apparently, none of that property seized and returned was delivered to Italy or to the IRS for use in any other proceedings.  Italy’s officials, including a forensic expert, had participated and obviously had some information learned in the execution of the search warrants, although not the documents seized.   Pursuant to the MLAT requests to the other countries, searches were executed and documents seized.  Italian authorities, including the forensic expert, was involved in those seizures and apparently obtained the documents seized.  The forensic expert then produced a report for use in the Italian investigation and  indictment.

In 2009, Agrama and his wife applied to join the 2009 OVDP and was accepted.  In the course of the OVDP process, “the Agramas represented that they were not under criminal investigation by any law enforcement authority.”  Then, according to the court:

In 2012, the IRS learned that Agrama was, in fact, under criminal indictment in Italy. Indeed, Agrama was convicted of tax evasion later that year in Italy, and received a three-year sentence. The Agramas were subsequently removed from the IRS' voluntary disclosure program in early 2013.

After the IRS terminated the Agramas from OVDP in 2013, the IRS started an audit of the Agramas, an audit which at the time of the summons and court petition to enforce covered “the Agramas' tax liability for fourteen tax years, ranging from 1997 to 2011.”  The summons in question arose from that audit and included the following description:

documents, including all documents related to Agrama's two criminal trials in Italy, documents related to Agrama's challenge to Italy's MLAT request to Ireland, and all documents provided to the Italian government from other countries, including Hong Kong, relating to Agrama's two trials in Italy (i.e., the MLAT documents).

Agrama produced some documents but not the MLAT documents.  The IRS then petitioned to enforce the summons.

With that background, I summarize the Court’s holdings:

Report that Prominent Billionaires Are Subject to Criminal Investigation (8/24/20)

This is a fascinating report of a tax investigation in process against two very prominent billionaires, Robert Brockman and David Smith.  David Voreacos & Neil Weinberg, Billionaire Robert Smith Fighting U.S. Criminal Tax Inquiry (1) (BloombergLaw 8/21/20), here.  This is an ongoing investigation, so charges may never be brought and, if they are, the  shape of the charges are uncertain.

What caught my eye and, I think may be of interest to readers of this blog is the following discussing divorce proceedings between Smith and his estranged wife:

            Experts on both sides of the divorce pored over the family finances. In 2014, Smith approached the IRS seeking amnesty from prosecution under a program used by more than 56,000 Americans who failed to report offshore assets, according to two of the people familiar with the matter. Through the program, the IRS collected more than $11 billion in back taxes, fines and penalties, while learning who enabled offshore tax evaders.

            But the IRS rejected Smith, according to people familiar with the matter. The agency typically turned down taxpayers if it already knew they had undeclared offshore accounts.

Now, I don’t know but assume that, because of the specificity (although limited), the investigators are correct about his attempt to go into the voluntary disclosure program and being rejected.  The article does not state whether Smith attempted the OVDP or Streamlined or OVDP with Streamline transition.  The Streamlined Procedures were adopted in 2014 the year that the article indicates he approached the IRS.  Of course, if Smith’s tax underpayment and FBAR failure to file (or file correctly) are the subject of a criminal investigation, the IRS must now think him willful which would have in 2014 disqualified for the Streamlined Procedures (even the Transition).  But, if the IRS already had Smith on the radar screen knew when he attempted to join OVDP, he would have been disqualified as the article notes. 

We don’t know whether he was disqualified from OVDP because of already being on the radar screen or he attempted Streamlined (either direct or through transition from OVDP) and was rejected because his nonwillful certification was inadequate.  Of course, if he attempted Streamlined via OVDP transition and was rejected, he still could have solved his criminal problem by staying in OVDP and not opting out.

Some unanswered questions and surely there must be more questions.  And the statutes of limitations may be an issue since one would assume that the targets of the investigation have kept their income tax filings current and, within a range, proper, at least in the case of Smith who knew when he was rejected (in 2014) that he had potential criminal issues.

Taxpayers Who Entered OVDP Closing Agreement Seek Their Money Back Under the APA (8/24/20)

In Harrison v. IRS (D. D.C. Dkt. 1:20-cv-00828) (key pleadings at CourtListener here), the taxpayers, husband and wife, joined the IRS OVDP at a time when the miscellaneous (or in lieu of penalty) was 27 1/2% of the high amount in the account(s) over the covered years.  While taxpayers were in process on the OVDP, the IRS announced the Streamlined Process which would permit nonwillful taxpayers to obtain the same relief with a 5% miscellaneous penalty.  The IRS announced also that qualifying taxpayers in OVDP process could transition to the Streamlined Process.  The key qualification for the Streamlined Process was that taxpayers be nonwillful.  The taxpayers attempted to transition into the Streamline Process but were denied transition by the IRS committee that must approve the transition.  (Taxpayers refer to this process as governed by Transition Rules.)  At that point, their options were to either accept the OVDP civil penalty result or opt out and hope to achieve a lesser costs (principally the FBAR nonwillful penalty or no penalty at all).  The taxpayers did not opt out and entered a Closing Agreement under the OVDP penalty structure (notably 27 1/2% miscellaneous penalty as noted).

One would think that the Closing Agreement put the matter behind the taxpayers and the IRS.  But, the taxpayers had another trick (real or imagined) up their sleeves.  

In this case, taxpayers seek their money back and have packaged the request in APA clothing (rather than refund clothing), urging that the IRS had failed to provide guidance for when the request for transition relief would be approved and failed to provide guidance as to willfulness.  Moreover, they assert, the IRS did not adopt the rules (whatever they were) by informal rulemaking procedure (notice and comment), which would have given interested parties an opportunity to comment.  I presume that the claim is that the transition process and whatever unpublished guidance governed it were legislative rules (with force and effect of law) under the APA, for only legislative rules require notice and comment; interpretive and procedural rules do not require notice and comment.  The claim also is that the Transition Rules denying them transition (whatever those Rules are) are arbitrary and capricious.  Further they allege that the Transition Rules violate Due Process.  Finally, they reallege all of the foregoing and assert that the Closing Agreement is invalid.  They seek declaratory relief and a "refund of all money that Plaintiffs paid to Defendant through their participation in OVDP's penalty structure.

DOJ moved for summary judgment.  Taxpayers responded.  No decision on the motion to date.  These motion documents can be retrieved from the Court Listener docket sheet linked above.

JAT Comments:

New LB&I Campaign for Post OVDP Compliance (11/25/19)

I previously reported that IRS LB&I included among its “campaigns” OVDP Declines-Withdrawals Campaign.  IRS LB&I "Campaigns" to Focus on OVDP Declines-Withdrawals, Among Other Issues (Federal Tax Crimes Blog 2/1/17), here.

LB&I’s campaigns are an audit strategy added in 2017 to improve return selection, identify issues representing a risk of noncompliance, and make the greatest use of its limited resources.

In another OVDP related development, in November 2019), the IRS added the following:

Post Offshore Voluntary Disclosure Program (OVDP) Compliance

Practice Area: Withholding & International Individual Compliance 

Lead Executive: John Cardone, director of Withholding & International Individual Compliance 

U.S. persons are subject to tax on worldwide income. This campaign addresses tax noncompliance related to former Offshore Voluntary Disclosure Program (OVDP) taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements. The IRS will address tax noncompliance through soft letters and examinations.

See IRS website for its active campaigns, here.

JAT Comment:  One of the traditional goals of the IRS's voluntary disclosure programs is not only to resolve past issues but, put the taxpayers involved on a track of ongoing compliance, not only with respect to offshore accounts but their tax obligations generally.  It is not clear whether these initiatives will focus narrowly on the compliance issue identify but might sweep more broadly to identify general noncompliance.

New IRS LB&I Compliance Campaigns of Interest (7/30/19)

IRS LB&I has announced six new compliance campaigns, here.

1.  The new campaign particularly relevant for readers of this blog is:

• Post OVDP Compliance
Practice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance

U.S. persons are subject to tax on worldwide income. This campaign addresses tax noncompliance related to former Offshore Voluntary Disclosure Program (OVDP) taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements. The IRS will address tax noncompliance through soft letters and examinations.

JAT Comment:  Readers will recall that the OVDP had several iterations and, with the expansion of the Streamlined alternatives for nonwillful actors, OVDP itself was targeted to willful actors or persons at risk of the IRS treating them as willful actors.  So, those persons who took advantage of OVDP and took care of past issues presumably were back in the system with respect to their foreign income and asset reporting.  But, presumably, the IRS has some reason to believe that those OVDP participants may not  have stayed in compliance after closing out their OVDP participations.

2.  Another campaign of possible interest to readers is:

• ExpatriationPractice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone, director of Withholding & International Individual Compliance 

U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.

OVDP Closes Friday; So What? (9/26/18)

There is a lot of buzz in the legal community and among commentators about the closing of the OVDP program this Friday.  I picked up substantial buzz from a listserv I am on and from posting on the web, including most prominently Peter Reilly's posting, Window Closing On IRS Program To Lessen Penalties, Avoid Prison For Offshore Shenanigans (9/25/18), here.

Some readers might find the following short comments helpful.

1.  The OVDP program is for the bad actor -- the taxpayer who was willful in filing or failing to file income tax returns and FBARs.  The willful bad actor is at risk of criminal prosecution and civil monetary costs (income tax, income tax penalties, interest and FBAR willful penalties).  The bad actor can square up with the IRS via OVDP and get substantial peace of mind.  After OVDP closes on Friday, the bad actor has no clear path to squaring up and getting peace of mind.  However, the IRS will have the traditional voluntary disclosure program which most the bad actor can use to square up and get peace of mind, assuming the bad actor qualifies, although, even if he mitigates the risk of criminal prosecution, the risk of higher financial costs is greater.

2.  For those who are not bad actors, the Streamlined Programs are still available.  The key to the Streamlined Programs is the nonwillful certification and narrative supporting the nonwillful certification.  The risk in entering the Streamlined Programs is that a taxpayer's certification and supporting narrative may be false or perceived by the IRS to be false or even suspect.  This could lead to an audit in which the IRS can test the validity of the certification and supporting narrative.  And, if those are false or misleading, the IRS could take away the financial benefit of the Streamlined Programs by making the taxpayer pay the income tax, income tax penalties (possibly the 50% civil fraud penalty), interest on both, and the FBAR willful penalty which is generally, by IRS exercise of discretion, a single 50% of high amount penalty, but might be more).  And, if the certification and supporting narrative are false, the taxpayer is at risk of criminal prosecution for that submission, as well as for the prior conduct the taxpayer was trying to absolve in the Streamlined Program.  Of course, that risk in the Streamlined Programs only apply to bad actors who should not have gotten into the program in the first place.

In short, the closing of OVDP on Friday only posits risks for bad actors -- those whose tax and FBAR noncompliance was willful.  Even for that category, there are fixes.  Those at risk of falling in that category should consult counsel.

FBAR Civil Penalty Items (3/21/18)

Items of interest to FBAR fans:

• First, FinCEN has updated the inflation adjustment for the FBAR civil penalties stated in $ amounts.   See Inflation Adjustment of Civil Monetary Penalties (Final Rule Adopted 3/18/18),  revising Table 1 of § 1010.821—Penalty Adjustment and Table, here):  Those adjustments are 

Penalty	Statute	Amount as Inflation Adjusted
Nonwillful Penalty Maximum (§ 5321(a)(5)(B)(i))	$10,000	$12,921
Willful Penalty Minimum (§ 5321(a)(5)(C)(i)(1)	$100,000	$129,210

• The National Taxpayer Advocate posted the following article on her blog:  Analysis of Tax Settlement Programs as Amnesties - When Should the Government Offer Them and How Should They Be Structured? (Part 1 of 3) (NTA Blog 3/14/18), here.  This first installment addresses the general effect of tax and tax-related amnesties.  The blog indicates: "Next week we will apply what we’ve learned about amnesties to the IRS’s OVDP.."

IRS to Ramp Down and Then End OVDP on 9/28/18, But the Streamlined Procedures for Offshore Assets Will Continue for Now (3/13/18)

The IRS has announced that it will "begin to ramp down [OVDP] * * * and close the program on Sept. 28, 2018."  IR-2018-52, here   Related FAQs, titled Closing the 2014 Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers are here.  I discuss the FAQs at the end of the blog.

First, the contents of the news release are:

Issue Number:    IR-2018-52 

IRS to end offshore voluntary disclosure program; Taxpayers with undisclosed foreign assets urged to come forward now 

WASHINGTON – The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.  

“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.” 

Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations. 

The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017. 

The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns. 

Tax Enforcement 

The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations. 

“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS." 

Streamlined Procedures and Other Options 

A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point. 

The implementation of the Foreign Account Tax Compliance Act (FATCA) and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets.  Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets: 

• IRS-Criminal Investigation Voluntary Disclosure Program;
• Streamlined Filing Compliance Procedures;
• Delinquent FBAR submission procedures; and
• Delinquent international information return submission procedures. 

Full details of the options available for U.S. taxpayers with undisclosed foreign financial assets can be found on IRS.gov.

IRS OVDP Declines-Withdrawals Campaign (2/27/18)

Late last year, IRS LB&I announced here certain compliance "campaigns" for examinations.  Among the campaigns is the following:

OVDP Declines-Withdrawals Campaign 

The Practice Area is Withholding & International Individual Compliance 

Lead Executive: Pamela Drenthe 

The Offshore Voluntary Disclosure Program (OVDP) allows U.S. taxpayers to voluntarily resolve past non-compliance related to unreported offshore income and failure to file foreign information returns. This campaign addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord. Taxpayers, who have yet to resolve their non-compliance and who meet the eligibility criteria, are encouraged to consider entering one of the offshore programs currently available. The IRS will address continued noncompliance through a variety of treatment streams including examination and letters.

 The linked letter which notifies the taxpayer of inclusion in this campaign is Letter 5935, here.  The letter is actually the second two pages of the pdf.  The letter indicates that a Form 15023, here, is included with the letter.  Note that the Form bears a creation date of January 2018, so I suspect that taxpayers did not start receiving the Letter and Form until

A commenter who received the Letter and Form called them to my attention here, and I provided a response just below it.  In the commenter's case, after his withdrawal in 2011 the commenter was in full compliance for 2011 forward and filed 3 years amended returns and original FBARs for the years 2008, 2009 and 2010.  It appeared therefore that the commenter's six-year statute of limitations for FBAR penalties for the latest originally noncompliant year (2010) was June 30, 2017 and statute of limitations for the income tax had expired for all years absent civil fraud.  needless to say, the criminal statute of limitations had expired, something to suspend the statute of limitations.  He says that he is a resident, so the criminal statute under § 6531 was not suspended for absence from the country.

Some issues just off the top of my head:

1.  The letter offers in Option 1 the opportunity to do a Streamlined Filing.  I thought (but have not double checked) that people who filed for preclearance in OVDP did not have the opportunity to do Streamlined.  Apparently, this letter suggests that they can.

Default Judgment Granted in Multi-Year FBAR Willful Penalty Case (12/2/17)

In United States v. Forbes, 2017 U.S. Dist. LEXIS 193856 (E.D. Va. 8/24/17), here, the Magistrate Judge entered a report and recommendation for default judgment on willful FBAR penalties against George Forbes.  The District Court subsequently sustained the recommendation, here, and entered judgment, here.  The complaint on which the default judgment is based is here.

Forbes did not appear or contest the default judgment, although he had been properly served.  So I draw the facts from the complaint which contains more facts than the Magistrate Judge's report and recommendation..

The key facts are that:

1. Forbes worked as an engineering consultant in the oil and gas industry in Qatar from 2004 to 2011.

2. Forbes had foreign accounts exceeding $10,000 in each of the years 2004 through 2011.

3.  Forbes filed FBARs through 2007 and then picked up filing FBARs in 2011. 

4.  FBARs did not file FBARs for 2008-2010.  He did not report the income in excess of $3,100,000 from the unreported accounts in 2008-2010.  In two of the years, he omitted Schedule B and in the third, he answered the foreign account question no.

5.  On 11/28/11, Forbes was accepted into the 2011 OVDP.   "Forbes entered the OVDP with the agreement that his FBAR disclosure would be certified for tax years 2008, 2009, and 2010."

5.  Forbes apparently submitted the OVDP package, including amended income tax returns.  "Forbes failed to make acceptable arrangements with the IRS for payment of the taxes owed, plus, interest, accuracy penalties, and a miscellaneous offshore penalty. As a consequence, Forbes was removed from the program on May 8, 2014.

6.  After exiting the OVDP, Forbes was audited.  "The audits found that, for the years 2008 through 2010, Forbes had failed to report income in excess of $3,100,000.  The audit also found that Forbes had omitted approximately $1,750,000 of income from the tax returns he had submitted in connection with his participating in the 2011 OVDP.

D.C. Circuit Rejects Injunction End-Run by OVDP Taxpayers Seeking Streamlined Procedures Relief (7/14/17)

The DC Circuit Court of Appeals dismissed an attempt by participants in OVDP before the more robust Streamlined Procedures opportunity was announced in 2014.  Maze v. United States, ___ F.3d ___ (D.C. Cir. 2017), here.  They were relegated to the transition relief which, if nonwillful, would have qualified them for transition treatment reducing the miscellaneous offshore penalty ("MOP"), but would not relieve them from the eight years of income tax, penalty and interest on both required by OVDP.  By contrast, the new Streamlined Procedures would have require only 3 years of income tax and interest, with no accuracy related penalties.

I always thought the transition opportunity was unfair to those who got into OVDP rather than waited.  Taxpayers were rewarded for holding out.  But often life is unfair and taxes are not fair.

The plaintiffs in this action thought this was unfair as well and brought suit to compel the IRS to treat them under the Streamlined Procedures.  They ran squarely into the prohibition against injunctions in § 7421(a), often called the Anti-Injunction Act ("AIA").  Basically, the AIA prevents suits in any form which have the effect of enjoining the IRS in its tax enforcement and collection activities.  This particular suit failed for that reason.

I don't know that there is anything else to really say about this, except, if the taxpayers involved in the suit really were nonwillful, they could opt out of OVDP, take the audit and get an appropriate civil cost (tax, penalty and interest) result that way.  All of their income tax years would be subject to the normal statute of limitations (usually three years, with an exception for substantial omission or fraud (with the fraud unlmited statute not apply if they were nonwillful)).

Indeed, the design of the Streamlined Procedures, as I understand it, was to roughly give nonwillful taxpayers the result they could obtain by joining OVDP and opting out.  True, joining OVDP and opting out of the OVDP penalty structure involves commotion not encountered in Streamlined Procedures but, if taxpayers with a good story to tell (which is a requirement for Streamlined Procedures) can tell the good story in the opt out of OVDP penalty structure and achieve, in broad strokes, a more or  less similar result.  (Note there is some fuzziness there.) And, by staying in OVDP and just opting out of the OVDP penalty structure they get some marginal assurance of no criminal prosecution.

This story reminded me about Jesus' parable of the workers.  The taxpayers in Maze got what they bargained for -- the OVDP and the opportunity to opt out if dissatisfied.  So, too, the workers in Jesus' parable which can be read in Matthew 20:1-16, here.  In the parable, it is an equal reward that causes the problem for the early workers as compared to the late workers, but on an hourly basis, the late workers get paid a lot more for waiting than the early workers.  In the Streamlined Procedures, the late joiners get benefits not allowed the early joiners.  But, in both cases, they get what they bargained for.  (Actually, the early OVDP joiners got the benefit of Streamlined MOP by transitioning.)  What is the complaint?  (Having said that, I have already said that I thought excluding people in OVDP from the Streamlined Procedures benefits -- both income tax and MOP -- is unfair for reasons other than that the OVDP participants shut out of Streamlined Procedures did not get the deal -- even better deal -- they accepted in joining OVDP.)

Tax Court Denies Claim in Offshore Account Case with Very Unusual Facts Because the Information Did Not Produce Collected Proceeds (6/16/17)

In Awad v. Commissioner, T.C. Memo 2017-108, here, a whistleblower case, the following is the key time line:

Date	Event
11/18/2008	Awad files WB claim (Form 211) identifying husband and wife (TH and TW, respectively) and their three adult children as owners of undisclosed foreign bank account.
2/?/2009	WBO assigns to LB&I
	LB&I Agent reviews returns and decides to accept as filed based on insufficient information
8/?/2009	TH dies.
1/?/2010	TW and children file "voluntary disclosures pertaining to a previously undisclosed account at the same foreign bank" Awad had disclosed.to WBO
??/??/2010	SB/SE opens exam incident to voluntary disclosure
7/?/2010	LB&I returns the case to WBO (although a year after LB&I made decision not to pursue)
9/?/2010	WBO discovers SB/SE exam and forwards information to SB/SE for possible use in examination
??/??/2010	SB/SE Agent interviews Awad by telephone; Awad provides additional information
??/??/2010	SB/SE advises WBO that the information did not assist in the audit
8/??/2011	IRS enters closing agreement on the voluntary disclosure requiring tax, penalties (including MOP) in excess of $2M for TW and estate
9/??/2013	WBO learns of estate tax exam for TPH and refers information to SB/SE Estate and Gift Tax
1/28/2014	WBO denies award.

There are some significant, scantily explained, time lapses in the foregoing, but they are not relevant to the outcome because the examining agents involved in LB&I and SB/SE all attested that the Form 211 information did not contribute to the ultimate outcome -- the acceptance of the TH Estate and TW's voluntary disclosure.  After all, for collection, the information does have to contribute to collected proceeds to permit a WB award.

The thing that is curious to me is that there were no procedures to flag the matter when the WBO first assigned it to LB&I so that, after that date, the taxpayers could not qualify for voluntary disclosure.  It is true that the procedure assumes disqualification only after the IRS has flagged the taxpayer for audit.  (I have had one client thus disqualified even though the IRS had never notified him of the audit.)  I understand that LB&I had not yet decided to audit, but it seems to me that there should be some way to disqualify once WBO decides the information has sufficient gravitas to refer to Examination, at least while it is in that status.  Just my view.

CCA on Application of Refund Statute of Limitations in OVDP (5/15/17)

In CCA 201719026 (4/12/17, released 5/12/17), here, an IRS Senior Technician Reviewer responds to the following:

Your office has received a number of questions from OVDP examining agents about taxpayers who report additional income and tax on their amended returns for most of the years in the disclosure period, but report an overpayment on their amended return for at least one of the years at issue. A typical fact pattern might involve a taxpayer for whom the disclosure period is tax years 2003 through 2010. For tax years 2003 through 2007 and 2009 and 2010, the taxpayer reports additional income and tax. But the amended return submitted for tax year 2008 includes a large loss, resulting in an overpayment for that tax year. After reviewing the amended return, the examining agent confirms the claimed loss and the resulting tax computations show an overpayment for tax year 2008. The taxpayer then requests that the overpayment for tax year 2008 be credited against increases in tax for the other tax years in the disclosure period or the miscellaneous offshore penalty. You have asked for advice regarding how I.R.C. §§ 6511 and 6514 affect the Service’s ability to credit the overpayment as requested by the taxpayer.

The author then discusses the law apply under certain possible scenarios.  Since the analysis is succinct, I will just refer readers to it.

A short summary of the answer to the "typical fact pattern" disclosed is that, assuming the original 2008 return was timely filed, the period for claiming a the refund expires 3 years after the date of the filing (or deemed filing).  Hence, if the amended return filed in OVDP was submitted on or before that 3 year period expired, then the refund is timely and the refund can be resolved in the OVDP proceeding (either by refund or credit against other years).  And, depending upon the facts, the filing of the claim for refund by amended return in the OVDP proceeding might be timely.

Although the author of the CCA does a very good job of discussing the rules, I offer the following from the current operating draft for the next edition of my Federal Tax Procedure book:

Just as there are statutes of limitation on assessment and collection taxes, there are also statutes of limitation on taxpayers claiming tax refunds from the Government.  There are two applicable rules. 

First, there is a statute of limitations for filing the claim for refund.  A claim for refund must be filed within three years from the date the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment.  § 6511(a).  Read literally, this means that a taxpayer can file a return 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allow such lengthy lapses before the claim must be pursued.  The answer to that concern is in the second rule to which I now turn. 

Second, there is a statute of limitations on the amount of tax that can be refunded if the claim is timely under the first rule.  The IRS may only refund the amount of tax paid within three years plus the period of any extension and, if the foregoing rule does not apply, then it may only refund the tax paid within two years of the date of the claim.  § 6511(b)(2).  This is called the “lookback” rule. 

IRS LB&I "Campaigns" to Focus on OVDP Declines-Withdrawals, Among Other Issues (2/1/17)

The IRS has announced that LB&I "is taking a new approach to tax compliance, with a series of 13 campaigns aimed at cracking down on tax evasion."  Michael Cohn, IRS rolls out new compliance campaigns for large businesses and international taxpayers (AccountingToday 1/31/17), here.  The campaigns are directed to several issues of tax compliance that the IRS will focus on.  The article lists them all, but the one particularly relevant to the subjects previously covered on Federal Tax Crimes Blog is:

• OVDP Declines-Withdrawals Campaign 

The Offshore Voluntary Disclosure Program allows U.S. taxpayers to voluntarily resolve past non-compliance related to unreported offshore income and failure to file foreign information returns. The campaign addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord. The IRS will address continued noncompliance through a variety of treatment streams including examination.

The article has the other categories, so interested readers should go there.

The article notes in concluding:

These campaigns represent the first wave of LB&I's issue-based compliance work. The IRS said more campaigns will continue to be identified, approved and launched in the coming months. 

JAT Comment:  I am not sure what this adds to the current process.  I had only two OVDP submissions that were  not completed -- one denied and one withdrawn.  Both were audited with good results -- in the denied case, ended up with same result as OVDP (which is what we wanted in the first place) and the other got a great result (which we anticipated in withdrawing).  So my limited anecdotal experience is that the IRS was attending to this category anyway.  But, perhaps the IRS had fallen behind or some were slipping through the cracks.

Conference Report on IRS Offshore and Voluntary Disclosure Efforts (12/18/16)

The ABA recently held a conference titled National Institute on Criminal Tax Fraud and Institute on Tax Controversy.  This is a report on part of the events:  Andrew Velarde, IRS Offers Hints About Future of John Doe Summonses (Tax Notes Today 12/12/16) [no link available].  Key points of my interest from that report are:

1. Expect continued IRS and DOJ activity against offshore service providers with respect to foreign accounts and in the John Doe Summons "JDS" area.

2. Discussion of the bitcoin JDS.  A senior IRS official, John McDougal, is quoted as saying that users of virtual currency "presented the same risk profile as [users of] an offshore account."  He also said that users of bitcoin have ranges of understanding with respect to tax compliance -- "from innocent misunderstanding of what the filing obligations are to tax evasion."

3.  Discussion of influx of information about offshore accounts from FATCA, voluntary disclosure and other sources.

4.  Discussion of certification of nonwillfulness in streamlined procedures. Reports that Scott Michel of Caplin & Drysdale analyzed the certification process where things are rarely black and white under the familiar tax penalty concepts of reasonable basis, substantial authority, and more likely than not.  Michel is quoted as saying:  "The scary thing to me, and I think a lot of others, is it is probably not good enough to have a reasonable basis."  [I infer that the thinking is, at least with respect to any legal issues (including legal issues in fact analysis), this range of levels of comfort in traditional tax penalty analysis may have some effect, at least in terms of practitioner behavior in advising taxpayers and perhaps in arguing cases, although I have not seen that in the application of the FBAR penalty and in the certification of nonwillfulness.]

5.  Discussion of potential problems, particularly criminal from improper certifications of nonwillfulness.  A senior DOJ Tax CES lawyer, Mark Daly, is quoted as saying that he has been looking at a lot of certifications recently.  Some have "patently ludicrous" narratives presented to support the nonwillful certification.  And, they are checking against information from other sources.  He cautioned better due diligence by practitioners.

6.  Discusses the salutary effect of streamlined to channel most taxpayers into streamlined rather than OVDP.  The article cites McDougal of saying that the average $10,000 payment in streamlined suggests that it is working and that, at least in most cases, practitioners are appropriately channeling the clients.  The article quotes statistics that show 18,000 streamlined submissions in the last year compared with 1,800 new OVDP submissions.