Key Points from Panel Discussion on OVDP and Streamlined (10/30/15; updated 11/3/15)

I participated in a panel at the Texas State Bar Advanced Tax Law Seminar, here.  The topic was the offshore voluntary disclosure programs (OVDP and Streamlined).  Dan is a major player with the IRS in these initiatives.  Chad is a major player from the private bar. Chad's bio is here.  The written presentations provided attendees is attached here, consisting of an outline by Chad Muller and Jack Townsend and an IRS Powerpoint which was presented by Dan Price during the panel presentation.  [Note to readers: the update on 11/3/15 was providing a download link for the pdf of the presentations (both in a single pdf).  If you download the pdf, you can work your way around the pdf with Acrobat's bookmark feature; if the bookmarks do not show on the left side, hit and that should show the bookmarks.]

Here are some major points that I thought readers may be interested in.  On some of these points, I expand with reasonable inferences from what was actually said.  Anything said below should not be attributed to Dan unless I specifically attribute it to him.

1.  OVDP is for the willful taxpayer.  For that type of taxpayer, the inside OVDP penalties are a pretty good deal (relative to the panoply of penalties that might otherwise apply.  Further, it is not just the willful taxpayer but the willful taxpayer who would be at risk of criminal prosecution or the devotion of IRS resources to investigate and impose the significant related income tax penalties and FBAR penalties.  Thus, I infer, it is possible that there are some willful taxpayers who may not be good candidates for OVDP because they are at fairly low risk.  For example, a taxpayer whose offshore income never exceeded $500 per year and tax never exceeded $150 per year.  Although other factors must be considered, that profile of taxpayer is not at material risk on either count.  That does not mean that other persons who are somewhere beyond the mid-point on the spectrum from nonwillful to willful should do OVDP.  The facts and circumstances might show that, even though potentially willful, there are other factors that might mitigate against full bore penalties if the taxpayer does not join OVDP.

2.  The IRS encourages nonwillful taxpayers to do streamlined if they otherwise qualify.  Although there will be no closing agreement at the end and the willful certification and narrative will be reviewed, if the narrative supports the certification and there is no indication that the certification is incorrect, it is not likely to be scheduled for audit.  However, other general audit techniques (such as DIF, etc.) might cause the return to be reviewed.  But the general audit coverage rate is fairly low, so the taxpayer pursuing streamlined has relatively low chance of audit.  But, there will be inherent uncertainty because no closing agreement is signed.

3.  In the Streamlined Program (either SFOP or SDOP), the IRS has the burden of proof if it conducts an audit and desires to assert the FBAR penalty or the income tax civil fraud penalty.  This is not like the Streamlined Transition where the taxpayer must persuade the IRS that he or she is nonwillful.  In this sense, in Streamlined Transition, the taxpayer has a burden of proof which, if he or she fails to meet that burden, Streamlined will likely be denied.

4.  In both Streamlined and Transition, the key is in the narrative in support of the nonwillful certification.  Dan made the point that the narrative (and any supporting materials, such as affidavits, etc.) should be proportionate to facts presented -- such as significantly the amount of income and the amount of the deposits.  I infer, for example, if the certification shows $100,000,000 in offshore deposits, more detail and support should be provided than $100,000 in offshore deposits.  Zeros or, more precisely, digits matter.

IRS Makes FOIA Disclosures to Tax Analysts Regarding OVDP and Streamlined Processing (10/3/15)

Tax Notes today has an article summarizing some comments about documents it received about OVDP (including its OVDI predecessor).  The article is Andrew Velarde, FOIA Response Shows Hints of IRS Thinking on OVDP, TNT 192-1 (10/5/15) [no link available].  The article will also be published in 149 Tax Notes 7 (Oct. 5, 2015).  The article provides certain highlights of the FOIA disclosures and links to the disclosures.  I list the indicated FOIA disclosures at the end of this blog entry.  Subscribers to Tax Notes might want to review the article and the FOIA disclosures.

The FOIA disclosures are internal IRS "job aids" for examiners and others implementing OVDP.  Much of the information was already public or known to practitioners.

There is some discussion of willfulness but nothing that adds to a practitioner's known analysis of the issue.

One point that was already known to practitioners is that rejection of the transition streamlined relief inside OVDP is not a determination of willfulness so that, upon opt out, the willfulness penalty is pre-determined.  Rather, it is simply a statement that, on the submission the taxpayer made in support of streamline transition relief, the IRS is unable to determine nonwillfulness.  The key is that the taxpayer should make a detailed submission in his transition relief narrative supporting his general claim that his tax and FBAR noncompliance was nonwillful.

Now, as to taxpayers making the streamlined submissions (either SFOP or SDOP) outside OVDP, it is noted that the nonwillful certification and narrative are not necessarily given the review that is required for streamlined transition inside OVDP.  The practitioners seem to be inferring that only a portion of the straight streamlined certifications will be audited.  Of course, if that is true, there is no public guidance as to which are selected for audit.  I think all of this was known already to practitioners, so that the FOIA disclosures confirm what they had already inferred.

There is also some helpful guidance offers in compromise, installment agreements and similar issues.

FOIA DISCLOSURES [No Links Available].
Job aid on miscellaneous offshore penalty refunds 2015 TNT 192-63: Other IRS Documents
Job aid on streamlined program transition rules for current OVDP taxpayers living abroad 2015 TNT 192-64: Other IRS Documents
Job aid on calculating the miscellaneous offshore penalty 2015 TNT 192-66: Other IRS Documents
Job aid on calculating the streamlined domestic offshore penalty 2015 TNT 192-67: Other IRS Documents
Job aid on refunds of advance payments for "barred" years 2015 TNT 192-68: Other IRS Documents
Job aid on issues to consider when determining nonwillfulness 2015 TNT 192-69: Other IRS Documents
Job aid outlining options available for U.S. taxpayers with undisclosed foreign financial assets 2015 TNT 192-71: Other IRS Documents
Job aid providing talking points for revenue agents on the OVDP and streamlined compliance program 2015 TNT 192-72: Other IRS Documents
Job aids on IRS Taxpayer Advocate Service's systemic advocacy management system 2015 TNT 192-52: Other IRS Documents
Job aid for IRS field insolvency function 2015 TNT 192-53: Other IRS Documents
Job aids on collection due process hearing requests 2015 TNT 192-54: Other IRS Documents
Job aid on reasonable cause for failure to file foreign corporation information returns 2015 TNT 192-55: Other IRS Documents
Job aid on time reporting for collection employees' international travel 2015 TNT 192-56: Other IRS Documents
Job aid on IRS field collections 2015 TNT 192-59: Other IRS Documents
Job aid on IRS field and office examinations 2015 TNT 192-57: Other IRS Documents
Job aid on offers in compromise 2015 TNT 192-58: Other IRS Documents

Comments by IRS Personnel on New Streamlined and OVDP Procedures (6/21/14)

I offer some points from Amy S. Elliott, IRS Answers Questions on Updated OVDP and Streamlined Filing, 2014 TNT 120-9 (6/23/14) which summarizes the comments of IRS officials at NYU's Tax Controversy Forum yesterday.  The two IRS officials were Jennifer Best, senior adviser, IRS Large Business and International Division,, and John McDougal, special trial attorney and division counsel, IRS Small Business and Self-Employed Division.  I only include here the items I think of most relevance to most of my readers.

1. The expanded Streamlined procedures were "were expanded in response to criticism that there wasn't an appropriate compliance path for individuals whose failure to report offshore accounts wasn't willful."  [This is not a direct quote from  the speaker.]

2.  The new procedures were designed to "encourage folks who are considering quiet disclosures to come in with their hands up"' and avoid taxpayers coming into OVDP with the intention to opt out.  [The quotations are indicated to be direct quotes from the speaker.]

3.  McDougal sais that a person is non-willful if he "isn't really worried about being prosecuted."  [That appears not to be a direct quote from the IRS employee but a statement of what the author heard him to say.]

4.  McDougal is quoted as saying: "The concept of willfulness is well documented in the case law," and "We're depending on the practitioners to help the clients work their way through what the risk is of criminal prosecution and significant penalties."  [JAT Note:  At least one blogger on this has lamented that these programs seem to require the taxpayer to engage counsel.  This is probably a subject for a separate blog.]

5.  As to the increase in the penalty rate from 27.5% to 50% if there is public disclosure of a bank or facilitator, the "public announcements that count for purposes of the 50 percent rate increase are those by the DOJ." [This is not presented as a direct quote from the speaker.]  Taxpayers delaying are at risk of a public disclosure before they act:  "it's risky to wait given that John Doe summonses, in particular, usually come with no warning."  [This is presented as a direct quote from the speaker.]

The New Streamlined Processes' Requirement of Certifying Non-Willfulness (6/19/14; rev'd 6/21/14)

I am going to do a series of separate blogs on certain discrete facets of the IRS announcement on June 18.  See IRS Issues More Liberal Streamlined Procedures and Makes Some Changes to OVDP (Federal Tax Crimes Blog 6/18/14), here.  In this blog, I focus on the liberalized streamlined procedures' requirement that the offshore account conduct not be willful.  I think this requirement goes to the core of the penalty mitigation offered by the new processes.

In invoking either of the streamlined procedures, the U.S. person with an offshore account problem is required to certify that the "the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct."  I will refer to that U.S. person as the taxpayer.  The certification forms are for residents, here, and for nonresidents, here.  The key part of the certification form is:

My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.  

I recognize that if the Internal Revenue Service receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral to Criminal Investigation.  

When can the taxpayer make the certification that his conduct was not willful for income tax and FBAR purposes?

Obviously, the taxpayer must know what is meant by willful, so that he can assess whether his conduct was not willful (or "non-willful").  As courts have noted, the word "willful" is a "chameleon" which changes in tone and color according to the Code section involved and the circumstance.  See e.g., former Justice Souter's opinion in United States v. Marshall, 2014 U.S. App. LEXIS 10415 (1st Cir. 2014), discussed in More On Willfulness (Federal Tax Crimes Blog 6/13/14), here.  But, I think it is clear that, in both the income tax context and the FBAR context, willful means "voluntary intentional violation of a known legal duty."  Readers will recognize this as the Cheek standard.

The IRS discussion of the new Streamlined Procedures approaches the issue from a different direction -- instead of starting with the definition of willfulness and moving to non-willfulness, it states what is non-willfulness without any predicate.  The explanation of non-willfulness is direct and somewhat cryptic:  "Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law."  (See the certification forms linked above.)

The IRS does not get into the thorny issue of the role of willful blindness (or similar formulations, such as deliberate ignorance, etc.) and whether willful blindness permits an inference or requires a conclusion of willfulness.  Presumably, though, the definition of non-willfulness as quoted would exclude willful blindness.  Stated otherwise, if willful blindness were involved, the conduct would not be due to negligence, nor to inadvertence, nor to mistake nor to a good faith misunderstanding of the tax law.

I conceptualize the path between willfulness and non-willfulness as a continuum.  The facts of some cases will present themselves on either end of continuum and will be clearly recognized as willful or non-willful.  When the facts present themselves other than at the ends of the continuum, there is a problem.  OK, if they are close to either end, that may not be a big problem.  But how close do the facts need need to be to be at either end before one can comfortably make a decision?  Another metaphor is the gray area between the extremes.  What do you do when you are in the gray area -- in the shadings between white and black?

IRS Issues More Liberal Streamlined Procedures and Makes Some Changes to OVDP (6/18/14)

The key documents on the changes are:

• IRS Commissioner Koskinen's News Release is here.
• IR-2014-73, June 18, 2014 is here; announces the changes.
• OVDP 2012 (as changed 6/18/14), here.
• Streamline Filing Compliance Process (as changed 6/18/14), here.  This is the description.  There are two types of Streamline filings:  Non-resident and Resident.  The Nonresident program -- referred to as Streamlined Foreign Offshore Procedures -- is described on a web page titled: U.S. Taxpayers Residing Outside the United States, here. The Resident program -- referred to as Streamlined Domestic Offshore Procedures -- is described on a web page titled U.S. Taxpayers Residing in the United States, here.
• Delinquent FBAR Submission Procedures (as changed 6/18/14), here. 
• Delinquent International Information Return Submission Procedures (as changed 6/18/14), here. (This relates to the Forms required for entities, such as CFC's, trusts,etc.)
• IRS OVDP 2014 FAQs, here.  Note particularly par. 1.1 on the changes from the original OVDP 2012.
• Transition Rules FAQs, here.
• Foreign Financial Institutions or Facilitators List (formerly Bank and Promoter List), here.  This list is the basis for the 50% penalty in OVDP 2014 (See FAQ 7.2 in the OVDP 2014 FAQs, here.)  I should note that the description in FAQ 7.2 is not clear as to whether the key cut off date is the date listed on the bank and promoter list or the date of the public disclosure as defined in FAQ 7.2).  Readers should look at the list.  For those who have been watching this area, the institutions should be familiar.

The new procedures apply as follows:

1. Foreign residents (requiring only foreign residence in the 3 year period):  File 3 years of delinquent or amended returns and pay tax and interest.  No penalties (including FBAR or miscellaneous) will be assessed.  Must also complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S. certifying (i) eligibility for the procedure, (ii) filing of all required FBARs, and (iii) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.

2.  Nonforeign residents (Domestic residents):  Must file 3 years of returns and pay tax and interest.  No penalties other than a 5% miscellaneous penalty on foreign financial accounts only will be assessed.  Must complete and Sign the Certification by U.S. Person Residing in the U.S. that (i) eligibility is met; (ii) all FBARs have been filed; (iii) "the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct;" and (iv) that the miscellaneous penalty amount is accurate.

Nonwillful conduct for the purposes of #1 and #2 is:  "conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law; 

The taxpayers can be audited under the income tax audit guidelines but will not be automatically audited.

A couple of the material changes to OVDP 2012 are described in par. 1.1 of the FAQs as follows:

• A 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation. See FAQ 7.2.
• FAQ 7 has been modified to require that the offshore penalty be paid at the time of the OVDP submission.

I will be back with more later.