National Taxpayer Advocate Nina Olsen Comments on FATCA and OVDP (10/31/15)

Tax Notes Today has an interview with Nina Olsen, National Taxpayer Advocate ("NTA").  William Hoffman, Tax Analysts Exclusive: Conversations: Nina Olson Stands Up for Taxpayer Rights, 2015 TNT 211-4 (11/2/15), no link available.  Ms. Olsen's bi is here.  The role of the NTA is described here and here.  As readers know, the NTA has criticized some features of the IRS offshore voluntary disclosure initiatives.  In this interview, she makes brief comments about FATCA and OVDP.  TA is the Tax Analysts interviewer:

TA: Some in the tax community object that the Foreign Account Tax Compliance Act is a violation of taxpayer rights on an international scale. Do you agree? 

Olson: I don't know how it could be a violation of rights on an international scale since every community has its own set of rights. That's part of the problem. To me, I think the jury is still out on what it is like under various European conventions and provisions. We just have to wait and see how it's thought about. 

The problem with FATCA is that it imposes burdens on taxpayers at all sorts of levels, and it's not clear what benefits we're really going to get from it or what we'll be able to do. 

My attention has been more on the foreign bank and financial account report and on the offshore voluntary disclosure arrangements. I could make a strong case that those violate many of our rights. 

For example, under that disclosure initiative, there is a secret committee that reviews recommendations for what would be the settlement in a particular case. Taxpayers are not allowed to talk to anyone on that committee. They don't receive a detailed explanation of the decisions that the committee made. I can't say it's a violation because this is not a law, but it impairs the taxpayer's right to be informed and, ultimately, the sense that he is part of a fair and just tax system.

Article Questioning Effectiveness of U.S. Swiss Bank Initiatives for Past Misdeeds (5/22/15)

The Economist has an article questioning the U.S.'s claimed success for the U.S. offshore account initiatives from UBS forward.  America the not so brave (The Economist 5/23/15), here.

An excerpt:

But the American government has been nowhere near as energetic and effective as it claims. It has been slow to chase tax evaders exposed by data leakers; it has failed to follow promising leads on some of the biggest fish; it has pulled punches with the biggest banks, for fear of destabilising markets; it botched the most prominent prosecution of a Swiss banker to date; and it has treated whistleblowers shoddily.

The article recounts relatively better success by France.

Another excerpt commenting no the Government's claimed success rate:

But that number is misleading because prosecutors only tend to bring cases when the odds of winning are high. Some of their victories have been questionable, such as the case of a 79-year-old who inherited her husband’s Swiss account. She faced six years in jail despite having come forward to confess to $670,000 of unpaid tax. Bemoaning prosecutors’ heavy-handedness, the judge gave her a few seconds of probation and urged her to seek a pardon. 

The biggest case of all—against Raoul Weil, UBS’s global head of private banking—was an embarrassing failure. Mr Weil was extradited to America in 2013 after being arrested in Italy. The main prosecution witness at his trial last November was Martin Liechti, UBS’s former private-banking head in the Americas, who testified that his erstwhile boss was aware as far back as 2002 that thousands of the bank’s accounts did not comply with American tax laws. Defence lawyers accused Mr Liechti, whom the government had promised not to prosecute if he helped in other cases, of lying to save his skin. The prosecution was widely criticised; the jury acquitted Mr Weil after barely an hour of deliberations.

The article also discusses claims of whistleblowers Brad Birkenfeld and Hervé Falciani that suggest that the U.S. is not actively following important leads.  The article then concludes:

Some wonder if America’s punch-pulling might have had something to do with the long tentacles of Swiss banks. They have certainly spent large sums raising their profile in Washington, DC. Credit Suisse, HSBC and UBS have spent $91m since 2002 on lobbying and political contributions in America, according to the Centre for Responsive Politics (see chart). 

Moreover, numerous officials and political figures have close past or present ties to the banks—including the president himself. Mr Obama has a well-publicised friendship with Robert Wolf, who ran UBS’s American operations until 2012. The IRS’s chief counsel, William Wilkins, is a former lobbyist for the Swiss Bankers Association. Eric Holder, the recently departed attorney-general, represented UBS when he worked in a private legal practice; for that reason, he avoided any involvement in the DoJ’s probe of the bank. (The revolving door spins the other way, too: prosecutors often move into private practice on leaving government, working with tax-challenged banks and companies.) 

Officials dismiss any suggestion that such links have affected the government’s response. The DoJ “makes its decisions based on law-enforcement considerations and nothing else,” says Kathryn Keneally, the former head of its tax division.

Another former official argues that America’s efforts to curb tax evasion have been effective, if you consider that the aim is not necessarily to maximise convictions but to scare those hiding money to come forward. The IRS’s voluntary-compliance programme is deemed a success, having brought in $7 billion in back-taxes and penalties from 50,000 individuals. But it is controversial because it allows for anonymous payment and no admission of guilt. 

America’s tax investigators continue to focus mainly on Switzerland, even as the returns on their efforts diminish. The 100-bank programme is bogged down, with only three banks having settled with the DoJ when most were expected to have done so by now. 

One obvious way to make the crackdown more effective would be to broaden it to tax havens that have so far been given an easy ride. Law firms in Panama, for instance, are giant incorporators of shell entities used by tax evaders, and the country has been slow to sign bilateral deals to exchange information on taxes. If federal prosecutors do eventually train their sights on such places, their experience with Switzerland has provided plenty of mistakes from which to learn.

Criminal Justice Article of U.S. Global Tax Enforcement (8/24/14)

Jay Nanavati, here, and Justin Thornton,  here, have authored an article on the DOJ and IRS offshore tax initiative.  "DOJ and IRS Use 'Carrot 'n Stick' to Enforce Global Tax Laws" , Criminal Justice, Vol. 29, No. 2, Summer 2014, here.  Most readers of this blog probably already know most of the contents of the article, but it is a good succinct summary of the developments.

I will quibble with their premise stated early in the article:  "The OVDP, currently in its third iteration, is the closest thing to a "carrot" that the government has offered taxpayers to induce compliance."  Of course, a command to get right going forward with no penalty for those who do get right into the future would induce a lot of compliance.  But OVDP does have a significant penalty structure.  With that penalty structure, OVDP is a carrot only for those willful actors for whom the penalties -- particular the FBAR penalties -- could be a lot greater.  But, for nonwillful actors for whom the penalties -- particularly the FBAR penalties -- should be a lot less, it  is not a carrot.  The carrot for them is the streamlined procedures, as recently revised, including the streamlined transition procedures for those in OVDP who would have opted out anyway because they were not willful.  This is just a quibble, though.  The article is good.

Toscher Article on Update on Offshore Account Sentencings (2/18/14)

Steve Toscher, here, a major player in the offshore bank account arena, has an excellent recent article, titled Update on the Department Of Justice’s and Internal Revenue Service’s Criminal And Civil International Enforcement Program: Don’t Let the Statistics on Sentencing Fool You (Bloomberg BNA Tax Management Memorandum 2014), here.  The following are some excerpts:

What the sentencing statistics for the offshore cases since 2009 show is that the defendants who have been prosecuted and have pled guilty have received substantially lower sentences than we might have expected under the now advisory Federal Sentencing Guidelines (‘‘Guidelines’’). These cases are ‘‘outliers.’’ While I have not undertaken an empirical study to support my views, I will provide my thinking as to why these cases are outliers in criminal tax sentencing, why they are not reflective of sentencing for tax crimes in general and, importantly, why these sentences may not be a good indicator of sentences in offshore criminal tax cases in the future.  

* * * * 

The word on the street is that because of the amount of resources required to administer the OVDI programs, the IRS is revamping the program, but it will no doubt work very much like the 2012 program, which looked very much like the 2009 and 2011 programs, but with possible increased penalties. 

While there have been criticisms of the OVDI programs, both in the terms of the way they were administered and the ‘‘one size fits all’’ penalty approach, it is fair to say that from a tax enforcement and compliance perspective, it has been a great success. The OVDI programs have brought more than 43,000 U.S. taxpayers back into U.S. tax compliance and are credited with the collection of tax, interest and penalties in excess of $5 billion.1 The level of voluntary disclosures and increased offshore tax compliance is unprecedented. 

* * * *

Article Analyzes Counter-Intuitive Effects of IRS Offshore Penalty Structure (2/12/14)

In a comment, a reader directed me and other readers to a recent article that is quite good, so I decided to elevate the article to a separate blog entry.  The article is Patrick W.Martin & Michelle Ferreira, The 2013 GAO Report of the IRS Offshore Voluntary Disclosure Program (1/10/14).  The web version is here, and the pdf is here.  The authors' bios are here and here.

As the authors note, "the GAO Report indicates [that] taxpayers with little or no criminal or civil fraud exposure were punished proportionately in higher amounts than those who participated and had true criminal tax exposure."  The authors break these categories into Bad Actors and other actors, referred to as Benign Actors.  That Bad Actors would be treated better than Benign Actors is a counter-intuitive result.

The authors also analyse the data to conclude that, relative to aggregate collections from those who don't opt out, the income tax is relatively small -- i.e., 64% of the collections is the in lieu of penalty, called the "Offshore Penalty," and 36% is income tax, penalty and interest.

The authors state:

One key question that the GAO Report raises, is why would so many taxpayers enter into the Offshore Voluntary Disclosure Program if they were not at least as liable for income taxes or penalties under the law? The authors think the answer to this question can be simply answered. Neither taxpayers nor many of their tax advisors understand how tax penalties actually apply under the law, particularly because some penalties are not in the Internal Revenue Code. Instead of understanding what the requirements are under the law, taxpayers simply relied upon the  Internal Revenue Service to inadequately explain how penalties could apply in and outside of the Program. Based upon only the Frequently Asked Questions (which were published subsequent to the Program’s announcement), taxpayers and their advisors had to make swift and uneducated determinations as to whether a taxpayer should participate on the Offshore Program at all and many feared all would be criminally prosecuted, as the IRS continuously led them to believe. 

The authors state that the IRS pronouncements -- particularly the FAQs are not very helpful in given good information to help taxpayers and practitioners assess true exposure under the law, thus causing many of them to accept the OVDP program and the Offshore Penalty from fear rather than understanding.  Thus, the opt out procedure is not the safety valve that the IRS perceives it to be. More from the authors:

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.

New Taxpayer Advocate Report to Congress Addressing, Inter Alia, OVDI/P Concerns (1/10/14; supplemented 1/13/14)

The Taxpayer Advocate has issued a new report addressing concerns, including the administration of OVDI/OVDP.  Taxpayer Advocate FY 2014 Objectives Report to Congress and Special Report to Congress.  The initial page is here.  The Report page is here.  The portion on OVDI/P is here.

The issues covered in the report are:

• The IRS Harms Taxpayers by Refusing to Issue Refunds to Some Victims of Return Preparer Fraud
• The Current Limited Oversight of Return Preparers Makes Taxpayers Vulnerable to Unscrupulous or Incompetent Preparers
• As the IRS Adopts a Specialized Approach to Identity Theft Victim Assistance, Concerns About Complete and Timely Account Resolution Remain
• Implementation of the IRS’s Return Review Program Is at Extreme Risk, Which Could Cause Significant Harm and Cost
• Collection Update: The IRS’s Tepid Approach to Implementing Recent Changes in Collection Policies Has Limited Taxpayer Access to Important Collection Options
• The TAS Collection Case Review Yielded Valuable Insights on How TAS Can Improve Advocacy in Collection Cases
• TAS Prepares for Implementation of Health Care Provisions
• The IRS has Revoked the Exempt Status of Thousands of Organizations in Error, Causing Significant Harm to Taxpayers
• TAS Works to Ensure Taxpayers Know Their Rights and  Obligations
• IRS Offshore Voluntary Disclosure Programs Continue to Burden “Benign Actors” and Damage IRS Credibility
• Shared Jurisdiction and Lack of Coordination between IRS and FinCEN Burdens Taxpayers and Undermines Compliance Efforts
• International Taxpayer Service Initiatives Continue but Need a More Formal Structure
• IRS ITIN Policy Changes Make Return Filing Difficult and Frustrating
• Cuts to IRS Tax Forums Mean Lost Opportunities

Although the report on OVDI/P is short, I just have not had time to study it for comments here.  I do provide the following excerpts from the OVDI/P portion (footnotes omitted):

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.

New Taxpayer Advocate Discussion of Problems with IRS OVDI/P Program (6/26/13)

The Taxpayer advocate has issue a new report.  The portion relate to the IRS's OVDI/P initiatives is here.  I cut and paste some of the discussion (footnotes and tables omitted):

A Government Accountability Office (GAO) analysis shows that the offshore penalty paid by those with the smallest accounts (i.e., those in the 10th percentile with accounts of $78,315) was disproportionate – at least 575 percent of the tax, interest, and penalties on their unreported income. It was also disproportionately greater than the amount paid by those with the largest accounts (i.e., those in the 90th percentile with accounts of more than $4 million) who paid 86 percent or less. Moreover, the IRS initially processed applications from benign actors who are expected to opt out much more slowly than others, though it has recently begun to process them more quickly, as shown by the following table  

In 2012, the IRS began allowing certain “low risk,” nonresident nonfilers – those with  simple returns and owing less than $1,500 in tax – to file the returns without triggering
penalties (the “Streamlined Nonresident Filing Initiative”). In January 2013, following
the National Taxpayer Advocate’s recommendation to expand the Streamlined Nonresident Filing Initiative to both U.S. residents and those owing more than $1,500, IRS officials publicly announced the IRS had eliminated the $1,500 threshold .
Although this is a positive change, the National Taxpayer Advocate remains concerned that the IRS does not have a simple and easy method for allowing benign actors who are U.S. residents to resolve past filing delinquencies. Nor has it provided clear guidance about key terms that it has used in its programs, such as when someone will be considered “high risk,” how they may avoid a penalty (e.g., by demonstrating “reasonable cause”), and when they will be subject to the lower penalty applicable to “nonwillful” conduct. The uncertainty surrounding these terms and the consequences of opting out has likely prompted some benign actors to pay more than they should inside the OVD programs  

* * * * 

Finally, in FY 2012 and FY 2013 YTD, TAS assisted 474 taxpayers with OVD-related problems and issued four taxpayer assistance orders (TAOs). In the three cases in which the IRS did not comply with the TAOs, the National Taxpayer Advocate elevated (or plans to elevate) them to the Operating Division Commissioner level or above.

For an article discussing an Opt Out Strategy, with some assistance fro the TAO, see An OVDI Odyssey - an Opt Out Success Story (Federal Tax Crimes Blog 6/16/13), here.

Navigating Offshore Tax Hazards: An Update (5/21/13)

Many of this blog's readers will be interested in Bill Sharp's recent article.  William M. Sharp Sr, Navigating Offshore Tax Hazards: An Update 655 (TNI 2013), here.  All of his article is very good and worthy of reading.  I incorporate only a couple of anecdotal excerpts below that I found particularly interest.

1.  Regarding quiet disclosures:

Another beneficial aspect of the OVDP addresses the once-questionable "quiet" submissions, which were generally discouraged in the 2009 and 2011 programs. n11 In its frequently asked questions, the 2012 program clarifies that submissions under the IRS voluntary disclosure "practice" may still constitute valid voluntary disclosures as far as resolving criminal tax exposure but does not guarantee that criminal treatment will be avoided. The OVDP also cautions that those submissions will not be eligible for the certainty of the OVDP's penalty framework. n12 This good news raises the question of when the noncompliant client should pursue remedial relief under the IRS voluntary disclosure "practice" instead of filing under the OVDP.
   n11 See FAQs 15 and 16 of the 2012 OVDP and 2011 offshore voluntary disclosure initiative, as well as FAQs 10 and 49 of the 2009 OVDP.
   n12 Id.

 * * * *

Submitting a practice filing (versus entering the formal program) can turn into a nightmare for all involved if the practitioner has been given incorrect information, misinterprets the law as applicable to the facts, or does not have a complete file of what actually occurred regarding the noncompliant offshore activities. Omitting a single offshore account from the disclosure package could not only cause the practice submission to be rejected during the assumed examination process, but depending on the facts, could also lead to a criminal investigation with a follow-on criminal referral to the DOJ, as well as expose the taxpayer to substantially higher taxes and penalties. Although having an incomplete file or other glitch in the context of an OVDP case filing does not insulate the filing taxpayer from criminal or increased civil exposure, in the context of a "defective" practice filing, the IRS may be less forgiving. And as a practical matter, some practitioners who advise clients to pursue the practice alternative incorrectly believe that merely filing amended tax returns and late FBARs will be sufficient and that such a filing requires less critical thinking than a submission under the OVDP. This is not so.

Guest Blog: Analysis of the Data in the GAO Report (5/13/13)

Introduction:  I previously posted a blogged on the recent GAO Report on the OVDI/P initiatives.  See GAO Report Targets Strategies Other than OVDP (4/26/13), here, and More on the GAO Report on IRS Offshore Disclosure Initiatives (4/27/13), here.  A reader made some comments to one of those blogs and, thinking that the comments might be refined by the reader and useful to other readers as a stand-alone blog, I invited the anonymous reader to do a guest blog on his comment.  The reader agreed to do so, but has chosen to remain anonymous.  Accordingly, the remainder of this blog is the Anonymous reader's comments as refined for this blog entry.  I have not attempted to verify the statements and conclusions of the reader by tracking them to the GAO Report, so I encourage those interested to do so and post any of their thoughts as comments for the benefit of all readers.

Particular thanks to this anonymous reader.  The balance of this blog entry is the Anonymous reader's offering.  I have not done anything other than cut and paste the offering and provided the full link to the GAO publication.

---------------------

Finally, the GAO report on the 2009 OVDP has some data which strongly suggests that a large majority of those who entered the OVDP had tax-compliant principal and only the earnings had not been taxed. It also shows how disproportionate the FBAR penalty has been.

Link: http://www.gao.gov/assets/660/653369.pdf

Table 2 divides participants into categories based on account size. For the 10th percentile group, with median account size of $78,315 the total unpaid taxes over the six-year 2003-2008 lookback period were $103 (or $17 per year.) It would be hard to imagine anyone wilfully setting up and maintaining a foreign account to cheat for such an insignificant amount of money, yet the average FBAR penalty for this group was $13,320 or 129 times the amount of unpaid tax. Had this been unreported domestic income the fraud penalty would have been 75% of $103, or $77.

Readers of this Blog Willing to Share Their Personal Experiences in the OVDP/I Programs (5/2/13)

A reporter for a nationally prominent publication has contacted me to help him get in touch with people who have gone through one of the OVDI/P programs to discuss their experiences and thoughts about the programs.  If you are interested and/or willing to do that, please contact me at jack@tjtaxlaw.com and I will put you in touch with the reporter.

As with any reporter, there is no requirement that you speak at all or, if you do, share your personal information with the reporter.  Make sure that there is a clear understanding between you and the reporter as to the information you share and how the reporter can use that information.  He seems to be an excellent and reputable reporter and will honor his commitments to you.

More on the GAO Report on IRS Offshore Disclosure Initiatives (4/27/13)

Yesterday I posted the general summary of the GAO report titled Offshore Tax Evasion:  IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion (GAO-13-318, Mar 27, 2013), here, and made comments regarding the general summary.  Yesterday's blog entry is GAO Report Targets Strategies Other than OVDP (4/26/13), here.  The focus of yesterday's blog was taxpayer use of alternative strategies to OVDP -- particularly quiet disclosure and go forward strategies.  Today, I will focus on the rest of the report that has some very interesting history of the IRS's identification of offshore account noncompliance and statistics of results, particularly from the 2009 OVDP.

Given the scope of the report, I will only present certain select issues.  I strongly encourage those with a particular interest in this general area to read the entire report to mine their own nuggets from it.  Where I quote, I omit footnotes.  However, footnotes are important for those wanting to dig into the report.

1.  The scope of the report is as follows (from opening letter to Senator Baucus):

You asked us to review IRS's 2009 Offshore Voluntary Disclosure Program (OVDP) -- IRS's second offshore program and the most recent program with enough closed cases for analysis. In this report we (1) describe the nature of the noncompliance of taxpayers participating in the 2009 OVDP, (2) determine the extent to which IRS used data from the 2009 OVDP in order to better prevent and detect future noncompliance, and (3) assess IRS's efforts to identify taxpayers who may have attempted quiet disclosures or other ways of circumventing some of the taxes, interest, and penalties that would otherwise be owed.

2.  "As of December 2012, these offshore programs have resulted in more than 39,000 disclosures and over $5.5 billion in revenues."

Care Must Be Taken With Closing Agreements in the Offshore Initiatives (4/13/13)

In Nance v. United States, 2013 U.S. Dist. LEXIS 52050 (WD TN 2013), here, the Nances (husband and wife), guided by an attorney who held himself out as an experienced tax attorney, undertook some "offshoring" of their assets with consequent tax underpayment and failures to file.  In the 1990s, they created two corporations in the Bahamas and a trust in Costa Rica.  They transferred assets to these entities.  In late 1999, the attorney advised them that these activities "may 'no longer' be valid from a tax standpoint."  He did not advise them, however, to liquidate the entities or take any other remedial action (such as form filings); still, the Nances ceased further deposits.

In 2003, the IRS contacted the Nances to invite them into an earlier version of a voluntary compliance initiative targeted to offshore financial accounts, called the Voluntary Compliance Initiative.  Under that initiative, the tax was required and penalties as follows:  (i) a civil fraud penalty for a major year and (ii) an accuracy related penalty for the other years.  The letter advised that (i) an FBAR penalty would be assessed for 1 year and (ii) other penalties, such as for failure to filed Form 3520 or 5471, would not be asserted if delinquent returns were filed.  The Nances, guided by new counsel, joined the program.  The communications between the IRS and the new counsel indicated some confusion as to whether the Nances would be required to filed the information forms.  Ultimately, the new counsel submitted, among other things, Forms 3520-A to the agent for the years 1997 through 2003.  Thereafter, on February 23, 2006, the Nances and the IRS entered a Closing Agreement for the years 1997 through 2002, in which they paid $1,245,396.52 in tax and $446,344.50 in penalties.  That closing agreement provided "[t]his agreement is final and conclusive except . . . if it relates to a tax period ending after the date of this agreement, it is subject to any law, enacted after the agreement date, that applies to that tax period."

On September 11, 2006, the IRS asserted a penalty of $156,478.00 based on the Nances' failure to filed Form 3520-A for 2003, a form that was due on March 15, 2004.  The Nances asked for waiver of the penalty.  The IRS denied the request.  This suit following that denial.

AAG Tax Says DOJ Tax Will Be Fair in Determining Whether to Prosecute Taxpayers Kicked Out of OVDP (4/12/13)

In a prior blog, I reported on news accounts of Bank Leumi clients being kicked out of the offshore voluntary disclosure programs.  See Bank Leumi U.S. Clients Rejected from OVDP (FTCB 3/8/13), here.  Responding to inquiries about whether those taxpayers will be prosecuted, Kathy Keneally, AAG Tax, said the Government would consider fairness.  See Janet Novack, Taxpayers Who Lost Offshore Account Amnesty Promised Fair Treatment (Forbes 4/11/12), here.

Excerpts from Ms. Novack's fine article:

According to their attorneys, some of the taxpayers ejected from the program had already made a full disclosure of offshore accounts and unreported income and had even paid back taxes to the IRS. “It would seem difficult for the government to actually pursue prosecutions of these individuals without a strong showing that such a prosecution is not based on tainted evidence,’’ Edward M. Robbins Jr., of Hochman, Salkin, Rettig, Toscher & Perez, the big West Coast tax defense firm, told Forbes in March. 

Keneally said yesterday that  “the DOJ Tax Division will review each case based on its specific facts and circumstances before authorizing prosecution, as is its practice in all criminal tax investigations.’’ In what was obviously a carefully worded statement, she added:  “In  any case in which an individual received a conditional acceptance letter, made substantive disclosures, but was subsequently disqualified from participation in the OVDP, the Tax Division considers now and will continue to consider the facts and circumstances under which any substantive disclosures were made, and the fairness of proceeding against that individual, as part of the Tax Division’s review.” 

* * * *

Article on Deterrence Through Criminal Enforcement and Defining Tax Shelters (3/7/13)

A recent article in Tax Notes summarizes a recent PLI conference on tax penalties.  Marie Sapirie, Revised Guidance on Tax Shelter Definition on the Way, 2013 TNT 42-9 (3/4/13).

Perhaps most importantly for tax crimes afficionados are statements made by Daniel W. Levy, AUSA SDNY, who is a prominent player in the Government's offshore crimes juggernaut.  The article discusses Mr. Levy's comments as follows:

"What we're trying to do is drive deterrence," said Daniel W. Levy, assistant U.S. attorney, Southern District of New York. At some point people who pay their housekeepers and nannies off the books will be prosecuted for criminal tax fraud, he said. "If it all revolves around housekeepers, I've already got my snappy code name in the can and it's Operation Clean Sweep," he joked.  

For now, however, "we're looking for clear violations of law, clear evidence of willfulness, cases that don't involve the possibility of negligence," Levy said. "We want the strongest possible evidence of willfulness because those are the strongest possible criminal cases we have." But that doesn't mean that the government shies away from complex cases, he added.  

Offshore bank accounts sometimes presented situations of relatively low tax loss and low evidence of willfulness. "We've had to make hard judgment calls about whether it's worth prosecuting that person given relatively limited tax evasion -- that is, relatively limited tax loss to the United States," Levy said. "There are some people who just passed into the night."

Warnings on Continued Government Patience for Offshore Account Ostriches (1/31/13)

A Tax Notes Today article reports that the Assistant Attorney General for the Tax Division, Kathy Keneally, has warned that amnesty for offshore account evasion will not last forever.  Jeremiah Coder, Keneally Says Government's Patience with OVDP Holdouts Has Limits, 2013 TNT 21-3 (1/31/13).  The opening quotes are:

The Justice Department Tax Division and the IRS will not forever offer criminal amnesty to taxpayers who continue to avoid reporting their undeclared offshore bank accounts, Kathryn Keneally, assistant attorney general for the Tax Division, said on January 29. 

Account holders should disclose their accounts through the IRS offshore voluntary disclosure program (OVDP) as quickly as possible, "because sitting it out at this point is extremely dangerous," Keneally said at a roundtable discussion held at the University of Southern California's annual tax institute. If a taxpayer knows a criminal investigation is underway, "it's too late" to enter the OVDP and avoid investigation by the DOJ, she said.  

Several offshore cases that started out as civil IRS exams have now gone criminal, Keneally said. "This idea of sitting it out, and if the government goes after me I'll only have civil penalties to deal with -- people need to get over that," she warned.

JAT Note:  She is right, of course.  But there is nuance in what she says.  When advising a U.S. taxpayer with this problem whether to enter the applicable version of the IRS OVDI/P  program, the key initial inquiry is whether that taxpayer has material criminal fraud risk and, correspondingly, material civil fraud risk that might result in the civil consequences of fraud (specifically, (i) for income tax, the unlimited statute of limitations and the civil fraud penalty) and (ii) the civil fraud FBAR counterpart, the willfulness penalty.  If those risks are material, the taxpayer certainly should get into the program.  If those risks are not material, then getting into the program may offer very little benefit.  The reason is that can happen when the risks have been accurately assessed to be minimal is that the taxpayer will be subjected to civil audit if the IRS chooses to audit.  Inside the program, the taxpayer with that profile will usually be a candidate for opting out and, upon opt out, will get an audit.  The taxpayer is no worse off and, indeed, the taxpayer may  be better off if he or she is not audited.  Of course, accurately assessing the criminal prosecution risk and the civil fraud consequences requires experienced judgment because of the consequences of missing a material risk assessment.

Steps in OVDI/P Processing and Opting Out

An anonymous commenter going under the name "Anonymous" posted the comment below.  It is a very good comment and solicits other comments, so I am posting it as a blog entry so that readers do not miss the excellent analysis and make comments as appropriate.

Anonymous 01/22/13 11:04 AM

I am listing below the steps leading to opting out of OVDI as I understand them from what I've read on this blog. I am not a professional, just a layman involved in OVDP. I am not sure everything is correct and would appreciate input. I've numbered the steps so intermediate steps can be added or the steps can be referred to by number.

1. Taxpayer decides to enter OVDP, possibly because of the risk of quiet disclosure or forward compliance.

2. Submit preclearance.

3. Submit intake letter.

4. Submit "package" of amended returns with payment of additional tax, 20% penalty on taxes, and interest on both, as well as penalty calculation worksheet.

4A. At this point, or once Federal returns are finalized, residents of many states will also need to file amended state income tax returns. The procedure, number of years, penalties, etc. vary by state and I'm just mentioning this so as not to leave it out.

5. After months, examiner assigned.

6. Examiner audit. Might be straighforward if returns prepared by professional.

DOJ Tax CES Attorney Comments on Offshore Criminal Enforcement Initiatives (1/12/13)

In a new article in Tax Notes, Lee Sheppard reports on comments of participants on a panel at the Florida Bar Annual International Tax Conference in Miami Lee A. Sheppard, IRS Officials Discuss Streamlined Voluntary Compliance, 2013 TNT 9-6 (1/14/13).  I am not much interested in the Streamlined Program because if its limited benefit, but here are some snippets on broader issues attributed to Mark Daly, a DOJ Tax CES attorney who is a major participant in the criminal enforcement efforst related to offshore accounts:

Mark Daly of the Justice Department Tax Division Criminal Enforcement Section talked about DOJ's approach to using data so gathered. DOJ is especially interested in bankers who helped fleeing UBS customers move to other banks. "They're the most culpable," Daly said. 

Swiss bankers are so nervous and so inconvenienced by their inability to travel that they have been offering bank account information to DOJ in an effort to obtain immunity. And there are a lot of CDs floating around Europe. 

"We're finding a lot more people knocking at our door," said Daly. "Your banker knows who you are." Moreover, DOJ can reconstruct bank account data to find transactions like monthly wires structured to evade suspicious transaction reports. 

But DOJ does not interpret the money laundering (18 U.S.C. section 1956) rules to grab income tax violations. According to the U.S. Attorneys' Manual, mailing a false tax return is not considered mail fraud, a predicate offense to money laundering. There has been no change in policy, according to Daly.

TA Report Identifies IRS' OVDP / OVDI As Problem (1/9/13)

The Taxpayer Advocate has issued her new Report to Congress, here.

In it, she identifies specific problems, among which is:  The IRS’s Offshore Voluntary Disclosure Programs Discourage Voluntary Compliance by Those Who Inadvertently Failed to Report Foreign Accounts, here.

Eliezer Mishory, a 2L student at George Washington University Law School, notified me of the Report and provided the following summary (which I may supplement later after I have had time to review in detail):

It may be newsworthy that the OVDP “made it” to Nina Olsen’s Taxpayer Advocate Report to Congress as “Most Serious Problem” number 8. I have only scanned the report but it seems that her chief grievances are (1) that the program treats “benign actors” who had reasonable cause or inadvertently failed to file FBARs the same way as “bad actors”, (2) the difficulty in opting out of the OVDP, and (3) the unnecessary burden on taxpayers caused by the overlap of FBAR and Form 8938. 

The report recommends establishing three (3) categories of taxpayers: 

1) Taxpayers who only underpaid a small amount should be able to come compliant without any penalties (essentially expanding the new program for foreign residents to include taxpayers who reside in the US). 

2) Taxpayers who have reasonable cause, or inadvertently failed to file ("benign actors"), should be able to pay the lower non-wilful FBAR penalties without having to opt out of the OVDP. 

3) Taxpayers who are not category 1 or 2 should come forward under the current OVDP rules.

Thanks to Mr. Mishory!

Addendum 1/10/13 4:30pm.