Thursday, May 6, 2010

Tax Practitioners Complain About Too Rigid Application of Voluntary Disclosure Program for Offshore Accounts

The tax news media is abuzz yesterday and today about a letter from a group of tax attorneys significantly involved in advising and representing clients with offshore accounts (i) who made what they thought were voluntary disclosures under the pre-10/15/09 special program and (ii) are considering a voluntary disclosure after 10/15/09 under the general voluntary disclosure program. The attorneys' concern is that the IRS is interpreting the conditions for voluntary disclosure too rigidly so as to disqualify persons who were truly voluntary in their disclosures in every meaningful sense of the word voluntary but who had the misfortune to have turned up on the IRS's radar screen (perhaps through UBS disclosures) before they could implement the voluntary disclosure. The following is a good sound bite from the letter:

Our immediate concern is the prospect that the government may bring criminal tax charges against persons who attempted voluntary disclosures but were later advised that pursuant to the VDP they were not timely. Such action would effectively destroy the VDP.
A copy of the letter is here. Articles appear in this morning's Tax Notes and in the popular press (WSJ article is here and the Tax Prof Blog article is here).


  1. Wow! Talk about a Who's Who list of notable tax attorneys that signed the protest letter. This may be a great place for a holder of an undisclosed account to shop for a lawyer but he probably better make sure his billfold is pretty full of dinero!

  2. There is a whole other aspect to the prosecution of the first group of voluntary disclosures which has been overlooked. Beyond the "softer" issues of fairness, reliance upon governmental public statements, and prudential prosecution, there are some substantially more solid procedural issues.

    While the IRS VD policy prior to March 2009 had clear rules for acceptance and timeliness, there was a complete absence of procedural processes for those who wanted to pursue this policy offer. Essentially, a taxpayer could make a timely disclosure to his legal counsel, but the absence of procedural processes and ambiguity could put the counsel in the position of making it untimely. This is the dirty little secret among practioners that no one is discussing.

    Specifically, a voluntary disclosure could have taken several forms prior to March 2009. They could be "noisy" or "quiet", meaning a practioner could either pick up the phone and call the IRS do file the VD OR just get all the records, file amended tax returns several months later, and quietly have done a VD. Both were legitimate procedures at the time. All of those prosecuted so far who did voluntary disclosures appear to have had counsel which pursued the "quiet" VD alternative, which was valid at the time. However, in the time between the client hiring counsel and counsel/the accountant filing the amended returns several months later, their names showed up on a list and they were denied any recognition of their timely VD efforts even though they had retained counsel to undertake a VD in a timely fashion.

    The crux of the problem is that there was a complete absence of IRS procedural processes for those who wanted to take advantage of the VDP prior to March 2009:

    1) There were no clear procedures as to whether disclosures should be noisy or quiet
    2) There were no specific forms to file
    3) There was no clear person to contact - IRS CI, or the DOJ, or your local IRS office.
    4) No codes to mark early resolution payments of underpaid tax before amended returns filed.
    5) No consensus among practioners as to what one was supposed to do - only around 100 VDs a year were filed anyway.

    Essentially the government made an offer of administrative grace without offering a procedure to accept it. One might call it false advertising or worse. Kind of like if a telemarketer had 100% money back guarantee but no returns department and no telephone number.

    The government itself has acknowledged their shortcomings by virtue of all the changes they made in March 2009 and further acknowledged that one of the old procedures, filing amended returns first, was too high a hurdle for the second group of 15000 names to make even a September 2009 deadline, 7 months away. If they had left THAT in place, the next 15000 would never have made the September deadline either.

    Essentially, prior to March 2009, a taxpayer could have made a timely disclosure to his legal counsel, but the absence of streamlined procedural processes and ambiguity could put the counsel in the position of making it untimely.

    This was a fundamental system problem which has led to the substantially unfair prosecution of some individuals who tried to do voluntary disclosures even before the reduced penalties and simplified procedures were announced in March 2009. They tried to do VDs under an even harsher penalty regime! And not surprisingly, you don't see a lot of civil tax practioners apologizing for getting their clients prosecuted because the practioner made the mistake of choosing the quiet disclosure option instead of the noisy one. Ooops - too bad for that client. But gee, we wouldn't want to 'fess up and trigger a malpractice suit either.

  3. Anonymous,

    I will try to pick the key points for my comments:

    1. You correctly note that, under the voluntary disclosure procedure prior to the special offshore initiative starting in Mary 2009 there would be some time between the taxpayer's hiring of the lawyer and his actually making the disclosure. That "hiatus" occurred in both types of disclosure -- quiet and noisy -- because the lawyer would need to conduct substantial due diligence before making even a noisy disclosure and that takes time. You are correct that the quiet disclosure often required substantial time before the returns were ready for filing and, conceptually, the taxpayer might be at risk if the IRS otherwise gets him or her in their gun sights before that filing could be made. However, I and other practitioners are very careful to document when the client made the decision to voluntarily disclose in order and each stage of the process to make the voluntary disclosure. This will permit the attorney to argue that the IRS should treat the disclosure as timely because the taxpayer had started the process. I have had to make the argument only once over the years and that taxpayer was not prosecuted (there were some other equitable factors as well). Anecdotally, I have asked other practitioners over the years this precise question and only one has advised me that he had to make the argument and the IRS accepted it. The disclosure was treated as timely. So, I am not sure it is fair to say that the hiatus period presented an unfair risk.

    2. There has always been the related issue of whether the quiet disclosure was a qualifying voluntary disclosure. The IRM discussion of the VD process is in the context of a noisy disclosure. It does not specifically bless a quiet disclosure. Nevertheless, most practitioners believe that the quiet disclosure worked historically and that the IRS would shoot itself in the foot by pursuing bona fide quiet disclosures. (The fuzz word there is "bona fide.")

    3. As to a noisy disclosure, I think most practitioners knew and could fairly discern from the IRM what the process was and what steps needed to get taken. As to quiet disclosures, all that was required was to prepare the delinquent original returns or amended returns and send them in.

    4. I am surprised that only 100 VDs were done a year. If you mean 100 noisy VDs, then that number would not be inconsistent with my experience and discussions with other practitioners. I had never done a noisy VD prior to the offshore VD initiative, and most practitioners I have discussed this with have either never done one or have only done a few small number as compared to quiet disclosures.

    5. I disagree that the VD program whether prior to or after the offshore VD initiative was false advertising. It worked well for a number of years. The IRS and the taxpayers involved are better off for it working.

    6. I also cannot confirm that anyone who has been prosecuted to date had started their process with their selected counsel prior to DOJ Tax becoming aware of their names. I think DOJ Tax became aware of the small list (perhaps 245 names or whatever the number was) before the special offshore VD initiative was announced. There may be an instance there where the taxpayer had really made the decision to do a voluntary disclosure before DOJ Tax got his name, but I am not aware of it. One of the fuzz issues here, of course, is when the taxpayer really makes the decision; often the lawyer will do the due diligence, perhaps even getting draft amended return, before the taxpayer really makes the decision, in which case there is little or no hiatus between the decision and the implementation of the VD. In that case, of course, if DOJ Tax becomes aware of the name after the taxpayer has contacted the lawyer but before making his or her decision, then that would or at least might be a disqualifying event.

    I don't know that these points address all you say, but again I think your comments are excellent.


Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.