Opting Out Considerations - A Jeff Neiman Guest Blog (9/10/11)

The OVDP and OVDI programs have come to an end and many taxpayers who participated in the programs are about to get their tax bill from Uncle Sam. In the programs, the formula to calculate tax and penalties was rigid and inflexible. The programs dictated that penalties are the same for the taxpayer who knew of his reporting obligations and the taxpayer who innocently was not in compliance. As I described in more detail in a Tax Notes opinion piece entitled, “Jeffrey A. Neiman, Opting Out: The Solution for The Non-Willful OVDI Taxpayer," Tax Notes 11135 (9/23/11), here, the failure to differentiate between the two distinct taxpayers has prevented thousands of taxpayers from coming forward as they view the programs as too expensive.

As we turn the corner, taxpayers who entered the program and who were not aware of their obligation to file an FBAR or to report their worldwide need to consider opting out of the voluntary disclosure program. Under the program, the IRS and DOJ assumed every taxpayer acted intentionally or willfully. However, in fact, I think in many cases, it will be very difficult for the government to prove that a taxpayer willfully violated the law.

Willfulness is defined as the intentional violation of a known legal duty. It is the cornerstone to any criminal prosecution, to the civil fraud penalty, and to the draconian 50% per year FBAR penalty. The government proves willfulness by looking at a taxpayers conduct. When I was a federal prosecutor, examples of conduct I looked to in order to infer willful behavior included using nominees, misleading the IRS, providing incomplete information to an accountant, dealing in cash, and maintaining a double set of books. Without some of these factors, it is very difficult to prove willfulness and without willfulness, there is no criminal case, no civil fraud penalty, and no 50% FBAR penalty.

So what does the non-willful taxpayer do in order to possibly reduce his penalties? Consider opting out. On June 1, 2011, the IRS announced certain procedures for taxpayers who wish to opt out of the offshore voluntary disclosure program. The guidance makes clear that opting out comes with a price. Once the decision is made to opt out, it cannot be undone. All potential civil penalties are on the table and so is a full audit. However, the IRS has said that it will not refer a case for criminal prosecution because the taxpayer opted out of the program so long as the taxpayer was honest and truthful in their program submissions.

I also think there is an important distinction to be made between proving that a taxpayer willfully failed to report income and that a taxpayer willfully failed to file an FBAR. The FBAR was a form few practitioners heard of pre-UBS. To prove a taxpayer’s knowledge of the FBAR and his obligation to file the form will not be an easy task for the government as few accountants told their clients of their FBAR obligation. Additionally, the FBAR is a penalty that arises out of Title 31 of the United States Code and not Title 26 (Internal Revenue Code). As a Title 31 penalty, the IRS can assess the penalty but it cannot collect it under the Internal Revenue Code with lies and levies and other IRS collection tools. Instead, the IRS is treated just like any other creditor. To collect the FBAR penalty, the IRS must make a referral to DOJ’s Tax Division, which then must seek a judgment in US district court against the taxpayer. Once in court, the taxpayer may assert a lack of willfulness as a defense and have his day in court.

The design of the offshore voluntary programs have provided little relief for the non-willful taxpayer. Therefore, the only option may be to consider opting out of the program. The decision to opt out should only be done after consulting with an attorney who can assess the pros and cons of opting out and after assessing the likelihood of success in demonstrating the conduct was not willful.
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Guest blogger Jeff Neiman is currently a practitioner representing clients individuals and corporations and other entities in criminal tax, money laundering, racketeering, healthcare fraud, securities fraud, and other white-collar criminal cases in court and before law enforcement and regulatory agencies. Jeff was formerly a principal prosecutor in the UBS proceedings in the Southern District of Florida that essentially started the current round of Government initiatives involving foreign financial accounts. Those proceedings included a deferred prosecution agreement for UBS and a John Doe summons. Comments may be made to this blog and, if desired, specific comments may be made directly to Jeff via his email jeff@jneimanlaw.com. His web site with contact information is http://www.jneimanlaw.com/.