Friday, March 8, 2013

Bank Leumi U.S. Clients Rejected from OVDP (3/8/13)

IRS has reportedly rejected Bank Leumi depositors from entry in the OVDP program.  See Janet Novack, IRS Yanks Criminal Amnesty Deal From Taxpayers With Secret Bank Leumi Accounts (3/7/13), here.  Key excerpts:
The Internal Revenue Service this week sent faxes to tax attorneys nationwide informing them that clients who were previously accepted into its criminal amnesty program for those who disclose once-secret offshore accounts, have “upon further review” been disqualified. 
* * * * 
Clearance green lights and the later letters are issued by the IRS’ Criminal Investigation division based on its checks of both criminal and civil proceedings.  McKenzie said his client received his clearance letter for the OVDP last summer. He speculated there might have been an administrative foul-up within the IRS —meaning  the government already had the taxpayers’ names, but the information wasn’t entered in the right computer system.   “I’m upset that I gave advice,  relying on the government letter, only to find I couldn’t rely on my government to do it properly,’’ McKenzie said. 
* * *  
[Ed Robbins, here] noted that many of the taxpayers  had not only gotten written clearance to participate in the OVDP,  but had also “proceeded to submit a complete disclosure including amended returns, FBARs, account information, etc.”

Added Robbins: “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. However, these individuals might not ultimately be afforded any civil benefits otherwise associated with participation in the IRS OVDP, etc. Time will tell.”
* * * * 
Ironically, Bank Leumi sent a letter to its U.S. account holders last December telling them about the OVDP and suggesting they consult with an attorney about participating in it.  Now Ian M. Comisky [here],  a top tax defense lawyer at Philadelphia’s Blank Rome, says the IRS’ sudden Bank Leumi about face could have “profound consequences” for the offshore disclosure program, making those with hidden accounts less willing to come forward.
JAT Comments:
  1. It does not appear that this IRS action is an exercise of the warning in FAQ 21, here, that eligibility for taxpayers with "accounts at specific financial institutions will be ineligible due to U.S. government actions in connection with the specific financial institution."  The reason is the commitment in FAQ 21 that such action will be by public notice and prospective only.  Hence, there would seem to be some other reason for the IRS to break its "contract" with its citizens and take action contrary to their reasonable expectations.  (I am not saying it is a contract in its strict legal sense, but after all the IRS did invite taxpayers into the program and had given preliminary clearance to these taxpayers; I am surprised that the IRS and DOJ Tax do not have enough clearly unqualified taxpayers to prosecute that they feel compelled to take this type of action.)
  2. It is not clear whether this action will deter taxpayers -- both Leumi clients and other bank clients -- from joining the OVDP program in the future.  From one perspective, waiting further can increase the risk of something like this Leumi episode, and many will determine to join as soon as possible before the IRS moves on to other Israeli banks and other banks in other countries.  Others may use this Leumi action as a reason not to join at all, on the thought that joining gives no assurance.
  3. Leumi clients may want to quickly join the program -- at least submit the preclearance letter and, perhaps start off with the intake letter -- to get in the cue, flesh out whether they have been identified (presumably the IRS has its database up to date by now), or even submit enough information that, as Mr. Robbins says, may make it difficult to establish an untainted source for enough information to prosecute or convict.  (The latter would be risky and should be done only with the advice and guidance of experienced counsel, like Mr. Robbins.)
Thanks again to Eliezer Mishory for calling this important development to my attention.

Addenda on 3/9/13:

A good discussion of this development is Jerald David August, Criminal Investigation Division of the Internal Revenue Service Issues Disqualification Notices Under the Offshore Voluntary Disclosure Program (Federal Taxation Developments Blog 3/9/13), here.

The following are excerpts from Amy S. Elliott and Jaime Arora, OVDP Disqualifying Previously Cleared Offshore Account Holders, 2013 TNT 47-2 (3/11/13), here:
Edward M. Robbins Jr. [here] of Hochman, Salkin, Rettig, Toscher & Perez PC agreed that the letters aren't something new. He said he thinks the post-clearance disqualification letters are because of miscommunication between CI, which administers the OVDP, and the Justice Department Tax Division, which has the bank records that lead to the disqualification.

* * * * 
"CI clears these guys and unbeknownst to them, [the DOJ] is sitting on the bank records [that] disqualify them," Robbins said. He added that it is sensible from CI's perspective to disqualify people it originally cleared when it learns that the DOJ already had evidence of noncompliance. If CI were to decide instead to do nothing and allow those account holders to remain in the OVDP, "it builds in a defense for other people it might want to prosecute who have not been in the program," Robbins explained. 
Robbins said most of his firm's clients who have received the letters got them after they had already submitted amended tax returns and paid the tax, interest, and penalties due. Thus, despite the concern that the letters cause, their recipients "are very unattractive candidates at that point for criminal prosecution," he said. The recipients, sometime in the future, "will be contacted by somebody from the civil side saying, 'Give us money,' and then that will be the signal that CI is no longer interested in them," he said, adding, "The guys who went into the program and got the [disqualification] letter recently are far better off than the guys who didn't go into the program at all." 
* * * *  
Fink [Bob Fink, here] said his clients enter into the OVDP because "they feel that they can rely upon their government, and then in the end they discover they can't."
* * * * 
Also, Campagna [Larry Campagna, here] said the revocations create an atmosphere of distrust. "If counsel and taxpayers can't rely on the acceptance letters, then what is the use of the pre-clearance and acceptance process?" he asked.

Campagna said it's difficult to understand why the government would go after program participants when it has so many criminal cases to pursue involving people who did not come forward in the OVDP. "It's perplexing that the government would reverse these acceptances in order to have the option of prosecuting people who were trying to do the right thing," he said. "There are so many more unrepentant people to pursue."

The following are excerpts from Michael Cohn, IRS Disqualifies Offshore Voluntary Disclosure Participants (Accounting Today 3/8/13), here, discussing comments by Bob McKenzie, attorney with Arnstein & Lehr LLP in Chicago, here, regarding this development:
McKenzie posted a query in an email “listserv” group that he participates in with other attorneys who represent clients with foreign assets and heard that others had also received faxes and letters. “It was mainly Bank Leumi in the last few days, but after I put this up on the listserv, I’ve had responses from other attorneys where they’ve had other banks where this has occurred. But the majority have been Bank Leumi, including one attorney who the day before yesterday received five recissions.”
On Friday morning, he said he had talked to another attorney in Baltimore with Bank Leumi clients who also received letters from the IRS rescinding their acceptance in the Offshore Voluntary Disclosure Program. 
The letter sent to McKenzie simply states, “Although your clients were informed they were accepted into the voluntary disclosure program, on or about August 14, 2012, upon further review it has been determined that your clients are disqualified from the OVDP.” The letter then adds that if they have any questions, they should call the phone number of the national coordinator of the OVDP. 
“We’re not receiving an explanation,” said McKenzie. “We’re not being told what this means. Are they now going to try to prosecute our clients who confessed everything on the belief of a letter from the IRS that they had been admitted into the program, or are merely going to try to impose very harsh penalties under the program?” 
  * * * * 
McKenzie doubts the IRS would succeed in prosecuting a client on the basis of evidence the client has voluntarily produced after being accepted in the program. 
“If they were to try to prosecute my client who confessed after they represented to them that he could participate in the program, I don’t think that any judge would find that to be good conduct on the part of the government,” he said. “But I don’t know whether it would in fact prevent them from imposing the harsh penalties allowed by law.”


  1. This looks to be the Mother of all "Bait and Switches". A repeat of 2009 OVDP, but on a grander scale.

  2. Thus, despite the concern that the letters cause, their recipients "are very unattractive candidates at that point for criminal prosecution,"
    Jack, can you explain why the lawyer in the first place tried to enroll them in OVDP? Criminal prosecution is the main thing that this program protect against. In which case would it be interesting to enter OVDP if there is no material risk of prosecution like they seem to assert here?

  3. If these clients were well represented and, I suspect, many (probably most) were, they joined the program because either (1) they were at material risk of criminal prosecution and/or (2) they were at material risk of the willful/fraud income tax and FBAR penalties. Joining the program can avoid the criminal risk and the risk of higher civil penalties than might otherwise apply.

    Now, the expectation is that, even if they IRS boots them out of the program, they will be unlikely prospects for criminal prosecution because of Kastigar related issues (particularly if they had already submitted the intake letter and/or the complete package). Kastigar related issues refers to the likely requirement that the Government will have to prove that it did not use the taxpayer's submissions in the program in any way to affect any criminal case it might desire to pursue. Also, from a practical policy perspective, I doubt that, except perhaps in very extreme cases, the Government would want to pursue criminally those people who attempted in good faith to join the program.

    The practical risk these people face is the possibility of higher civil penalties. Remember that the second benefit of joining the program is a cap on the civil penalties. That becomes very fact specific. But for much the same reasons that the IRS is unlikely to pursue criminal prosecution, I suspect that the IRS will not pursue aggressively higher civil penalties against all of these people. It will pursue higher civil penalties in some of the cases, but, I suspect, not in all. And, perhaps in some of the cases, the IRS may not even insist upon the inside the program penalties because, in its audits, it may not have the resources or will to pursue aggressively establishing a case for willfulness/fraud, which may mean that some of these people will have civil penalties less than offered under the program.

    And, of course, some of these people probably were ill-advised and should not have joined the program anyway. Those people would have opted out and obtained the audit result. When and if they are audited outside the program, they should get the audit result. So, except for the hassle and delay and increased costs for tax representation, they should not be affected on the bottom-line.


    Jack Townsend

  4. The prosecutions raise interesting questions:
    1. Can a FBAR penalty of 50% in criminal cases be levied on ‘high’ balances that occurred more than 6 years ago under relevant conduct doctrine. For example, if a person is prosecuted for having bank accounts from 2001 to 2010 and the highest balance was in 2002, can 50% be levied on the 2002 balance or would it have to be 50% of the highest balance in the last 6 years. I know that under relevant conduct doctrine, tax can be added for more than 6 years for sentencing but not sure if the 50% FBAR penalty can be taken from the highest balance occurring more than 6 years ago.
    2. After taking 50% as criminal FBAR penalty, can additional civil FBAR penalties be assessed? For can $100K per account per year be levied after payment of 50% of the highest balance
    3. Does SOL for FBAR penalty (both civil and criminal) toll is the taxpayer is outside the US. I know it tolls for tax purposes but not sure if it tolls for FBAR purposes

  5. Klmj

    1. The concepts are being mixed here. I will try to answer. First, the FBAR penalty -- I assume you mean the FBAR civil penalty -- is not levied or assessed in criminal cases. In order to reach a plea agreement, DOJ Tax requires that the FBAR civil penalty be agreed upon. If the taxpayer does not reach a plea agreement, the FBAR civil penalty is not resolved in the criminal trial. If the taxpayer is convicted, it also is not resolved in the sentencing phase unless the taxpayer wants to do it to put the best face forward for sentencing -- i.e., it may be viewed favorably as an acceptance of responsibility or just to make the judge feel warm and fuzzy in making a Booker departure downward from the indicated sentencing range. Second, the relevant conduct concept is a sentencing concept that does not apply to the FBAR civil penalty at all. So, in the assertion of the FBAR civil penalty, the IRS will only have the open FBAR civil penalty statute open (up to 6 years, which is a moving and lessening target if the taxpayer moved into compliance after he or she was indicted). So, the 50% penalty would only apply to open FBAR years. But, keep in mind that the statute on its face authorizes the FBAR penalty for each open year rather than just the highest year among the open years. Hence, it is possible that, should the taxpayer not resolved the FBAR civil penalty in the criminal proceeding, the IRS could go for more than the amount produced by applying 50% to just the highest year. Whether the IRS would do that may be debatable, but it is a risk.
    2. I think the answer is subsumed in the answer to #1. It is possible that the IRS can assess for more than one year.
    3. I have not fully research the question. 18 USC 3290 (Title 18 is the general criminal code) provides simply and cryptically "No statute of limitations shall extend to any person fleeing from justice." If this were a Title 18 crime, I am sure this could toll the statute. I don't know if it applies to a Title 31 crime, such as the FBAR crime. I suspect it or a similar common law concept might. I do address the issue cryptically in my Federal Tax Crimes book where I say: "The “majority rule” is that “intent to avoid arrest or prosecution must be proved” for § 3290's fugitive definition to apply; the minority rule is that mere absence from the jurisdiction, regardless of intent, is sufficient." One thing to keep in mind, however, that the FBAR criminal charge is only one of several, perhaps many, charges that could be made for the pattern presently being prosecuted (i.e., failures to file FBARs related to tax crimes). Thus, if there were an FBAR criminal statute of limitations problem in charging a person outside the U.S. for extended periods of time, the prosecutor could simply charge him under either Title 26 (the tax code) or Title 18 (the general criminal code) and get the benefit of suspension of the statute under Section 6531 or Section 3290. Hence, staying outside the U.S. is not a sound strategy. And, of course, the U.S. can always get a sealed indictment within any applicable statute of limitations that will toll the statute of limitations.


    Jack Townsend

  6. I was advised by several lawyers (including high charging ones that you have listed in the OVDI Attorney link)
    in 2012 to enter the OVDI program and opt out. As they wanted me to
    enter OVDI with intention to opt out, certainly they knew I had no
    criminal prosecution risk. In fact my tax dues are so low that I was
    very confused by the advice. In the end I decided to go in for the
    program even though all this did not make sense to me. What can an
    layman do when professionals charging 500 to 700 dollars an hour tell
    you do go in the program for tax loss that is less than 1500$ per year. I
    am a US resident so I do not fall into the modified program for non
    residents. Any ways I am now stuck in the program and also shelling out
    huge amounts for the representation.

    I don't know what to say about this whole episode.

  7. To The_Newman:

    I do feel your concern. I am surprised that lawyers would advice you to join the OVDI with the expectation of opting out without further discussion of the options to go-forward or, perhaps, do a quiet disclosure. I find that generally, someone who would be a good candidate for opt out probably should not join the program in the first place. That is a nuanced judgment based upon all the facts and circumstances, but I think over the whole spectrum of cases it is correct.

    Keep in mind that what I say in the preceding paragraph is just a statement of general rules. There may be nuances in your situation that would indicate that you should join the program. Also, regardless of these nuances, there are clients who prefer certainty, and joining the program will give certainty (at least certainty until the time to opt out arrives, when there may be some uncertainty on the opt out).

    I wish you the best.

    Jack Townsend

  8. we have received 906 with the form 49 that shows that they r charging interest on the (20%) penalty for tax due for 2003 through 2010. I thought in the OVDI 2011, you pay tax plus interest and then the 20% penalty on the tax due. So why are they charging interest on this penalty? We are getting the 25% FBAR, can we apply to TAS to get some relief? Thanks.

  9. No, the law is clear that interest is paid on the tax and the accuracy related penalty on the tax. Interest accrues on both from the due date of the income tax return.

    The only interest benefit is with respect to the "in lieu of" penalty (the 20-27 12\ % penalty), which does not accrue interest until assessed.

    Jack Townsend

  10. Any opt out news lately? From all the hundreds that opted out no published ones?

  11. Join OVDI and then opt-out has some advantage. At least you know what is going to happen. Going forward/Queit Disclosure is like a hide and seek game. You hope IRS won't bother to audit you -- and then everything is okay. But before your FBAR SOL expires, you really don't know.
    If you believe you have no risk of criminal prosecution, you should have done all these by yourself. As long as you do it with full disclosure, IRS will do all the correction for you (at no cost!) --- why should you pay high $ to a lawyer?
    Lawyers/Doctors have their practices for business, that is right, it is business 1st -- and to help you 2nd. By no means they are doing anything wrong --- you pay them money, they do the best for you. I think they advise you to join OVDI and then opt-out is based on certainty of the issue to be resolved.

  12. However if you hire a lawyer you run the risk of experiencing what I did. The lawyer will say to you, "Just pay the penalty as it is cheaper than our costs to assist with you with the opt-out process". My lawyers had never done an opt out so this was their best advice. So if someone wants to join OVDI and opt out using a lawyer, they need to try to pin their lawyer down to what it may cost as they may be unpleasantly surprised that the opt out strategy could cost them more than their penalty.

    ij - the IRS will not do all the work. I had to adjust foreign tax credits and the IRS made my accountant do this. However, they did do all the PFIC work for me.

  13. @anon5percent:disqus ,

    I told them "take it or correct it as I don't have money to pay any pro" --playing hardball !
    By the end, all became irreverent after opting-out because tax related problem were beyond SOL.
    Looking back, I should have just done forward -- so it would save a lot IRS resource and my LCU --- but I was just so scared then ....

  14. In light of what Jack has said about those who were disqualified being unattractive targets for prosecution, I think it was a big blunder for the IRS to disqualify people who were so far in the process (as opposed to saying either that any future disclosures by that bank's customers would be disqualified, or that there is a very short time window for such people to enter the process.) But then again it's not the first blunder.

    I am one (of many) who entered the program because I wanted to rectify the past, even though the chances of the IRS discovering me were nil (and still are, since I have had no dealings with UBS, CS, HSBC, Leumi etc.) I suspect that if preclearance has been rndered meaningless, far fewer will be willing to make a disclosure.


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