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. 

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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. 

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[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.”

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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.

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"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." 

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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."

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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?” 

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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.”