New York State Bar Letter to Treasury to Restore OVDP Integrity by Not Ejecting Precleared Taxpayers (5/21/13)

The Personal Income Taxation Committee of the New York City Bar Association, here, has sent the IRS a letter, here, asking that the IRS reconsider disqualification of taxpayers previously accepted into OVDP.

Key excerpts are:

Based on public reports, it appears that the total number of taxpayers directly affected by the disqualification seems to be relatively few -- about 50 or so who held unreported accounts at Bank Leumi in Israel. However, the incident has received attention in the mainstream media and among practitioners. The implications for the IRS are much broader than those taxpayers directly affected and are likely to have a much greater impact on the OVDP which has been an overwhelming success. 

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The IRS's disqualification of taxpayers who were previously accepted into the OVDP and in some cases had provided detailed information to the IRS in reliance on their "pre-clearance" to participate in the program, will inevitably affect the ongoing success of the OVDP as a whole. Thus, by reversing its pre-clearance and preliminary acceptance of these taxpayers, the IRS has undermined the ability of practitioners to advise their clients with certainty as to how the program works. In fact, the Model Rules of Professional Responsibility governing the conduct of attorneys requires attorneys to "explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation." See Rule 1.4 Client-Lawyer Relationship-Communication. Attorneys will now have to advise their clients and prospective clients that they may be disqualified from participating in the OVDP even after they were admitted into the program and disclosed detailed information about their foreign bank account(s). This information will lead some (if not many) clients to hesitate (or decline) to come forward with additional disclosures. Moreover, the IRS's failure to abide by the "rules of the road" in connection with the OVDP may affect the willingness of taxpayers to make voluntary disclosures relating to non-compliance outside the offshore account area.

The disqualification was apparently caused by a lack of communication between the IRS (which pre-clears and accepts taxpayers into the OVDP) and the Department of Justice, which presumably had the taxpayers' names prior to the taxpayers being pre-cleared for the program. Assistant Attorney General Kathryn Keneally's comments to Forbes last month that the disqualified taxpayers would be treated with "fairness," in any determination by DOJ to prosecute, is insufficient at best and injects an aspect of arbitrariness that is inconsistent with the principal benefits of the program: clarity and certainty. Moreover, any attempt by the DOJ to prosecute such taxpayers will undoubtedly be subject to motions relating to the conduct of the IRS and DOJ, including motions to suppress information provided by the taxpayer after he/she had received "pre-clearance" to participate in the OVDP. Additionally, the IRS has not indicated how those disqualified taxpayers will be treated from a civil penalty perspective: whether they are eligible for the single 27.5% miscellaneous penalty currently applicable in the OVDP. 

To resolve the situation and restore the integrity of the OVDP, we urge the IRS (a) to readmit the disqualified taxpayers into the program, subject to the conditions set forth in the guidelines published on the IRS's website; and (b) to institute new safeguards to avoid such a situation from occurring again. Finally, we would appreciate the inclusion of a description of the proposed safeguards on the IRS's website and submit that providing such information will enable tax practitioners to appropriately advise clients seeking to rectify past non-compliance regarding the benefits of making a voluntary disclosure and to reassure those clients regarding the minimal risk of being disqualified from the program after admission. These steps are critical so that the OVDP continues to have vitality.