Friday, January 10, 2014

New Taxpayer Advocate Report to Congress Addressing, Inter Alia, OVDI/P Concerns (1/10/14; supplemented 1/13/14)

The Taxpayer Advocate has issued a new report addressing concerns, including the administration of OVDI/OVDP.  Taxpayer Advocate FY 2014 Objectives Report to Congress and Special Report to Congress.  The initial page is here.  The Report page is here.  The portion on OVDI/P is here.

The issues covered in the report are:
  • The IRS Harms Taxpayers by Refusing to Issue Refunds to Some Victims of Return Preparer Fraud
  • The Current Limited Oversight of Return Preparers Makes Taxpayers Vulnerable to Unscrupulous or Incompetent Preparers
  • As the IRS Adopts a Specialized Approach to Identity Theft Victim Assistance, Concerns About Complete and Timely Account Resolution Remain
  • Implementation of the IRS’s Return Review Program Is at Extreme Risk, Which Could Cause Significant Harm and Cost
  • Collection Update: The IRS’s Tepid Approach to Implementing Recent Changes in Collection Policies Has Limited Taxpayer Access to Important Collection Options
  • The TAS Collection Case Review Yielded Valuable Insights on How TAS Can Improve Advocacy in Collection Cases
  • TAS Prepares for Implementation of Health Care Provisions
  • The IRS has Revoked the Exempt Status of Thousands of Organizations in Error, Causing Significant Harm to Taxpayers
  • TAS Works to Ensure Taxpayers Know Their Rights and  Obligations
  • IRS Offshore Voluntary Disclosure Programs Continue to Burden “Benign Actors” and Damage IRS Credibility
  • Shared Jurisdiction and Lack of Coordination between IRS and FinCEN Burdens Taxpayers and Undermines Compliance Efforts
  • International Taxpayer Service Initiatives Continue but Need a More Formal Structure
  • IRS ITIN Policy Changes Make Return Filing Difficult and Frustrating
  • Cuts to IRS Tax Forums Mean Lost Opportunities
Although the report on OVDI/P is short, I just have not had time to study it for comments here.  I do provide the following excerpts from the OVDI/P portion (footnotes omitted):
[T]hese programs apply a one-size fits all approach designed for “bad actors” to “benign actors” who inadvertently violated the rules, requiring them to opt-in and then optout, and subjecting them to lengthy examinations and draconian civil and criminal penalties.
A Government Accountability Office (GAO) analysis shows that the offshore penalty paid by those with the smallest accounts (i.e.,  those in the 10th percentile with accounts of $78,315) was disproportionate – at least 575 percent of the tax, interest, and penalties on their unreported income. It was also disproportionately greater than the amount paid by those with the largest accounts (i.e., those in the 90th percentile with accounts of more than $4 million) who paid 86 percent or less. Moreover, the IRS initially processed applications from benign actors who are expected to opt out much more slowly than others, though it has recently begun to process them more quickly, as shown by the following table. 
JAT Comment (1/13/14):  I think the TA's discussion in the preceding paragraph needs nuance.   It references the GAO report titled Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion , here, which  I  previously discussed on the following blog entries:  More on the GAO Report on IRS Offshore Disclosure Initiatives (Federal Tax Crimes Blog 4/27/13), here; and More on the GAO Report on IRS Offshore Disclosure Initiatives (Federal Tax Crimes Blog 4/27/13), here.  Without attempting to reconcile the GAO report numbers and the TA numbers, at least conceptually, taxpayers in the lower percentiles are likely to be less culpable than those in the higher percentiles.  It would thus make no sense to make their punishment relatively greater than the taxpayers in taxpayers in the higher precentiles. So, I agree with the taxpayer advocate that the phenomenon indicated by the statistics is counter-intuitive.

But, the phenomenon that those in the lower percentiles will incur greater relative costs / punishment than those in the higher percentiles is based on the design of the program when the taxpayers do not opt out.  I think the IRS perceives the opt out as the IRS's fail-safe cure for the problem of higher proportionate penalties if the less culpable taxpayers stay inside the penalty structure without opting out.  The smaller / less culpable taxpayers should get better treatment by opting out.  The larger / more culpable taxpayers better stay in  the program's penalty structure without opting out because that is their best "deal."  However, since the figures do not consider what occurs on the opt out, they really do not present a balanced picture of the real relative costs incurred by the less culpable and the more culpable.

If the opt  out functioned smoothly, then it would be a good fail safe.  However, what mitigates its role as a fail safe is that opting out creates major uncertainty, particularly for unsophisticated taxpayers -- just the type of taxpayer likely to be in the lower percentiles.  Thus, the anomaly is that the opt out is designed to protect them but they are scared to opt out.  Many just want to be done with it -- even with exorbitant penalty cost -- so they just take the program cost structure without opting out.  That, to me, is the design flaw in the program.  If the IRS were more transparent about what would happen on opt out, the opt out process might really serve as a fail safe to smooth the rough edges of the program.
JAT Comment (1/13/14):  In the original posting, I  omitted Table II.4, simply because I don't have the programming skills to put it in the blog.  Readers can review the table at the link above.  However, I will state that I had some difficulty discerning precisely what the point of the statistics as presented was.  They do show average days to closure and, I suppose, that is useful.  (I do not, however, that some of the numbers do not compute and seem to me to be off more than can be explained by rounding errors (see, e.g., the open line in the three sets of three that would seem to be the result of the immediately preceding minuends and subtrahends, but that does not seem to work.  For example, the report says

Total certifications applicants  10,792
Closed after certification  10,735
Open certifications  55

The result in the third line probably should be 57.  The same type mistake appears in each of the three sets, with each being off by 2.  Can't figure out why, but I would not think that is rounding error.
[Omit description of the Streamlined Nonresident Initiative] 
Although [the Streamlined Nonrsident Initiative] is a positive change, the National Taxpayer Advocate remains concerned that the IRS does not have a simple and easy method for allowing benign actors who are U.S. residents to resolve past filing delinquencies. Nor has it provided clear guidance about key terms that it has used in its programs, such as when someone will be considered “high risk,” how they may avoid a penalty (e.g., by demonstrating “reasonable cause”), and when they will be subject to the lower penalty applicable to “nonwillful” conduct. The uncertainty surrounding these terms and the consequences of opting out has likely prompted some benign actors to pay more than they should inside the OVD programs.
Those having access to TNT should look at the following article:  Andrew Velarde, Unfairness Plagues Accuracy-Related Penalties and OVDP, Report Finds, 2014 TNT 7-1 (1/10/14)

I am traveling and will likely not be able to add more until Monday.


  1. "Many Americans get screwed over financially by entering the programs."

  2. Jack's blog is encouraging Americans to honor tax crimes:

    "They force everyone into assuming they're criminals,"!

  3. The law is the law. You are doing is what America does best, and that is to blame, condemn and hate the world for Americal faults, problems and crimes. The problem is not "those contesting taxpayers delaying tactics". Rather, the problem is that the IRS needs to include more details to its request in order for it to be compliant with the law.

    Do "taxpayers", whom you commonly accuse people who do not live in America, do not use the US infrastructure, are subject to the laws of a non-US jurisdiction and pay taxes to a non-US jurisdiciton, aware that "US law" requires that they "notify the U.S. Attorney General"?

  4. Don't forget this one MSP 23

    REPORTING REQUIREMENTS: The Foreign Account Tax Compliance Act (FATCA) Has the Potential to be Burdensome, Overly Broad, and Detrimental to Taxpayer Rights

  5. Sorry Jack but the swiss banking industry needed those job cuts anyway..... they happened in London and New York already in 2012-13. $AUM are at a new all time high for 2013 . Why would you think that they are looking for sympathy in the world community for those job losses ? Looking at IB/PB projected bonuses for 2/2014 I am myself surprised to read (confidential) today on my memo pretty serious increases from 2012/13.

  6. Agree with Swisstechie that the law is the law. And it cuts both ways. Those who have a right to appeal have a right to appeal. And the person who missed the deadline missed the deadline.

    As to Jack's statement that appealing disclosure is a bad decision in the end I wouldn't be so sure. I recall reading that some of the UBS accountholders who appealed were successful in not having their data transfered. Also, what counts is the state of mind (willful or not) at the time of the FBAR deadline. I would question whether appealing disclosure of past noncompliance would make things worse.

    On the other hand many of us made a noisy OVDI disclosure as soon as we learned of the requirements and did not delay, but I don't see us getting any credit for doing that instead of waiting to be sure that our accounts would be disclosed.

  7. Haven't read the whole thing but as far as foreign accounts, it seems that the same things keep being said and keep falling on deaf ears.

  8. Jack - wonder if you had any comment on Tax Notes Today 2/3/14 - "IRS Considering Modifications to OVDP" by Jaime Arora:

    "The IRS is reexamining its offshore voluntary disclosure program (OVDP) and considering making modifications to it, according to Michael Danilack, deputy commissioner... Danilack, who spoke January 30 at the Pacific Rim Tax Institute conference in Palo Alto, Calif., noted that National Taxpayer Advocate Nina Olson was critical of some elements of the OVDP in her recent annual report...Danilack said that IRS Commissioner John Koskinen is interested in the program and will be considering whether it is "sitting exactly right."

    Apologies if you have already commented on this elsewhere, couldn't find it. And thanks for all that you've done and continue to do.

    On a side note: where would be the most appropriate place ask a question of your readers without bothering you? Is there a general "forum" area?

    many thanks

  9. mdlaf,

    I have not commented on it before. I did see the story (I, like you, read Tax Notes). But it was not enough to comment on. I am afraid that many readers of this blog will take that farther than Danilack intended his comments to go. So, I deferred until something more definite is released. Still, I appreciate your raising the question.

    I do hope something comes from it.

    Jack Townsend

  10. Excellent point about not reading too much into it / raising false hope. I'm happy to have it removed (or do it myself) for the sake of removing wheat from chaff if you see fit.

    Let me know about where best to post a general advice question most appropriately, otherwise I'll just jump in where I think it best and see what happens.


  11. @mdlaf...... if you want to ask some questions about your facts and circumstances

  12. The mystery and unpredictablility of the opt-out process is what is causing the benevolent actors to stay in the program and not opt out. In the areas of taxes, traffic tickets and so on there are published laws that state how much people owe. Likewise one ought to be able to calculate the appropriate FBAR penalty based on published information, not be scared out of opting out by the possiblity of being assessed 300% of high balance.

  13. But with a quiet disclosure you also have to gamble in the IRS casino! And in both cases you get to haggle in the IRS bazaar of appeals. Not sure which option has the edge when it comes to civil penalties, but my hunch is that the opt-out does (in moderate cases).

    Unless I'm misunderstanding something, the gamble for benign actors primarily involves dodging an assessment non-willfulness (in other words, qualify for reasonable cause). The ceiling for non-willfulness can be quite high. I'm not sure how much IRS agents tend to scale against the ceiling (80%?, 50%? 25%?), but a practitioner might know.

  14. Unpaid taxes and FBAR nonreporting are two separate issues. I feel the tax penalty is appropriate. My concern is with the FBAR fine. Why should people face a huge 27.5% fine FBAR reports that are ultimately filed (although years late) but voluntarily before the IRS knows about the accounts? It has been said by Bill Yates, former IRS Chief Counsel Attorney, in this interview:
    that "FBAR reporting is required pursuant Title 31, the Bank Secrecy Act.
    Because of this, IRS could not initiate an audit of a taxpayer based
    solely on an FBAR filing. The taxpayer being examined had to have an
    underlying Title 26 issue. Only with a Title 26 issue could IRS use
    account information found on an FBAR in furtherance of an audit or exam
    of the taxpayer."
    Therefore in most of the disclosure cases the lack of a filed FBAR resulted in zero harm to the IRS since they would not have tried to consult it anyway. The back taxes interst and penalties are taken care of separately so the FBAR issue seems just like an excuse to extract 27.5%

  15. That makes sense. However, to be fair I want to mention this: "Unpaid taxes" can be decomposed into three (not mutually exclusive and not exhaustive) categories: (A) tax deficiency solely due to unreported interest income, (B) tax deficiency due to unreported income, (C) income has been properly reported but no FBAR's have been filed. Those in the last category don't have to participate in the OVDP (according to the FAQ). A significant chunk of people in the first category can opt-out, and still face fairly large potential penalties from IRM 4.26.16, but usually with an expected penalty significantly lower than the one-size-fits-it-all 27.5%. Most people in the second category probably have serious threat of criminal prosecution, so the 27.5% seems like a nice civil settlement.

  16. You might want to read this recent analysis of the OVDP taking information from the GAO report...


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