Wednesday, June 4, 2014

IRS Commissioner Koskinen Announces that Changes -- Liberalizations -- Are In the Offing for OVDP 2012 (6/4/12)

IRS Commissioner Koskinen's prepared remarks at a speech before the International Business - OECD International Tax Conference (6/3/14), here.

The prepared remarks cover the history of the offshore enforcement initiative since UBS in 2009.  But the remarks acknowledges that the design of the voluntary compliance programs is not as fine-tuned to meet the overall goals of enforcement and fairness as they should be.  Here are the key excerpts (bold face supplied by JAT):
Now, while the 2012 OVDP and its predecessors have operated successfully, we are currently considering making further program modifications to accomplish even more. We are considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don't necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. For example, we are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives. We have been considering whether these individuals should have an opportunity to come into compliance that doesn't involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas. We are also aware that there may be U.S.-resident taxpayers with unreported offshore accounts whose prior non-compliance clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn't involve the threat of substantial penalties. 
We are close to completing our deliberations on these respects and expect that we will soon put forward modifications to the programs currently in place. Our goal is to ensure we have struck the right balance between emphasis on aggressive enforcement and focus on the law-abiding instincts of most U.S. citizens who, given the proper chance, will voluntarily come into compliance and willingly remedy past mistakes. We believe that re-striking this balance between enforcement and voluntary compliance is particularly important at this point in time, given that we are nearing July 1, the effective date of FATCA. We expect we will have much more to say on these program enhancements in the very near future. So stay tuned.
The remarks also offer high level discussions of (i) FATCA and its implementation and (ii) the Base Erosion and Profit Shifting initiative, commonly referred to as BEPS.  Readers of this blog are well aware of FATCA, although the key discussion in this blog has been in comments where readers express concern about FATCA itself and about some inconveniencies they believe have been visited on them by what they believe is the poor design of FATCA.  BEPS has not appeared on this blog because it really is a larger issue dealing with the general subject of transfer pricing -- how to allocate the profts from cross-border economic activity of multinational corporations to the various countries contributing to the profit.  I have heard it said that transfer pricing can be the tool for far more sophisticated tax evasion than bullshit tax shelters, but I have not spent time on it because it does not be a subject of criminal tax enforcement.  Maybe it should, but it hasn't, so I just have not spent time on it in this blog.

Some early comments on Commissioner Koskinen's teaser about changes to OVDP are contained in the following Tax Notes article:   Jaime Arora and William Hoffman, OVDP Relief Coming for Non-Willful Compliance Failures (TNT 6/4/14).  [I do not have permission to offer the whole article, but those with a Tax Notes subscription can review the article.]  Essentially, the article covers the ground covered above and then offers the comments of three practitioners to the effect that revision of the system to recognize more nuance and more fairness is appropriate.  Since Commissioner Koskinen did not offer particulars, however, the comments are necessarily vague and general.

One of the comments in the article did suggest that the IRS could be more transparent about the real risks of opting out and would make the revisions retroactive if they would produce a better result than the taxpayer had previously agreed to.  Caution:  Those are just hopes as to what the revisions may include.

I will post details as soon as I become aware of them.

All in all, this is good news, at least from a hope perspective.  Let's hope that the hope is justified and realized.

Just some comments:

1. One of the ironies of the design of the offshore voluntary disclosure iterations since the beginning was that it benefited the worst offenders the most.  They were the ones who really needed relief from the risk of criminal prosecution and would be subject to the most onerous monetary penalties.  But, those taxpayers whose conduct was less offensive to the tax system, did not need relief from criminal prosecution and should not be subject to onerous monetary penalties.  But because of uncertainties as to how they may be treated should they not join OVDI/P, they often joined and then were discouraged from opting out because of the black box nature of what the IRS was doing with potential large monetary penalties should they opt out.  For example, there was a risk that the IRS could imagine and assert at least willful blindness-- a concept that is of uncertain scope of and operation -- as a substitute for willful conduct to assert the willful FBAR penalty.  My actual experience on opt outs have shown a reasonable application of the monetary penalties in all except one case -- a case which, in my mind, fully justifies the fears of persons who are actually nonwillful in their FBAR filings.  My hope has been that, at least, the IRS would offer more concrete guidance about what it is doing and will do in opt outs so that taxpayers can make informed decisions.  I have never understood the IRS's need to persist in black-boxing the opt out process.


  1. Too late for those who joined OVDI/OVDP and signed 906 ! They should start back in time of opt-out for Just Me, Anon123 and many others.

  2. A well designed, equitable and non-punitive approach would be a welcome relief for a number of people and would likely encourage a lot more compliance at a lot less cost/resource to the IRS. Be interesting to see where this comes out.

  3. As part of the equitable program, you would hope they would allow for retrospective refunds (as they allegedly were offering for those who agreed 906 but would have qualified for streamlined) but then again, who knows what they will propose this time.

  4. We shall see. Color me skeptical that they are capable of doing the "right thing" in their "fine tuning".

    I do not think that Winston Churchill's often repeated quote will apply to the IRS... "The United States invariably does the right thing, after having exhausted every other alternative."

    If, in their attempt to be more nuanced, they do nothing to address the benign actor in the immigrant community at the same time, then this is all for not. They will just be picking and choosing one group over another for better consideration.

    This Opt Out story just makes me sad that so many LCUs were wasted and for what?

    Will the new program deal with this?

    The problem they have with proposing a new and improved "liberalized" streamline OVDP, is that their own tax code complexity plus the myriad of penalties and mind numbing boring regulations and IRM creates their own catch 22′s that ties them in knots.

    I doubt they will ever get it right. We will know instantly by how many pages of FAQs and guidance are issued with technical thresholds when and if they actually make a change. You will still need an attorney to interpret it for you is my prediction. KISS (Keep it simple stupid) is NOT part of their make up.

  5. This will not help those lifelong savers who now find that their retirement savings are taxable by the IRS. As long as CBT exists, no goal post will ever be close enough to guarantee you won’t sustain a crippling injury just trying to make the shot.

  6. Agreed. The problem is, there is no easy way out of non-compliance, and the IRS does not have the ability to simply do away with some of the bigger issues such as CBT, PFICs, phantom income, tax traps and double taxation. However, with respect to coming into compliance, it would be great if the institutional culture were tilted towards, ok, there are people who didn't comply and the majority of them aren't bad actors. Let's give them a chance to explain and a reasonable framework to comply. That is the hope, of course. There is always the potential that they develop a six-part test that in reality only applies to Canadian grandmothers who haven't spent more than a total of 30 minutes a year in the US.

  7. Michael J. MillerJune 4, 2014 at 6:53 PM

    It will be very interesting to see what they come up with. I suspect (and this is purely a guess) that one element will be a revision of the streamlined program to provide greater certainty to US citizens (and possibly green-card holders) living outside the US that they can come into compliance without being penalized.

    If that happens, it will be a tremendous step forward. Of course, it won't solve the other problems that arise from taxing nonresident citizens (e.g., PFIC and the failure to respect qualified retirement plan status in other countries, except by treaty), but it would be a huge step nevertheless.

  8. Heck. It's five years too late, but that sounds like its almost an apology. Of course I want the apology for all my distress, worry and lost sleep to come from Mr. Schulman, not the new guy.

  9. Even if I would get a complete free pass, without penalties, to come into “compliance” I wouldn’t do it. Compliance itself is a problem. If I get a break now but they get to hose my future retirement savings/contributions with their worldwide income tax. I still can’t properly invest, I still have problems with TFSAs and RESPs.
    We watched the expatriation provisions turn into a taxable deemed sale of unrealized gains and a deemed inclusion of as yet unpaid pensions in income. We watched as they foisted tax punishment on the children because of the expatriations of their parents. We’ve seen the
    incomprehensibility, mission creep and devastating penalties of an FBAR regime which now seems to hold people hostage to whatever penalty the IRS wishes to impose for not reporting whatever the IRS now decides you should have reported on your FBAR. We’ve watched the OVDP turn into a penalty revenue generating machine wholly disproportionate to the tax
    peccadillos of most of the “voluntary” participants. We’ve seen the introduction of asset reporting affecting mostly those abroad in the form of 8938 and the (deliberately?) tricky and confusing differences in the reporting requirements there that should have been harmonized with the FBAR. We’ve seen legislation by way of Notices and guidance and revised notices and amended guidance and technical corrections and Q&As until no one can possibly know what the rules are at any given time. We were not in the least bit surprised when the Medicare tax
    applied to non-residents even though they can’t use Medicare. We’ve seen the US pass up many opportunities to at least exclude financial accounts in the jurisdictions where US persons are long-term residents from FATCA reporting. And the 77,353 GIIN-registered institutions
    already represent one forcibly co-opted IRS bounty hunter for every 100 Americans abroad.

  10. I really wish the IRS would get off it's high horse thinking it's doing us favors.

    I left the USA in 1990 with no assets and about $35k in after tax cash and moved to Canada with my spouse. This is a permanent move, and I have ZERO interest in moving back. All of my accumulated wealth is generated IN CANADA, and I find the USA's thinking that somehow they're entitled to some of this just idiotic. What I really want from the USA now is a free, opt out of your citizenship/RA status without ANY strings attached. I owe you nothing, and I want nothing in return. I accept that I'll get what I pay for, and in this case, that means NOTHING from the USA. If anything, they've already confiscated any social security entitlements that I paid into while there.Why is this hard to understand down there?

  11. Individuals who do not live in the US are subject to non-US jurisdictions and thus need to be left alone by the US. If the US really needs to threaten and harass individuals who "live abroad", then it can do so to individuals who live in America.

  12. Without addressing the fact that Americans abroad leading normal lives may have pension plans and mutual funds that were not set up to avoid taxes any compliance program is incomplete.

    It has taken the IRS approximately six years and countless cases of torturing Americans resident abroad in OVDP to recognize that there are US Citizens resident abroad who are not willful violators of US tax laws. This is just a baby step. While it is positive, it is underwhelming. The IRS is again bumbling and not addressing the full scope when it comes to Americans resident abroad.

    Most Americans abroad I know who DO file taxes and consider themselves compliant have never heard of a PFIC, nor do they realize that their local pension plan which is tax exempt where they reside may be taxed in the US. These people are not sponsored by major corporations and are complying with the laws where they reside and building lives based on local conditions where they reside. For those who have lived and worked in the US previously, these plans look analogous to pensions and mutual funds in the US so they declare them that way. For those who have never lived in the US, why would they even suspect that they should declare these differently than how they do locally? When one's life is outside of the US, why would anyone even think of using a US (foreign to where one resides) investment advisor to buy an investment?

    Once a US Person resident abroad learns what compliance means in terms of punitive taxation for locally based mutual funds or pensions, who would want to be compliant? All chances to lead a normal life where you reside and invest for your future as the millions of other people do where you live are gone.

    The IRS needs to address the matter of PFICs and foreign pension plans for non-resident US citizens. For those countries with tax treaties with the US, it could be as simple as finding the right wording to include these, or getting a list from the foreign tax authority of these kinds of plans. Without addressing these matters as they apply to Americans abroad, the IRS is again setting itself up for failure and bad relations with the 7 million Americans abroad when it comes to compliance.

  13. interesting quote from Larry Lipsher, a U.S. accountant in Guangzhou, who seems to have just helped a client do a “quiet disclosure”:...."all those additional years of billings, most tax practitioners have prostituted themselves (O.K., now the lawyers and CPAs will hate me as much as the IRS probably does!)."
    The moral of this: "be a tax consumer – don’t just assume that your tax practitioner is telling you the way to go. You, the tax filer, MUST be responsible for your taxes – you are only asking your practitioner to assist you, not to do it all as he or she sees fit ! "...

  14. The optimist would say better late than never and any liberalization of the current program's requirement for non-willful taxpayers and for non-resident taxpayers would be most welcome and could even increase the intake that the IRS would see into these programs. However the timing of the program's official unveiling is off and is placing nonresident
    taxpayers and their tax advisers in a difficult situation with regard to
    deadlines for filing 2013 tax return extensions by June 16 and filing FBARs by June 30.


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