Key Points from Panel Discussion on OVDP and Streamlined (10/30/15; updated 11/3/15)

I participated in a panel at the Texas State Bar Advanced Tax Law Seminar, here.  The topic was the offshore voluntary disclosure programs (OVDP and Streamlined).  Dan is a major player with the IRS in these initiatives.  Chad is a major player from the private bar. Chad's bio is here.  The written presentations provided attendees is attached here, consisting of an outline by Chad Muller and Jack Townsend and an IRS Powerpoint which was presented by Dan Price during the panel presentation.  [Note to readers: the update on 11/3/15 was providing a download link for the pdf of the presentations (both in a single pdf).  If you download the pdf, you can work your way around the pdf with Acrobat's bookmark feature; if the bookmarks do not show on the left side, hit and that should show the bookmarks.]

Here are some major points that I thought readers may be interested in.  On some of these points, I expand with reasonable inferences from what was actually said.  Anything said below should not be attributed to Dan unless I specifically attribute it to him.

1.  OVDP is for the willful taxpayer.  For that type of taxpayer, the inside OVDP penalties are a pretty good deal (relative to the panoply of penalties that might otherwise apply.  Further, it is not just the willful taxpayer but the willful taxpayer who would be at risk of criminal prosecution or the devotion of IRS resources to investigate and impose the significant related income tax penalties and FBAR penalties.  Thus, I infer, it is possible that there are some willful taxpayers who may not be good candidates for OVDP because they are at fairly low risk.  For example, a taxpayer whose offshore income never exceeded $500 per year and tax never exceeded $150 per year.  Although other factors must be considered, that profile of taxpayer is not at material risk on either count.  That does not mean that other persons who are somewhere beyond the mid-point on the spectrum from nonwillful to willful should do OVDP.  The facts and circumstances might show that, even though potentially willful, there are other factors that might mitigate against full bore penalties if the taxpayer does not join OVDP.

2.  The IRS encourages nonwillful taxpayers to do streamlined if they otherwise qualify.  Although there will be no closing agreement at the end and the willful certification and narrative will be reviewed, if the narrative supports the certification and there is no indication that the certification is incorrect, it is not likely to be scheduled for audit.  However, other general audit techniques (such as DIF, etc.) might cause the return to be reviewed.  But the general audit coverage rate is fairly low, so the taxpayer pursuing streamlined has relatively low chance of audit.  But, there will be inherent uncertainty because no closing agreement is signed.

3.  In the Streamlined Program (either SFOP or SDOP), the IRS has the burden of proof if it conducts an audit and desires to assert the FBAR penalty or the income tax civil fraud penalty.  This is not like the Streamlined Transition where the taxpayer must persuade the IRS that he or she is nonwillful.  In this sense, in Streamlined Transition, the taxpayer has a burden of proof which, if he or she fails to meet that burden, Streamlined will likely be denied.

4.  In both Streamlined and Transition, the key is in the narrative in support of the nonwillful certification.  Dan made the point that the narrative (and any supporting materials, such as affidavits, etc.) should be proportionate to facts presented -- such as significantly the amount of income and the amount of the deposits.  I infer, for example, if the certification shows $100,000,000 in offshore deposits, more detail and support should be provided than $100,000 in offshore deposits.  Zeros or, more precisely, digits matter.


5.  I asked Dan if he could state whether the IRS has ever approved Streamlined Transition relief in OVDP where the taxpayer has a "shell" corporation interposed between the taxpayer and the accounts.  A not uncommon fact pattern is for a Swiss bank (really could be any country bank) playing in this arena to insist/encourage/suggest that the U.S. depositor have a corporation/foundation/some such in between the account and the U.S. depositor.  Or maybe even more than one in between.  My question was whether the IRS had approved Streamlined Transition requests in those patterns.  Dan dodged the question, saying that it is all about facts and circumstances.  That would suggest that it is possible.  I have asked a lot of practitioners that question and, so far, none have said that they are aware of approvale of Streamlined Transition where one or more such entities were involved.  However, note that the Streamlined Process for domestic taxpayers (SDOP) does allow streamlined transition where entities are involved.  See SDOP FAQ discussed below in paragraph 9.

6.  The May 2015 Guidance provided a general ("in most cases") rule for a 50% high year aggregate FBAR penalty.  See New IRS FBAR Penalty Guidance (Federal Tax Crimes Blog 5/29/15; 6/1/15), here, with link to the guidance.  Dan reminded practitioners that this is a general rule, but that penalty can go up to 100% of the high year balance in particularly egregious cases.  This caution is evident from the guidance which specifically states that the examiner may recommend a higher or lower than 50% willful penalty, but in no event can be higher than 100%.

7.  Domestic nonfilers who are exempted from the Streamlined Domestic Offshore Procedures may still either join the OVDP or make the standard types of voluntary disclosures historically available depending upon their facts.  Thus, for example, those taxpayers can still do the quiet or noisy disclosures (depending upon their fact patterns and tolerance for risk) and take the normal consequences.  JAT Comment: What are the normal consequences?  In a reasonably good fact pattern (aye, there's the rub), go quiet -- file the delinquent returns and delinquent FBARs (sometimes amended FBARs, yes that happens) and await what happens.  Lawyers will talk to the client about worst case and, if indeed it is a reasonably good fact pattern, worst likely case is not that bad.  Almost certainly, the IRS will assert the delinquency penalties (perhaps up to about 47%), but it could be worse even if it likely won't be.  Consult your adviser.

8.  The 2014 OVDP version dropped discounting of entity discounts, at least ostensibly.  Here is the Q&A:

35.1.  [Q] If a taxpayer holds OVDP assets through an entity or a series of entities, may the taxpayer apply valuation discounts such as a discount reflecting lack of marketability, a discount for holding a minority interest, or a discount for holding a tenants in common interest?
[A] No. The offshore penalty will be applied to the taxpayer’s interest in the underlying OVDP assets without regard to valuation discounts.

The first point is that, as described, the value of the taxpayer's tax noncompliant interest in the entity (say via subpart F income the taxpayer failed to report) gets included in the penalty base.  But the issue is what is the number included.  For foreign bank accounts, the number is easy.  And the number is the same as the value to the taxpayer of the account(s).  But, as we all know, entities are not so much.  The value of the taxpayer's interest may be subject to several of the standard discounts that, when reasonably applied, tell us what the interest in the entity is really worth (so that, at least in a value sense, there is some comparison to the bank accounts).  So, I am not sure that the IRS's refusal to consider discounts starting with the 2014 program is fair.  (It is the IRS's program, so fairness may not be an issue of meaning.)  Fairness may be an approach a taxpayer or his practitioner can take with the assigned agent whose eyes will slightly glaze over (you know when that happens even on a telephone call) and insist that he or she cannot do anything about it.  That's the party line, so to speak.  Are there exceptions? Not according Dan, but who knows in the right case where you may be able to assert that it is not apples to apples and should not be be applied just because the IRS is generally averse to valuation discounts.  But, at least for those who joined prior to the 2014 OVDP, they should be able to get reasonable discounts.  Dan did say that the IRS's experience is that people were claiming unreasonable discounts.  I infer that what the IRS did was to throw the baby out with the bath water.

9.  Although not discussed at the conference, I just noticed the following with respect to the discount issue.  The SDOP FAQ 5, here, says:

Q5.  How should I value stock in a foreign corporation that is included in the 5-percent penalty base for Streamlined Domestic Offshore filers?
[A] Any reasonable method of valuing the stock, such as using the balance sheet on the Form 5471, for purposes of calculating the 5-percent penalty.  No valuation discounts may be taken on foreign financial assets subject to the 5-percent penalty. The principles in 2014 OVDP FAQ 35.1 are applied to Streamlined Domestic Offshore submissions.

Think about that and discuss it with your adviser.

10.  If, after entering the closing agreement, the taxpayer discovers noncompliant foreign accounts that he or she inadvertently omitted in the OVDP process, the taxpayer can fix the problem by notifying the IRS (either CI or the agent handling the closing agreement) and, if appropriate, a subsequent closing agreement can be entered.  I suppose the, if appropriate, is the key.  For smaller omissions, the cost to supplement the closing agreement may not justify the effort.  And, for small omissions, the practitioner may just say not do anything because there will likely be no adverse consequences.  But, for material omissions, the taxpayer should invoke the process and assume the likely risk that the IRS will want more income tax (with penalties and interest) and more MOP and a supplemental closing agreement.

11.  Dan reminded practitioners that the penalty base for the SDOP is different than the penalty base for the OVDP.  I have not gone back to figure that out, but will do that soon.

12.  Dan reminded the practitioners present that they should not forget about the other penalties that might apply on opt out.  These are all the potential civil penalties listed in 2014 OVDP FAQ 5.  Dan did acknowledge that does get the criminal penalty relief even if he or she opts out, but is subject to the range of civil penalties that might apply.

I will probably supplement and correct this posting later.  So, readers should check back to see those supplements and corrections.