Selected Items from ABA Tax Section Civil and Criminal Penalties Session (5/9/16; 5/10/16)

On 5/10/16, I added item 7 regarding whether, in Streamlined, the IRS might require adjustments for earlier years where the statute of limitations might otherwise be open.

I attended the ABA Tax Section May Meeting this past week.  My favorite session at these meetings is the Civil and Criminal Tax Penalties Meeting on Saturday.  I cover here the highlights from my perspective, but do not cover those items that I have previously covered in earlier blog entries:

1. Panama Papers.  Not much new was provided regarding the Panama Papers Disclosures.  See my  posting from last Friday, Articles on ICIJ's Panama Papers and Ramifications (Federal Tax Crimes Blog 5/6/16), here.  I expect to offer soon more on the President's and related initiatives announced.

2. Luis v. United States, No. 14-419, 578 U.S. ____, 130 S. Ct. 1083, 2016 U.S. LEXIS 2272 (March 30, 2016), here.  The Supreme Court held that untainted assets -- assets not obtained from the alleged illegal conduct -- could not be forfeited or restrained in violation of the owner's Sixth Amendment  right to retain counsel.  Prior cases permitted forfeiture or restraint of tainted funds.  See Kaley v. United States, 571 U.S. ___, 134 S. Ct. 1090 (2014), Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, (1989), and United States v. Monsanto, 491 U.S. 600, (1989).  The Government wanted to preserve the untainted funds for payment of restitution and penalties.  The Court adopted a balancing of interest approach rather than a clear rule.

3. Anecdotal evidence indicates that the IRS may be focusing on attorney Form 8300 compliance.  Form 8300 if a joint IRS and FinCEN form to report cash payments over $10,000 received in a trade or business.  Exams are focusing on aggregation issues, correct and timely filing of Form 8300, and timely notice to the payor of the currency.

4. The key recent inclusion in the Domestic Voluntary Disclosure Program is the requirement for preclearance, a procedure clearly inspired by preclearance in OVDP.  If the preclearance clears (meaning the IRS has no disqualifying indication), the IRS sends for completion a 10 question "intake" letter.  Rather than focusing on others involved as the OVDP intake letter does, the Domestic Voluntary Disclosures intake letter focuses on the actions of the taxpayer.  Assuming the intake responses clear, the taxpayer will be directed to send amended or delinquent returns to an IRS office in Massachusetts.  It is reported that the IRS has been reasonable in the number of years of amended or delinquent returns required.  It is not clear where "quiet disclosures" fit in the new scheme, but presumably the formal program with preclearance and intake letters would be appropriate only for the "nonwillful." (JAT conclusion)  I will try to do a blog entry on the state of domestic voluntary disclosures this week.

5. There was discussion of potential criminal prosecution of false Streamlined Certification.  It was generally agreed that a streamlined certification (Foreign or Domestic) which has a robust narrative of the material good and bad facts should not generate a criminal action for false certification even if the IRS disagrees with the taxpayer's conclusion that those facts support nonwillfulness.  Where, however, the taxpayer fails to properly and fairly disclose the material facts-- good and bad -- the taxpayer may be at risk of prosecution.  I suppose the one caveat would be where the facts fully and fairly disclosed do not in any reasonable way support nonwillfulness, there might be prosecution or some other untoward response.

6. With regard to Streamlined Voluntary Disclosures, there was some noise that the IRS will be deploying incoming information from other sources to ensure that the Streamlined Voluntary Disclosures are complete.  If the amended returns and FBARs submitted in the Streamlined Voluntary Disclosure process are not reasonably complete, the taxpayer will be at considerable risk to explain why.

7. One key discussion at the meeting involved whether the Streamlined Program which requires three years of amended returns (and in the case of SFOP, delinquent returns) and 6 years of FBARs effectively closes out exposure for earlier years.  Years other than the latest three years for which amended returns are required could be open for a couple of reasons.  Since the predicate for Streamlined qualification is that the taxpayer acted nonwillfully (same as civil fraud), I assume that the earlier years are not open under the fraud exception that keeps the statute open forever.  So, absent fraud, why would earlier years be open, keeping in mind that the general statute is three years and the taxpayer is delivering 3 years of amended or delinquent returns?  First, all years in which the taxpayer failed to file a return could be open.  For example, if the taxpayer moved overseas 10 years ago for legitimate reasons but failed to file returns after the move, all of those years would otherwise be open.  Second, for those taxpayers filing returns (and assuming no fraud), the statute could be open for 6 years rather than the normal three years for two years -- a 25% income omission or a $5,000+ income omission for Form 8938 assets.  So, the question was whether, as to any year before the covered three years in the Streamlined program that might otherwise be open, is there any assurance that the IRS will not require adjustments for those years?  The Streamlined programs textually offer no such assurance, but most practitioners have assumed that, given its design and the way voluntary disclosure programs have worked in the past, earlier years would not be subject to adjustment.  John McDougal, an IRS attorney who has been a major player in the IRS's offshore initiatives since the inception, said that, while he could only speak for himself and not the IRS (the standard disclaimer), he thinks there is practical assurance because that is the design of the program and seems to be implicit.  He said that, should the IRS choose to go after earlier years, that action would impede the effectiveness of the program that encourages people to get back into the system to the extent they have not in the past.  Fewer people would join the program, and the IRS will have shot itself in the foot.  While Mr. McDougal is a lone voice not speaking for the IRS, he is an authoritative voice whose comments need to be considered by taxpayers and practitioners.