The District Court for the District of Columbia has rejected taxpayers' attempt to force the IRS to admit them into the full Streamlined Procedures rather than the Streamlined Transition Treatment in OVDP 2012. Maze v. IRS, 2016 U.S. Dist. LEXIS 96471 (D. D.C. 2016), here. The fight, as it usually is, is about money, but seasoned by the risk of criminal prosecution theoretically looming in the background (relief from which is the common inducement to join any IRS voluntary disclosure program). In order to follow the money, I first have to review key features of the programs in question:
The common features of the various iterations of the IRS offshore voluntary disclosure programs (referred to here collectively as OVDP) have been: (i) filing delinquent or amended income tax returns for 8 years, (ii) payment of income tax penalties (20% accuracy related penalty for amended returns or the delinquency penalties (up to 45+%) for delinquent returns), (iii) filing 8 years of delinquent or amended FBARs, and (iv) a Title 26 Miscellaneous Offshore Penalty ("MOP") based upon a percentage -- currently 27 1/2% (increasing to 50% if a bad bank is involved) -- of the highest balance in the offshore accounts for the 8 year period. The inducement was that, with completion of the OVDP process via a closing agreement, the IRS will not refer the taxpayer to DOJ Tax for criminal prosecution. A taxpayer joining OVDP who thought the OVDP civil penalty structure was too high under the circumstances could opt out and be subject to a regular IRS audit that covered both income tax and FBAR noncompliance. Usually, taxpayers who were relatively innocent -- i.e., nonwillful -- with respect to income tax and FBAR noncompliance might want to either forego joining OVDP altogether or joining OVDP and opting out. If they were relatively innocent -- nonwillful -- the results of the audit would often be much better than the OVDP civil penalty regime, except possibly if certain other returns or forms (such as for foreign corporations or trusts) were not filed. But the "typical" U.S. taxpayer would only have foreign accounts with no foreign entities to muddy the water with other penalties that might apply and could, in any event, probably avoid those penalties with true nonwillfulness. The risk of opting out was that the taxpayer has miscalibrated as to his nonwillfulness.
In 2014, the IRS substantially amended its Streamlined Filing Compliance Procedures. As I understand it, the design of the revision was to catch relatively innocent taxpayers -- those who could certify nonwillfulness and provide a supporting narrative -- who would otherwise choose not to join OVDP or, if they joined OVDP, would opt out. The Streamlined tax and penalty regime was calibrated to impose, roughly, the result they might obtain upon audit (either audit if they did not join OVDP or audit after opt out if they did join OVDP). The key to this procedure with substantially less financial cost than OVDP was that the taxpayer must certify that his income tax and FBAR noncompliance was nonwillful and provide a narrative supporting the certification. Based upon that certification and narrative, the procedure requires 3 years of amended returns or, in the case of foreign resident taxpayers, delinquent returns during the period (a domestic taxpayer does not qualify if he filed no return in the key 3 year period) and 6 years for delinquent or amended FBARs (although the narrative make take some explaining about bank accounts omitted from original FBARs). The income tax and interest is due for the three years; there is no accuracy related or other income tax penalties. The MOP will be 0% for the foreign resident taxpayer and 5% for the domestic resident, based upon the high year-end balance in the 6 year period. The Streamlined Procedure does not result in a closing agreement, the taxpayer can be audited (although as an initial step such an audit might focus on the validity of the certification and narrative), and the taxpayer is given no assurance that he will not be criminally prosecuted. (I have recently noted that DOJ Tax has noised about potential criminal prosecutions for improper certifications and narratives, as well as the underlying conduct.)
