District Court Rejects Complaint Denying Full Streamlined Relief for OVDP Participants (7/26/16)

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.)

Report on ABA Criminal Tax Fraud and Tax Controversy Conference (12/18/14)

A recent Tax Notes Today article reports on the Criminal Fraud and Tax Controversy Conference in Las Vegas, sponsored by the American Bar Association Section of Taxation. Ajay Gupta, Offshore Enforcement to Remain Top Priority in 2015, 2014 TNT 240-6 (12/13/14), no link available.  Here are some key points from the article:

Offshore

1. "The information flow from the [DOJ Swiss Bank] program "is good," according Acting DAAG Tax Larry Wsalek.

2.  On the Streamlined program, David Horton LB&I director for international compliance, said that there are differences between the OVDP and Streamlined, particularly noting to Streamlined "requires a certification of non-willfulness, and a false certification could lead to possible criminal liability."

3.  On the certification statement of reasons for noncompliance, Horton said that a "conclusory statement" will not suffice and that there is not a "checklist on willfulness."

4.  "He ]Horton] warned of 'a lot more John Doe summonses' in the next 12 to 24 months, in other parts of the world and 'beyond banks.' The focus will be on intermediaries, he said, referring to those who promoted or facilitated transactions for stashing money abroad."

5.  John McDougal, IRS special trial attorney, a major IRS player in the offshore initiative, noted that, unlike UBS, "most foreign financial institutions don't have a presence in the United States," thus requiring that Agents "piece together a picture of evasion based on records of transactions in correspondent banks."

6.  Horton indicated that the IRS was aware of but did not have a current solution for the difficulty and delay of U.S. citizens abroad most of their lives not have as SSN and unable to get one in a decent time period, thus delaying their OVDP or Streamlined.

Non-Offshore

7. Away from the offshore initiative, identify theft is "the leading concern.

8. Anecdotally, a prosecutor from the Los Angeles area said that IRS CI was focusing on cybercrimes, transactions in bitcoin and transactions on "on eBay and other online-only businesses."

JAT Note:  I used to attend this conference when it was in San Francisco, where I have daughter, son-in-law and grandchildren.  I have no such connection in Las Vegas or other interest in going to that venue.

Time for an IRS Ass Kicking? Herein of Lack of Honor and a Dumb Decision in OVDI/P and Streamlined (7/28/14)

I have said  before that the IRS has, in broad concept, a general program (within the program some variations) to get taxpayers back into the system with some cost.  The problem has always been is whether the cost is appropriate.

I won't go through the IRS's implementations of the program since it started in 2009.  Readers of this blog know that.  Of course, what the IRS did not tell from the beginning so that the ordinary lay reader or, let's say, the ordinary taxpayer (who is the customer the IRS claims it serves) could understand that the OVDI/P inside penalty was really meant for the bad actors -- those who intended to violate known legal duties (FBAR and income tax).  What does intend to violate a known legal duty mean?  Actually, the IRS customer would not really know that, at least to the extent required to take the legal risk that the IRS was claiming they might suffer -- criminal prosecution, multiple year FBAR willful penalties, etc.  So, the design of the program forced these intimidated customers to seek legal counsel at great expense, when even most legal counsel could only make somewhat better analyses of the situation, but not perfect because of the uncertainties in application of the concept of willfulness in conjunction with the IRS threats of dire consequences.  Who knows what willfulness is except in the eyes of the beholder, and the IRS was threatening, threatening, threatening?

So, a lot of innocent (well, clearly on the innocence side of the continuum) joined OVDI/P, but because of the IRS continual saber rattling (aka threats), many of those innocents were afraid to opt out, and many lawyers were afraid or unable to counsel them as to their real risks on opt out.  (I have to admit that I have not been reticent to recommend opt out in appropriate cases, but the dicey nature of this exercise is the fact that, in my absolute -- on any scale -- best opt out case, the IRS asserted multiple year FBAR willful penalties; the IRS won't prevail, but the IRS is hell-bent to force angst and processing costs to force my client into litigation that, in my best judgment, the IRS can't win.)  The point though is that the IRS forced through threats an exercise that innocent taxpayers should not have to endure.

Now, as best I understand the recent iteration of the Streamlined program, the IRS realized that it had forced through fear taxpayers into the OVDI/P when they could opt out and get better results.  Why force them to join in the first place when a shortcut implementation such as Streamlined can get somewhat close to the right result?  Well, now the IRS seemed to be finally talking to their customers in a language they could understand.  So, one could ask, why wouldn't it be an easy decision for the IRS to let taxpayers in OVDI/P who had not yet signed a Form 906 to proceed fully under Streamlined.  Well, it appears, that the IRS wanted to keep all of the income tax, penalties and interest for closed income tax years and penalties for open years that it was not entitled to, while giving a partial benefit of the Streamlined program (the 5% penalty applied to innocents, many of whom should owe no penalty).  Basically, the IRS wanted something that it was not entitled to.

Oh, sure, the IRS says that, well, the taxpayer / customer unhappy with its lesser Streamlined benefit via transition, can opt out and get a better result if he or she is entitled to a better result.  That sounds well and good but seems to me to be bullshit, of the same genre smoke that was hawked by tax shelter promoters promoting bullshit tax shelters, but in reverse.  Basically, the message the IRS is sending -- intentionally or unintentionally, but by now knowingly -- is that those people who got into the program early to get right with the IRS will be treated more harshly and subjected to greater processing costs, time, angst, etc., than those who sat back and waited on straight Streamlined or proceeded otherwise (quiet disclosure, etc.).

The New Streamlined Processes' Requirement of Certifying Non-Willfulness (6/19/14; rev'd 6/21/14)

I am going to do a series of separate blogs on certain discrete facets of the IRS announcement on June 18.  See IRS Issues More Liberal Streamlined Procedures and Makes Some Changes to OVDP (Federal Tax Crimes Blog 6/18/14), here.  In this blog, I focus on the liberalized streamlined procedures' requirement that the offshore account conduct not be willful.  I think this requirement goes to the core of the penalty mitigation offered by the new processes.

In invoking either of the streamlined procedures, the U.S. person with an offshore account problem is required to certify that the "the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct."  I will refer to that U.S. person as the taxpayer.  The certification forms are for residents, here, and for nonresidents, here.  The key part of the certification form is:

My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.  

I recognize that if the Internal Revenue Service receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open an examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral to Criminal Investigation.  

When can the taxpayer make the certification that his conduct was not willful for income tax and FBAR purposes?

Obviously, the taxpayer must know what is meant by willful, so that he can assess whether his conduct was not willful (or "non-willful").  As courts have noted, the word "willful" is a "chameleon" which changes in tone and color according to the Code section involved and the circumstance.  See e.g., former Justice Souter's opinion in United States v. Marshall, 2014 U.S. App. LEXIS 10415 (1st Cir. 2014), discussed in More On Willfulness (Federal Tax Crimes Blog 6/13/14), here.  But, I think it is clear that, in both the income tax context and the FBAR context, willful means "voluntary intentional violation of a known legal duty."  Readers will recognize this as the Cheek standard.

The IRS discussion of the new Streamlined Procedures approaches the issue from a different direction -- instead of starting with the definition of willfulness and moving to non-willfulness, it states what is non-willfulness without any predicate.  The explanation of non-willfulness is direct and somewhat cryptic:  "Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law."  (See the certification forms linked above.)

The IRS does not get into the thorny issue of the role of willful blindness (or similar formulations, such as deliberate ignorance, etc.) and whether willful blindness permits an inference or requires a conclusion of willfulness.  Presumably, though, the definition of non-willfulness as quoted would exclude willful blindness.  Stated otherwise, if willful blindness were involved, the conduct would not be due to negligence, nor to inadvertence, nor to mistake nor to a good faith misunderstanding of the tax law.

I conceptualize the path between willfulness and non-willfulness as a continuum.  The facts of some cases will present themselves on either end of continuum and will be clearly recognized as willful or non-willful.  When the facts present themselves other than at the ends of the continuum, there is a problem.  OK, if they are close to either end, that may not be a big problem.  But how close do the facts need need to be to be at either end before one can comfortably make a decision?  Another metaphor is the gray area between the extremes.  What do you do when you are in the gray area -- in the shadings between white and black?

IRS Issues More Liberal Streamlined Procedures and Makes Some Changes to OVDP (6/18/14)

The key documents on the changes are:

• IRS Commissioner Koskinen's News Release is here.
• IR-2014-73, June 18, 2014 is here; announces the changes.
• OVDP 2012 (as changed 6/18/14), here.
• Streamline Filing Compliance Process (as changed 6/18/14), here.  This is the description.  There are two types of Streamline filings:  Non-resident and Resident.  The Nonresident program -- referred to as Streamlined Foreign Offshore Procedures -- is described on a web page titled: U.S. Taxpayers Residing Outside the United States, here. The Resident program -- referred to as Streamlined Domestic Offshore Procedures -- is described on a web page titled U.S. Taxpayers Residing in the United States, here.
• Delinquent FBAR Submission Procedures (as changed 6/18/14), here. 
• Delinquent International Information Return Submission Procedures (as changed 6/18/14), here. (This relates to the Forms required for entities, such as CFC's, trusts,etc.)
• IRS OVDP 2014 FAQs, here.  Note particularly par. 1.1 on the changes from the original OVDP 2012.
• Transition Rules FAQs, here.
• Foreign Financial Institutions or Facilitators List (formerly Bank and Promoter List), here.  This list is the basis for the 50% penalty in OVDP 2014 (See FAQ 7.2 in the OVDP 2014 FAQs, here.)  I should note that the description in FAQ 7.2 is not clear as to whether the key cut off date is the date listed on the bank and promoter list or the date of the public disclosure as defined in FAQ 7.2).  Readers should look at the list.  For those who have been watching this area, the institutions should be familiar.

The new procedures apply as follows:

1. Foreign residents (requiring only foreign residence in the 3 year period):  File 3 years of delinquent or amended returns and pay tax and interest.  No penalties (including FBAR or miscellaneous) will be assessed.  Must also complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S. certifying (i) eligibility for the procedure, (ii) filing of all required FBARs, and (iii) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.

2.  Nonforeign residents (Domestic residents):  Must file 3 years of returns and pay tax and interest.  No penalties other than a 5% miscellaneous penalty on foreign financial accounts only will be assessed.  Must complete and Sign the Certification by U.S. Person Residing in the U.S. that (i) eligibility is met; (ii) all FBARs have been filed; (iii) "the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct;" and (iv) that the miscellaneous penalty amount is accurate.

Nonwillful conduct for the purposes of #1 and #2 is:  "conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law; 

The taxpayers can be audited under the income tax audit guidelines but will not be automatically audited.

A couple of the material changes to OVDP 2012 are described in par. 1.1 of the FAQs as follows:

• A 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation. See FAQ 7.2.
• FAQ 7 has been modified to require that the offshore penalty be paid at the time of the OVDP submission.

I will be back with more later.

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.

Taxpayer Advocate Report on OVDI/P's Burden on Benign (Relatively) Taxpayers (1/18/14)

In the recently issued Taxpayer Advocate FY 2014 Objectives Report to Congress and Special Report to Congress, here, the Taxpayer Advocate included a report titled OFFSHORE VOLUNTARY DISCLOSURE: The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Made Honest Mistakes, here.

Key Excerpts (footnotes omitted):

Definition of the Problem: 

* * * Designed for “bad actors,” these programs burdened “benign actors” who inadvertently violated the rules by requiring them to “opt in and opt out” to get a fair result. The programs were punitive, charging average penalties of more than double the unpaid tax and interest associated with the unreported accounts. Because those opting out faced prolonged uncertainty and a risk of even more severe penalties, some agreed to pay more than they should, as described in prior reports. 

Unlike those who remain in the programs, those who opt out are audited, which essentially penalizes them for coming forward. On average, the IRS assessed penalties of nearly 70 percent of the unpaid tax and interest in the audits of those who opted out. Thus, while those who opt out generally face smaller penalties than those inside the OVD programs, they still face very significant ones. 

For those who remained in the 2009 program, the median offshore penalty applied to those with the smallest accounts (i.e., those in the 10th percentile with accounts of $87,145 or less) was disproportionate — nearly six times the median unpaid tax. Among unrepresented taxpayers with small accounts it was even more disproportionate — nearly eight times the unpaid tax. It was also disproportionately greater than the median penalty paid by those with the largest accounts (i.e., those in the 90th percentile with accounts of more than $4.2 million) who paid about three times the unpaid tax. Given the harsh treatment applied to those with small accounts, some have made “quiet” disclosures by correcting old returns and others have begun to comply prospectively — in each case without subjecting themselves to the lengthy and seemingly-unfair OVD process. 

While 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements,8 the IRS received only 807,040 FBAR submissions in 2012.9 Yet the FBAR audit rate is less than one quarter of one percent. Thus, the IRS has likely failed to address significant information reporting noncompliance.

Quiet Disclosures Increasingly on IRS's Radar Screen (10/18/13)

Some taxpayers not willing to pay the price of the various Offshore Voluntary Disclosure Initiatives (currently OVDP 2012) have attempted an end run the initiatives by doing "quiet disclosures" -- by filing some number of years of amended or delinquent returns and delinquent FBARs.  Apparently, they think that the IRS may process the returns and FBARs without further ado or, at worst, if they are caught, the quiet disclosure might mitigate either criminal or civil penalty risks.

Today's Tax Notes has the following article discussing comments at the American Law Institute tax controversy conference in Washington:  Jaime Arora, IRS Auditors Taking Closer Look at 'Quiet' Disclosures of Offshore Accounts, 2013 TNT 202-4 (10/18/13).  Key excerpts from article are:

Scott D. Michel of Caplin & Drysdale said that it has recently become clear that the IRS has figured out a way to detect these so-called non-program disclosures. In speaking with revenue agents, Michel said, it is clear that they are unhappy with the practice and intend to go after those taxpayers they discover have taken that approach. 

* * * * 

Speaking on his own behalf, Russell [previously with the IRS Large Business and International Division and now at Dixon Hughes Goodman LLP] said that all penalties would be considered in the case of a non-program disclosure. Also, IRS agents have much less discretion in terms of penalties than if the taxpayer had come in through the voluntary disclosure program, he said. 

* * * * 

Practitioners ought to caution clients if they are considering making a quiet disclosure of an offshore account instead of going into the voluntary disclosure program, Michel said. "I think the odds of being detected are significantly higher now than they were two to three years ago," he said.

One question not addressed in the article is whether, even if a quiet disclosure does not avoid potential civil penalties, will it avoid or mitigate the criminal prosecution risk?  Attorneys have worried about that for a long time.  Traditionally, although there was no specific IRS guidance blessing quiet disclosure vis-a-vis criminal prosecution, most attorneys did feel that quiet disclosures avoided or mitigated the criminal risk.  I am not aware of any case where the taxpayer was prosecuted after making a good quiet disclosure and thereafter cooperating in any resulting investigation.  Of course, if the taxpayer files fraudulent or misleading or incomplete amended or delinquent returns or delinquent FBARs as the "quiet disclosure," the taxpayer has not really made a quiet disclosure and the criminal mitigation risk is forfeited.

Reader Question on Temporary Fund Deposit and IRS OVDI/P Penalty (9/25/13)

I recently posted on this blog a series of examples that I think highlight some perhaps unintended consequences in the inside (miscellaneous or in lieu of) penalty in OVDI/P, particularly as a result of interpretations that result in inequity.  See Elimination of Duplications and Short Term Deposits in Miscellaneous Penalty Base - FAQ 37 and Extrapolations (Federal Tax Crimes Blog 9/10/13), here.

A reader has asked that I posit a question to fellow readers who hopefully will offer some feedback either by way of comment or by emailing to me (jack@tjtaxlaw.com) and I will forward the email to the person making this request.  The question is:

Have you been able to exclude from the OVDI/P penalty base temporary funds parked in a foreign bank account?  By temporary, I mean that the funds are in the account only for a day or two and did not earn any interest.  The funds came from fully U.S. tax compliant sources and went to a fully U.S. tax compliant destination after the temporary stop in the noncompliant foreign account.

Readers who can and will answer that question, please do so in the ways indicated above.  If possible, the reader asking this question would prefer to be able to establish contact with the readers providing answers (via emailing me), but if the authors desire anonymity, they can still provide meaningful feedback by making comments to this blog.

Article on Real People Consequences of the Rigidity of OVDP/I (7/16/13)

Tax Notes has a great article on the plight of Marie Sapirie, The Personal Impact of Offshore Enforcement, 140 Tax Notes 187 (July 15, 2013), here.  I offer only the opening excerpts to grab readers' attention if interested in this area.

They often refer to themselves as minnows. They are -- or, in some cases, were -- Americans who reside abroad and who had undisclosed bank accounts in their local jurisdictions. In an attempt to become compliant, some found themselves entangled in the offshore voluntary disclosure programs (OVDPs) that were intended for larger and more culpable taxpayers. 

Some were U.S. taxpayers who intentionally hid money from the IRS in foreign bank accounts. Some continue to hide assets. But not everyone who entered the 2009 or 2012 OVDPs or the 2011 offshore voluntary disclosure initiative (OVDI) was intentionally concealing large sums and purposely evading tax. 

The stated objective of the offshore disclosure programs was to bring taxpayers "that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax" into compliance. However, the language in the FAQs for the programs appeared to apply generally to anyone with an undisclosed foreign account, regardless of circumstances. 

U.S. citizens who have moved abroad and have bank accounts there often may not fit the profile of a tax evader. This set of taxpayers typically faces unique and diverse filing and reporting challenges. Those who wish to be compliant frequently have limited access to professional assistance and have difficulty determining the appropriate tax treatment of specific foreign accounts. Since the UBS scandal opened the floodgates of offshore enforcement in 2008, those taxpayers have sometimes lived in fear of owing large, and perhaps financially devastating, penalties for unwitting compliance mistakes. Some taxpayers have legitimate reasons for owning foreign bank accounts, and their failure to declare them was merely negligent, as National Taxpayer Advocate Nina Olson has pointed out.

After that, the author presents some real world taxpayers who have journeyed through the process, often with many twists and turns, but usually with what appears effort and angst which, in my view, are not compelled by systemic revenue imperatives.  The IRS has appeared slow to correct as these glitches in the offshore initiatives began to present themselves.

I hope the IRS is listening / reading.  I also hope that readers encountering similar situations will find some hope and strategies for action.

P.S. I have not had time to read the article in sufficient detail to collect my thoughts and present more detailed analysis succinctly here.  I will be back later.

Articles of Interest to Tax Crimes Enthusiasts (6/27/13)

These are some new articles.  Enjoy!

• Stever Toscher and Della Bauserman, Suprise-The Tax Fraud of YOur Tax Preparer May Extend the Statute of Limitations on Tax Assessments, J. Tax Prac. & Proc. 31 (April-May 2013), here.

The authors review the wreckage from Allen v. Commissioner, 128 T.C. 37 (2007).  Although I have written about Allen before, this excerpt should remind readers. 

The issue in Allen was whether the taxpayer must have an intent to evade tax in order to keep the statute of limitations on assessment open indefinitely under Code Sec. 6501(c)(1). The Tax Court concluded the statute of limitations would remain open if the tax preparer had the intent to evade tax. To state this conclusion another way, the Tax Court allowed the statute of limitations on assessment to remain open forever  when the tax preparer has fraudulently filed a tax return even if the innocent taxpayer was also defrauded by the tax preparer. This was a startling proposition—at least at first blush—for most of us in the tax litigation field.

• Josh Ungerman, What to Do When the Special Agent Arrives (Outline for speech at the Tax Alliance Conference 6/12/13), here.

Josh offers some good insights on the initial surprise "interview" by Special Agents and then damage control after it occurs.

• Charles P. Rettig, IRS Offshore Voluntary Disclosure Program: Opt-Outs, a Revised FBAR and Rescissions of Pre-Clearance Letters by Criminal Investigation, J. Tax Prac. & Proc. 23 (April-May 2013), here.

Chuck provides some timely information about developments in the offshore account area, including most prominently (i) summary observations on joining OVDP in the first place and then in opting out and (ii) lines of inquiry that might be asked by the agent on the opt out or an AUSAs or IRS agent assisting a grand jury investigation of enablers.

• Edward M. Robbins, Jr., The Fifth Amendment FBAR Lives!, 139 Tax Notes 1546 (June 24, 2013) [no link for this yet, but will post it when I get it; in the meantime, readers might check his firm's publications page here]

Quiet Disclosures That Don't Stay Quiet - Civil Examinations (6/13/13)

Chuck Rettig, a major player in representing taxpayers through the thicket of correcting offshore account noncompliance, has written a very good summary article of the quiet disclosure that is discovered and examined by the IRS.  Charles Rettig, IRS FBAR Voluntary Disclosure Program: Taxpayer Interviews (Forbes 6/12/13), here.

The problem, he notes, is that "Many taxpayers continue to enter the OVDP. Others have bypassed the OVDP and simply amended returns or begun filing accurate returns on a prospective basis."

After discussing, the GAO report (previously blogged here), Chuck says that for persons filing amended returns -- quiet disclosures -- in lieu of joining OVDP:: " It should be anticipated that the IRS will pursue examinations of these amended returns in some manner."

With respect to the interviews in those examinations, Chuck says

When discovered, U.S. taxpayers who have bypassed the OVDP by filing amended or delinquent returns and FBARs should anticipate detailed IRS examinations likely to include interviews of the taxpayer, their return preparer and pehaps others. Numerous taxpayers having previously undisclosed interests in foreign financial accounts have recently been interviewed by representatives of the IRS as well as many having been interviewed by prosecutors associated with the Tax Division of the Department of Justice.

He then describes the types of questions and inquiries made.  He concludes:

Taxpayers continuing to have undisclosed interests in foreign financial accounts must consult competent tax professionals before deciding to participate in the OVDP.  Some may decide to risk detection by the IRS and the imposition of substantial penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution. If discovered before any voluntary disclosure submission, the results can be devastating. 

I recommend Chuck's article to those contemplating or having made a quiet disclosure.

JAT comments:

Of course, the big uncertainty with the quiet disclosures for those taxpayers with material criminal investigation and prosecution risk is that, according to the IRS's rhetoric, quiet disclosures for offshore accounts are not "voluntary disclosures" subject to the voluntary disclosure program to mitigate or eliminate such risk.  The message -- or risk -- that the IRS intends to convey is, dammit, join the program or take the risk.

Despite the IRS's rhetoric, one has to ask the question whether a taxpayer otherwise have criminal investigation and prosecution risk can eliminate or mitigate the risk with a good quiet disclosure (whatever that is, but I know it when I see or do it)?  I think many practitioners think that the taxpayer can do that; that there are good reasons that the IRS and DOJ Tax would make the call at least not to criminally prosecute a good quiet disclosure.  Of course, I approach it a different way.  If the taxpayer has material criminal investigation and prosecution risk, joining the program is the way to go and the taxpayer should not be doing a quiet disclosure upon the uncertain hope that it will not be discovered and, if discovered, it will mitigate or eliminate the criminal investigation and prosecution risk.  Having said that, however, I suspect that, in the final analysis, for good quiet disclosures, the IRS will exercise discretion to conduct just a civil examination.  I suspect that the real risk is in the amount of the civil penalties that will be asserted and the number of income tax years that will be put in play.  And for those taxpayers will real criminal prosecution risk, there is a major risk of severe penalties and thus should join without quiet disclosure to get better penalties or, if the quiet disclosure was made and not yet discovered by the IRS, join the program.

Rubinstein on the State of Offshore Bank Account Compliance (6/12/13)

Asher Rubinstein, here, has posted an article titled, Offshore Update: The Door to Foreign Account Amnesty Can Close At Any Time, here.  Key points that interested me are:

1.  After naming certain Swiss banks in the IRS and DOJ cross-hairs, he says:(par. 3) that IRS may and presumably will "close the door" on U.S. depositors in those banks qualifying for OVDP.

2.  He says the following about Singapore banks becoming targets:

The inclusion of Singapore is significant because of the rise of Singapore as a major international financial center.  The flow of        funds from Switzerland to Singapore when Swiss banking secrecy evaporated was substantial.  According to one report, the amount on deposit in Singapore has grown more than fifty percent over the last five years, which is precisely the period of time since UBS was sued by the DOJ.  Although there have been suggestions that Singapore might be “the next Switzerland”, this is unlikely.  Singapore would not risk its financial reputation (depending on the report, either the fourth or fifth largest world financial center, after New York, London, Tokyo and Hong Kong) to be a harbor for non-compliant accounts.  Singapore makes a significant amount of money from legitimate international banking and would not jeopardize this by being “blacklisted” as an uncooperative tax haven, as it was a decade ago.  To this end, Singapore has recently announced that it is in talks with the US on a FATCA-type of agreement.  In addition, a new regulation requires Singapore banks to identify all accounts that may harbor the proceeds of tax evasion, and close them.  Failure to abide by this new law will result in criminal charges for the Singaporean bankers under Singapore law.

He later says:

Recently, the IRS and tax authorities in the UK and Australia agreed to exchange information regarding offshore trusts and corporations.  In its press release announcing this agreement, the IRS specifically noted that the three countries have already “acquired a substantial amount of data revealing extensive use of such entities organized in a number of jurisdictions including Singapore, the British Virgin Islands, Cayman Islands and the Cook Islands.  The data contains both the identities of the individual owners of these entities, as well as the advisors who assisted in establishing the entity structure.”

Navigating Offshore Tax Hazards: An Update (5/21/13)

Many of this blog's readers will be interested in Bill Sharp's recent article.  William M. Sharp Sr, Navigating Offshore Tax Hazards: An Update 655 (TNI 2013), here.  All of his article is very good and worthy of reading.  I incorporate only a couple of anecdotal excerpts below that I found particularly interest.

1.  Regarding quiet disclosures:

Another beneficial aspect of the OVDP addresses the once-questionable "quiet" submissions, which were generally discouraged in the 2009 and 2011 programs. n11 In its frequently asked questions, the 2012 program clarifies that submissions under the IRS voluntary disclosure "practice" may still constitute valid voluntary disclosures as far as resolving criminal tax exposure but does not guarantee that criminal treatment will be avoided. The OVDP also cautions that those submissions will not be eligible for the certainty of the OVDP's penalty framework. n12 This good news raises the question of when the noncompliant client should pursue remedial relief under the IRS voluntary disclosure "practice" instead of filing under the OVDP.
   n11 See FAQs 15 and 16 of the 2012 OVDP and 2011 offshore voluntary disclosure initiative, as well as FAQs 10 and 49 of the 2009 OVDP.
   n12 Id.

 * * * *

Submitting a practice filing (versus entering the formal program) can turn into a nightmare for all involved if the practitioner has been given incorrect information, misinterprets the law as applicable to the facts, or does not have a complete file of what actually occurred regarding the noncompliant offshore activities. Omitting a single offshore account from the disclosure package could not only cause the practice submission to be rejected during the assumed examination process, but depending on the facts, could also lead to a criminal investigation with a follow-on criminal referral to the DOJ, as well as expose the taxpayer to substantially higher taxes and penalties. Although having an incomplete file or other glitch in the context of an OVDP case filing does not insulate the filing taxpayer from criminal or increased civil exposure, in the context of a "defective" practice filing, the IRS may be less forgiving. And as a practical matter, some practitioners who advise clients to pursue the practice alternative incorrectly believe that merely filing amended tax returns and late FBARs will be sufficient and that such a filing requires less critical thinking than a submission under the OVDP. This is not so.

New York State Bar Letter to Treasury to Restore OVDP Integrity by Not Ejecting Precleared Taxpayers (5/21/13)

The Personal Income Taxation Committee of the New York City Bar Association, here, has sent the IRS a letter, here, asking that the IRS reconsider disqualification of taxpayers previously accepted into OVDP.

Key excerpts are:

Based on public reports, it appears that the total number of taxpayers directly affected by the disqualification seems to be relatively few -- about 50 or so who held unreported accounts at Bank Leumi in Israel. However, the incident has received attention in the mainstream media and among practitioners. The implications for the IRS are much broader than those taxpayers directly affected and are likely to have a much greater impact on the OVDP which has been an overwhelming success. 

* * * * 

The IRS's disqualification of taxpayers who were previously accepted into the OVDP and in some cases had provided detailed information to the IRS in reliance on their "pre-clearance" to participate in the program, will inevitably affect the ongoing success of the OVDP as a whole. Thus, by reversing its pre-clearance and preliminary acceptance of these taxpayers, the IRS has undermined the ability of practitioners to advise their clients with certainty as to how the program works. In fact, the Model Rules of Professional Responsibility governing the conduct of attorneys requires attorneys to "explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation." See Rule 1.4 Client-Lawyer Relationship-Communication. Attorneys will now have to advise their clients and prospective clients that they may be disqualified from participating in the OVDP even after they were admitted into the program and disclosed detailed information about their foreign bank account(s). This information will lead some (if not many) clients to hesitate (or decline) to come forward with additional disclosures. Moreover, the IRS's failure to abide by the "rules of the road" in connection with the OVDP may affect the willingness of taxpayers to make voluntary disclosures relating to non-compliance outside the offshore account area.

GAO Report Targets Strategies Other than OVDP (4/26/13)

The U.S. Government Accountability Office (GAO) has released a report titled Offshore Tax Evasion:  IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion (GAO-13-318, Mar 27, 2013), here.  The summary is here.

The summary page is here.

What GAO Found 

As of December 2012, the Internal Revenue Service's (IRS) four offshore programs have resulted in more than 39,000 disclosures by taxpayers and over $5.5 billion in revenues. The offshore programs attract taxpayers by offering a reduced risk of criminal prosecution and lower penalties than if the unreported income was discovered by one of IRS's other enforcement programs. For the 2009 Offshore Voluntary Disclosure Program (OVDP), nearly all program participants received the standard offshore penalty--20 percent of the highest aggregate value of the accounts--meaning the account value was greater than $75,000 and taxpayers used the accounts (e.g., made deposits or withdrawals) during the period under review. The median account balance of the more than 10,000 cases closed so far from the 2009 OVDP was $570,000. Participant cases with offshore penalties greater than $1 million represented about 6 percent of all 2009 OVDP cases, but accounted for almost half of all offshore penalties. Taxpayers from these cases disclosed a variety of reasons for having offshore accounts, and more than half of them had accounts at Swiss bank UBS. 

Using 2009 OVDP data, IRS identified bank names and account locations that helped it pursue additional noncompliance. Based on a review of cases, GAO found examples of immigrants who stated in their 2009 OVDP applications that they were unaware of their offshore reporting requirements. IRS officials from the Offshore Compliance Initiative office said they have not targeted outreach efforts to new immigrants. Using information from the 2009 OVDP, such as the characteristics of taxpayers who were not aware of their reporting requirements, to increase education and outreach to those populations could promote voluntary compliance.

AAG Tax Says DOJ Tax Will Be Fair in Determining Whether to Prosecute Taxpayers Kicked Out of OVDP (4/12/13)

In a prior blog, I reported on news accounts of Bank Leumi clients being kicked out of the offshore voluntary disclosure programs.  See Bank Leumi U.S. Clients Rejected from OVDP (FTCB 3/8/13), here.  Responding to inquiries about whether those taxpayers will be prosecuted, Kathy Keneally, AAG Tax, said the Government would consider fairness.  See Janet Novack, Taxpayers Who Lost Offshore Account Amnesty Promised Fair Treatment (Forbes 4/11/12), here.

Excerpts from Ms. Novack's fine article:

According to their attorneys, some of the taxpayers ejected from the program had already made a full disclosure of offshore accounts and unreported income and had even paid back taxes to the IRS. “It would seem difficult for the government to actually pursue prosecutions of these individuals without a strong showing that such a prosecution is not based on tainted evidence,’’ Edward M. Robbins Jr., of Hochman, Salkin, Rettig, Toscher & Perez, the big West Coast tax defense firm, told Forbes in March. 

Keneally said yesterday that  “the DOJ Tax Division will review each case based on its specific facts and circumstances before authorizing prosecution, as is its practice in all criminal tax investigations.’’ In what was obviously a carefully worded statement, she added:  “In  any case in which an individual received a conditional acceptance letter, made substantive disclosures, but was subsequently disqualified from participation in the OVDP, the Tax Division considers now and will continue to consider the facts and circumstances under which any substantive disclosures were made, and the fairness of proceeding against that individual, as part of the Tax Division’s review.” 

* * * *

IRS has New Forms for Offshore Voluntary Disclosure Letter and Attachment (3/23/13)

These new forms apparently will replace the dog-ugly word versions.  As of this posting, the old ones -- in MS Wod format -- are still the forms linked on the master page, here.  I have not compared the content to see what might have changed.

Form 14457 (March 2013)  Offshore Voluntary Disclosure Letter, here.

Form 14454 (March 2013) Program Letter Attachment, here.

I will be back if I learn anything material.

Addendum 4/8/13: A reader has advised me -- and I have confirmed -- that the IRS has apparently taken the forms off the links, but the notice is that they will be posted soon.  In the meantime, here the forms are as they were originally posted:

• Form 14452 Foreign Account of Asset Statement, here.
• Form 14453 Penalty Computation Worksheet, here.
• Form 14454  Offshore Voluntary Disclosure Program Letter Attachment, here.
• Form 14457 Offshore Voluntary Disclosure Letter, here.

Bank Leumi U.S. Clients Rejected from OVDP (3/8/13)

IRS has reportedly rejected Bank Leumi depositors from entry in the OVDP program.  See Janet Novack, IRS Yanks Criminal Amnesty Deal From Taxpayers With Secret Bank Leumi Accounts (3/7/13), here.  Key excerpts:

The Internal Revenue Service this week sent faxes to tax attorneys nationwide informing them that clients who were previously accepted into its criminal amnesty program for those who disclose once-secret offshore accounts, have “upon further review” been disqualified. 

* * * * 

Clearance green lights and the later letters are issued by the IRS’ Criminal Investigation division based on its checks of both criminal and civil proceedings.  McKenzie said his client received his clearance letter for the OVDP last summer. He speculated there might have been an administrative foul-up within the IRS —meaning  the government already had the taxpayers’ names, but the information wasn’t entered in the right computer system.   “I’m upset that I gave advice,  relying on the government letter, only to find I couldn’t rely on my government to do it properly,’’ McKenzie said. 

* * *  

[Ed Robbins, here] noted that many of the taxpayers  had not only gotten written clearance to participate in the OVDP,  but had also “proceeded to submit a complete disclosure including amended returns, FBARs, account information, etc.”

Added Robbins: “It would seem difficult for the government to actually pursue prosecutions of these individuals without a strong showing that such a prosecution is not based on tainted evidence. However, these individuals might not ultimately be afforded any civil benefits otherwise associated with participation in the IRS OVDP, etc. Time will tell.”

Bank Leumi and Mizrahi-Tefahot Reportedly Under U.S. Criminal Investigation (2/19/13)

I reported Saturday on a plea agreement involving a U.S. customer of Bank Leumi (Bank B in the plea agreement) and Mizrahi-Tefahot Bank (Bank A in the plea agreement).  See New Plea Agreement Involving Israeli Banks (2/15/13), here.  Today, a Bloomberg reporter, David Voreacos, follows through his early news report on that plea with a new report, perhaps implicit in the earlier one, that these banks are getting focused attention of U.S. criminal tax enforcement authorities and specifically a federal grand jury.  See
David Voreacos, Bank Leumi, Mizrahi Clients Said to Aid U.S. Tax Probe (Bloomberg 2/19/13), here.

As usual, readers should read Mr. Voreacos' entire article.  Here are some excerpts that caught my attention.

Dozens of U.S. citizens who used offshore accounts to avoid taxes have helped the federal government in a criminal investigation of two Israeli banks, Bank Leumi Le-Israel Ltd. and Mizrahi Tefahot Bank Ltd., two people familiar with the matter said. 

* * * * 

“Those two banks are under investigation for making loans to permit their depositors to repatriate undeclared, offshore assets to the U.S.,” said Robert Fink, a tax attorney at Kostelanetz & Fink LLP in New York who represents clients who have come forward. “The focus is on undeclared foreign bank accounts on which income has been earned that has not been reported to the IRS.”