Opting Out Considerations - A Jeff Neiman Guest Blog (9/10/11)

The OVDP and OVDI programs have come to an end and many taxpayers who participated in the programs are about to get their tax bill from Uncle Sam. In the programs, the formula to calculate tax and penalties was rigid and inflexible. The programs dictated that penalties are the same for the taxpayer who knew of his reporting obligations and the taxpayer who innocently was not in compliance. As I described in more detail in a Tax Notes opinion piece entitled, “Jeffrey A. Neiman, Opting Out: The Solution for The Non-Willful OVDI Taxpayer," Tax Notes 11135 (9/23/11), here, the failure to differentiate between the two distinct taxpayers has prevented thousands of taxpayers from coming forward as they view the programs as too expensive.

As we turn the corner, taxpayers who entered the program and who were not aware of their obligation to file an FBAR or to report their worldwide need to consider opting out of the voluntary disclosure program. Under the program, the IRS and DOJ assumed every taxpayer acted intentionally or willfully. However, in fact, I think in many cases, it will be very difficult for the government to prove that a taxpayer willfully violated the law.

Willfulness is defined as the intentional violation of a known legal duty. It is the cornerstone to any criminal prosecution, to the civil fraud penalty, and to the draconian 50% per year FBAR penalty. The government proves willfulness by looking at a taxpayers conduct. When I was a federal prosecutor, examples of conduct I looked to in order to infer willful behavior included using nominees, misleading the IRS, providing incomplete information to an accountant, dealing in cash, and maintaining a double set of books. Without some of these factors, it is very difficult to prove willfulness and without willfulness, there is no criminal case, no civil fraud penalty, and no 50% FBAR penalty.
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IRS Responds to Indian-American Community's Concerns Over OVDI (8/17/11)

I previously posted a blog on Indian American community requests for relief with respect to the OVDI initiative. See Indian American Groups Push for Foreign Account Relief (7/29/11) here.  I provide below a response from Heather Maloy, IRS Commissioner, LB&I. I do not yet have a public link to the letter itself, but will provide the link when I get it.  (Readers with access to Tax Notes Today can find it at 2011 TNT 159-16.)

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August 4, 2011

Mr. Inder Singh
Chairman
GOPIO International
P.O. Box 560117
New York, NY 11356

Dear Mr. Singh:

I am responding to your letter to Secretary Geithner dated June 27, 2011. You asked about relief available to certain taxpayers under the 2011 Offshore Voluntary Disclosure Initiative (OVDI). Thank you for your interest in the OVDI.

The OVDI provides a way for taxpayers with undeclared assets offshore to resolve their tax problems. The terms of the OVDI require taxpayers to pay the following penalties:

• A 20 percent accuracy-related penalty under section 6662 of the Internal Revenue Code (Code);
• A failure-to-file penalty under section 6651(a)(1) of the Code;
• A failure-to-pay penalty under section 6651 (a)(2) of the Code; and
• An offshore penalty equal to 25 percent of the highest aggregate balance in foreign bank accounts and entities or the value of foreign assets during the period covered by the voluntary disclosure in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties.
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Tax Notes Article on Practitioner Assessment of Offshore Initiatives (8/15/11)

Tax Notes has published an article, Marie Sapirie, Practitioners Assess Offshore Initiative as Deadline Approaches, 132 Tax Notes 664 (Aug. 15, 2011). With permission of Tax Analysts, I make it available to readers here.

The article is short and worth reading in its entirety. Some excerpts:

"The second voluntary initiative gives people a fair way to resolve their tax problems," IRS Commissioner Douglas Shulman said August 8 in a reminder that the 2011 OVDI is ending.

Not all practitioners agree. The standardized penalty structure of the OVDP and OVDI "has led to some incredibly disproportionate and painful results," said Michel.

* * * *

The program's inability to differentiate between taxpayers' conduct and their culpability is frustrating, said Jeffrey A. Neiman, who led the prosecution of Swiss bank UBS as an assistant U.S. attorney in the Southern District of Florida. "If the OVDI program were more fair for these taxpayers who were not acting willfully, you would not have an issue with quiet disclosures or opting out, and you would probably have more compliance as well," he said.

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Taxpayer Advocate Criticizes IRS Implementation of OVDP on Bait and Switch (6/30/11)

The Taxpayer Advocate has issued a Report to Congress on its Fiscal Year 2012 Objectives (6/30/11).

In the Report at pp. xxxiv and xxxv, the Taxpayer Advocate criticizes the IRS's implementation of its statement in the 2009 OVDP that “[U]nder no circumstances will a taxpayer be required to pay a penalty greater than what he would otherwise be liable for under existing statutes.”  The IRS did the old bait and switch on that seemingly clear statement.  The Taxpayer Advocate lays it out pretty well in her report.  The relevant excerpt (with footnotes) is here.  I have cut and paste the relevant excerpt without the footnotes are follows:
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Opting Out of the IRS 2009 OVDP and 2011 OVDI (6/14/11)

Readers have commented on prior blog entries about the opportunities and risks of opting out of the IRS 2009 OVDP and 2001 OVDI. I thought I would devote a specific blog entry to the subject to better focus readers comments, particularly as anecdotal evidence comes out about how the IRS is actually dealing with opt outs, and make them more easily accessible to readers.

The fear among taxpayers and practitioners is that the IRS will be punitive in its application of the penalty structure. We don't know yet whether the fear will be realized.

First, I quote the 2011 OVDI FAQ 51 for the opt out (as updated 6/2/11):

If, after making a voluntary disclosure, a taxpayer disagrees with the application of the offshore penalty, what can the taxpayer do?

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