Friday, April 11, 2014

Grinberg Article on Battle Over Taxing Offshore Accounts (4/11/14)

I am attending a tax conference in Charlottesville Virginia today.  The weather is lovely, but we are inside talking tax.  (A pitch for readers' sympathy.) 

One of the handouts is the following article by Professor Itai Grinberg, Associate Professor at Georgetown Law School, for which I cut and paste the abstract.  The complete article is here.

The Battle Over Taxing Offshore Accounts
Itai Grinberg [Profile here]

Abstract
The international tax system is in the midst of a contest between automatic information
reporting and anonymous withholding models for ensuring that nations have the ability to tax offshore accounts. At stake is the extent of many countries’ capacity to tax investment income of individuals and profits of closely held businesses through an income tax in an increasingly financially integrated world.  
Incongruent initiatives of the European Union, the Organisation for Economic Cooperation and Development (OECD), Switzerland, and the United States together represent an emerging international regime in which financial institutions act to facilitate countries’ ability to tax their residents’ offshore accounts. The growing consensus that financial institutions should act as cross-border tax intermediaries represents a remarkable shift in international norms that has yet to be recognized in the academic literature. 
The debate, however, is about how financial institutions should serve as cross-border tax intermediaries, and for which countries. Different outcomes in this contest portend starkly different futures for the extent of cross-border tax administrative assistance available to most countries. The triumph of an automatic information reporting model over an anonymous withholding model is key to (1) allowing for the taxation of principal, (2) ensuring that most countries are included in the benefit of financial institutions serving as cross-border tax intermediaries, (3) encouraging taxpayer engagement with the polity, and (4) supporting sovereign policy flexibility, especially in emerging and developing economies. This Article closes with proposals to help reconcile the emerging automatic information exchange approaches to produce an effective multilateral system.

57 comments:

  1. NeedDirection,

    I tell clients that the only certainty is to get in OVDP and not opt out. Each of the altneratives -- OVDP with opt out, QD or GF -- involves uncertainty. One uncertainty is the time involved before certainty might be achieved. The certainty that comes will be the audit or the expiration of the statute of limitations (6 years for FBAR civil penalty).

    Another uncertainty,of course, is the type or range of penalties that the IRS may impose if the IRS audits. Certainty there will come if there is an audit or the statute of limitations expires.

    So, to do anything other than OVDP and no opt out, a taxpayer must be comfortable dealing with uncertainty and the risk involved with that uncertainty.

    Jack Townsend

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  2. Jack,

    Thanks for the explanation. I see your point that the three options -- OVDP with opt out, QD or GF -- involve uncertainty.


    1. I am curious you did not refer to "VD" (voluntary disclosure) in your reply. Is that even an option for taxpayer with otherwise squeaky clean record to consider to deal with unfiled FBAR and unreported interest income?


    2. What is the pro-cons of VD (just plain VD, not OVDP) over QD/GF?


    Thanks

    ReplyDelete
  3. Mr Townsend,
    How do the IRS reconcile the 3 year statute of limitation on the tax returns and the 6 years on the FBARs?
    Say a taxpayer did a GF 3 years ago. The SOL for tax is over.
    What is the risk that the IRS audit that taxpayer for FBAR? (knowing that the first 2 FBARs were filed, and there was no need to file the last one since the account was closed 2 years ago, and that the amount of the amount was relatively small (~18k).

    ReplyDelete
  4. Jack i have 2 questions

    1) if you have heard any big fines for people filing QD and i am talking about ordinary joe?

    2) I am thinking about doing a QD if the worst case scenario is audit how far back can they go to audit and what exactly do they audit?
    I will be amending 6 years of tax return and filing 6 years of Fbar i am a US Resident. My total bank interest is under 4k for 6 years.

    Thanks for your help

    ReplyDelete
  5. 1. I have not heard of any results of audits on QDs -- whether big or small fines.

    2. The relevant statutes of limitations permit the IRS to audit 6 years of FBAR violations and 3 or 6 years of income tax violations (with an unlimited statute if the IRS proves fraud by clear and convincing evidence). The normal statute is 3 years but, even without fraud, goes to six years for certain omissions of gross income.

    Now, what actually happens? The IRS usually operates on the assumption that a 3 year statute applies and, given how long an audit might take, will usually not start an audit for the oldest year in that 3 year period. It will start an audit for one or two of the other years and then expand the audit as appropriate. Keep in mind that it can expand an audit for reasons sufficient to itself, but will have to have an open statute of limitations in order to make an adjustment.

    In the audit, the IRS can address everything -- particularly, based on the QD amended returns, it will look at foreign account income and any other items it think appropriate based on its audit criteria and priorities.

    I cannot address whether QD is a good strategy for you. That is a big discussion requiring considerable judgment for a seasoned practitioner.

    Best regards,

    Jack Townsend

    ReplyDelete
  6. I understand your question, but I don't know enough about your situation to provide any answer that could be meaningful.

    Make sure that you don't have a statute of limitations that exceeds 3 years on the income tax side.

    Then, on the FBAR side, make sure that you have correctly identified the years involved for the 6 years in your case.

    From what you do say, it appears that you think that the FBAR statute years years 4, 5 and 6 in the six year period have income tax and FBAR compliance, so no audit risk there. Years 1, 2 and 3 appear to have audit risk. I can't tell you what your exposure -- legal and practical is for those years.

    Best regards,

    Jack Townsend

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  7. NeedDirection,


    1. Of course, QD and GF are options to OVDP.


    2. I can't meaningfully tell you the pros and cons without your context.


    Jack Townsend

    ReplyDelete
  8. Thank you Jack my only other question is that i don't think i have all the receipts of the expenses i took some of them are lost. I am wondering if their is an audit and if i can't prove an expense would that consider as fraud?

    ReplyDelete
  9. Jack,lets assume for argument sake that you have a joint account with $500,000 max. account value and the same value for 6/30 ... the date of the filing violation with 1 USP and 1 non-US individual (who does not need to file an FBAR) how does the IRS determine the base value for assessing the FBAR penalties (outside of OVDP) ?

    1. do they still assume $500K ?
    2. or is it $250K because of only 1 accountholder being not in compliance with regards to filing the FBAR Form ?
    3. or something else depending on the "mood" of the examiner ?

    ReplyDelete
  10. My understanding is that, inside the OVDI/P and on opt out, the IRS will include in the base to which the penalty applies only the portion of the account that the USP (U.S. person) beneficially owns.


    I don't know whether the IRS will do the same on audit any other way. One could infer that, if they do that on OVDPI/P opt out where, they claim, the audit result applies, then they should do that in all audits however they get to audit -- i.e., whether by opting out of OVDI/P or by QD or by GF. Still, I have no anecdotal information that the IRS is doing that.


    I would suspect though that, if the nonUSP is the entire beneficial owner so that the USP acts like a signatory, then there would be no U.S. tax noncompliance and there would be no penalty. Perhaps an infererence that might be drawn from that too, is that, for example, if the account is beneficially owned 50-50, then the base for opt out penalty purposes would only be the 50% for which there is U.S. tax noncompliance.


    But, please keep in mind that I am not aware of what the IRS will do in cases other than opting out of OVDI/P.s


    Jack Townsend

    ReplyDelete
  11. Claiming deductions for which the receipts are lost is not a criminal act. Claiming deductions for which you never had receipts could be a criminal act (probably is) The worst that could happen if you lost receipts is that the IRS will deny the deductions and assess tax and interest -- perhaps civil accuracy related penalty as well.

    Jack Townsend

    ReplyDelete
  12. thank you Jack -
    you write :
    "If the account is beneficially owned 50-50, then the base for opt out penalty purposes would only be the 50% for which there is U.S. tax noncompliance" .
    Would you agree if I would interpret a husband & wife joint account as beneficially owned 50-50 (just as it would in divorce proceedings) or would the IRS always lean in the direction of who receives a salary/income etc. ?
    Husband (USP) works
    Wife (non-US individual) does not work

    Does that mean 100%, 75% or 50% beneficially owned ?
    What is the legal definition of "beneficially owns" within a joint account ?

    ReplyDelete
  13. Beneficial ownership means simply who is the real owner of the account. Often, in the absence of some controlling document, that is determined by the law that would apply to the account. It is not necessarily the person who received the income as compensation.

    If that issue is important to you, you will have to seek advice from a lawyer familiar with the jurisdiction(s) involved.

    One thing you need to carefully consider is whether the nonUS persons is married to the US Person and they live in the US. The nonUS person could be a US person by virtue of presence in the US for the required number of days in the year or lookback period. If that person becomes a US person, even though not a citizen or green card holder, then that person would have an income tax reporting obligation with respect to that person's beneficial ownership of the account.

    And, whether to join OVDP and whether to opt out are big issues as to which I strongly encourage you to get advice of an attorney. I list a number of attorneys on the upper right in the blog. It would be best if you visited one locally because face to face meetings offer the best communications.

    Jack Townsend

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  14. thank you Jack but lol.... I am not in need of an attorney

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  15. Jack, you said "Claiming deductions for which you never had receipts could be a criminal act (probably is)"
    I think there is more subtlety involved. If the deductions are bogus you are correct, but what about small deductions for which people don't often keep or even get receipts? It used to be that for business meals, short taxi trips, tips, money dropped in the collection basket at church, etc. you could keep a contemporaneous diary and that was acceptable to the IRS. Of course if the amounts were huge or seemed suspicious for other reasons the IRS could deny the deduction.

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  16. Thanks for your comment. You are correct. I worded the quoted comment wrong. I should have said that claiming deductions for which you are not entitled -- bogus in your word -- is a criminal act. Merely because you failed to get receipts or lost receipts but the deductions were otherwise legitimate.


    Thanks for correcting the statement.


    Jack Townsend

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  17. Jack, same Anonymous here as in two posts up. I was basing my comments based on the interview with former IRS Bill Yates http://blogs.angloinfo.com/us-tax/2013/07/01/fatca-interview-with-bill-yates-former-attorney-office-of-associate-chief-counsel-international-irs/
    from which I inferred that in the past little was done with incoming FBARs, and that typically an investigation into FBARs would have to be initiated because of an income tax situation. Of course, what happened in the past may be different from what happens now.


    Also, does the IRS actually administer filing of FBARs, or only penalty enforcement? I thought that it was only the latter under the Treasury-IRS agreement.


    To triarc, FBARs have not required e-filing (although it was available.) The requirement began with the new Treasury Form covering the 2013 year, due by 6/30/2014.

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  18. From my experience and what I hear, little was done with filed FBARs prior to 2009, at least in the tax area. The FBAR (like other BSA filing requirements) was really designed principally as an additional tool to fight the war on crimes of drug dealing, organized crime, etc. It does have a tax administration component, but, at least from experience and understanding as a long-time practitioner, that did not take hold in any significant way (except anecdotally) before 2009.

    Keep in mind that most law enforcement agencies can access FBAR information. Hence, I suspect that leads as to FBAR enforcement could come from those any of those agencies quite apart from income tax examinations. I don't doubt that, prior to 2009, the limited FBAR compliance was substantially driven by income tax violations, though.

    The FBARs are filed with the IRS Enterprise Computing Center in Detroit. The mailing is to "U.S. Department of the Treasury, P.O. Box 32621, Detroit, MI 48232-0621," but that zip code is to the IRS Enterprice Computing Center in Detroit. I don't know, but I think it is logical to presume that the IRS which has deep experience in handling and managing similar filings probably handling the filing and computer input of information from the FBARs. The entries may be into a computing system separate from the IRS's computing system (meaning it is not readily accessible in the IRS's day to day operations), but is accessible when the IRS is performing its function of administering and enforcing FBAR compliance.

    Thanks for your comments.

    Jack Townsend

    ReplyDelete
  19. Hi Jack,

    Thanks for doing this blog.

    My wife and I had a couple of accounts in Switzerland because we both have relatives there, and go each year. The max combined total on the accounts was about $60,000, and the max interest was $120 per year total on all accounts.

    We were clueless about reporting these accounts on our income taxes because they were taking taxes out, so we figured that is how the taxes were handled, and never reported the tiny amounts of interest. The taxes taken out are greater than what we would owe, so if we redid our taxes and took the foreign tax credit, the government would actually owe us $7. We were even more clueless about filing an "FBar" and never did.

    We were told to just file the missing Fbars, and the IRS would not fine us because we have no tax liabilities.

    Do you agree this would be a good way to proceed?

    thank you

    Bob M

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  20. Bob M

    I can't give you legal advice because I don't represent you and certainly do not have all of the facts and circumstances necessary to give you good advice.

    I don't know who told you to just file the missing FBARs and whether he or she developed all of the relevant facts. If the attorney did develop the facts and has the experience to make the call, then it might be a good call.

    Just on the bare facts given, I would not think that the IRS would assert an onerous penalty. However, that is not advice, but just a thought based on the limited facts you present.

    Best regards,

    Jack Townsend

    ReplyDelete
  21. Jack, I am considering taking the audit risk and go QD given my clean record, no criminal intent and reasonable clause. In the event of an audit, if by luck, the examiner assesses an excessive penalty in spite of good facts, does a tax payer have recourse to "The Excessive Fines Clause of the Eighth Amendment" to argue with IRS?

    In other words, when facts are good, does a taxpayer have the benefit of the Constitution to argue with the IRS without resorting to a lawsuit?

    ReplyDelete
  22. NeedDirection,

    This may not be helpful to you, but I feel compelled to say it anyway.

    If the facts are good, the IRS will not assert an onerous penalty. That is generally a true statement. There is always the outlier even where the IRS asserts a penalty it should not have. But, generally, if your facts are good, there will be either no or an acceptable penalty that does not implicate the Excessive Fines Clause.

    If the IRS does assert an onerous penalty inconsistent with the facts, the Excessive Fines Clause could be implicated. You could assert the Excess Fines Clause in opposition to an unreasonable penalty that in IRS Appeals Office hearing or in court if that becomes necessary.

    All of this, though, while true, is somewhat academic because it assumes away the key issue that, on balance, your facts are really that good. That is the risk you take. If your facts are, on balance, really not that good, you could get an onerous penalty that does not implicate the Excessive Fines Clause.

    You probably need an objective test as to whether your facts are that good and therefore that a QD or GF is the right choice, consistent with your risk tolerance and the real risks involved.

    Best regards,

    Jack Townsend

    ReplyDelete
  23. Hi Jack

    You have said several times in this blog that one may not want to consider OVDP if is one plans to opt-out. However OVDP provides closure which other options lack. So I have been trying to weigh the costs of the options to make a decision.

    When I talk to tax professionals I find it is hard for them to get ballpark estimate (within say a few thousand dollars) the penalty that IRS will likely assess in case of say post-QD audit or OVDP opt-out. I guess one reason could be there are many possibilities - willful penalty/non-willful, assess one year of FBAR penalty or assess multiple years, etc etc. Is that reason or are they afraid that the client will accuse them of false promises? Or may be I have not spoken with seasoned professionals.

    Interested in your comments.

    Thanks!

    ReplyDelete
  24. Thanks Mr. Townsend for sharing your thoughts on this.

    My wife and I are poised to file our missing Fbar’s from 2008 to 2011 but have one final concern before proceeding that hopefully you can shed some light on.

    Could just filing the missing FBAR's be considered a “quiet disclosure”
    which the IRS is apparently strongly opposed to?

    It seems that it might be different for several reasons:

    1. We would not be amending our tax returns because we do not owe any tax due to the foreign tax credit. We never claimed the accounts which had a maximum combined interest of $120 for the year, but if we did amend our taxes, we would actually be eligible for a overall tax credit of $7 due to the foreign tax credit, so it seems like amending is not necessary.

    2. On the Fbar there is a place for an explanation, and we are explaining that we did not file an Fbar for these accounts because we were clueless, and want to be up to date, and that we owe no taxes, so we are not hiding the fact that we did not file.

    Finally, does this statement below in OVD FAQ #17 possibly help the situation?

    “The IRS will not impose a penalty for the failure to file the delinquent FBARS’s if there are no underreported tax liabilities and you have not been previously contacted regarding an income tax examination or a request for delinquent returns.”

    Thank you for any thoughts you are willing to share about this confusing maze of rules.

    ReplyDelete
  25. Thanks JRA!


    - What does it mean to line up an attorney? Find one who agrees with the approach plus agrees on the representation cost in case of audit?


    - I understand CPAs can represent with IRS. Did you line up an attorney because you believe you will need one because of your case-specific facts?

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  26. Thanks JRA!

    - What does it mean to line up an attorney? Find one who agrees with the approach plus agrees on the representation cost in case of audit?

    - I understand CPAs can represent with IRS. Did you line up an attorney because you believe you will need one because of your case-specific facts?

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  27. BobMaz,


    1.Filing delinquent FBARs is a guiet disclosure. In the income tax universe, quiet disclosures are made by filings -- whether of amended returns or delinquent returns. Applying that anology to the FBAR arena, filing the delinquent FBARs would be a quiet disclosure. I would suggest that you consider filing amended returns even though you would owe no tax. You can correct the schedule B question and include the interest.


    2. You are requested state the explanation for delinquent FBAR filings. If you did not know, you did not know. That is a full and correct and honest answer. You might also state in the explanation that, even though you owe no additional tax, you are filing amended returns to correct the Schedule B answer and include the de minimis additional income.


    As to your question about FAQ #17, I have not filtered through the context for that answer recently, so I am hesitant to answer that question. But, at your levels of tax liability -- you say $0 -- and the other facts, I think that unless there are bad facts you do not disclose, the IRS is unlikely to pursue an FBAR penalty that would be material.


    Jack

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  28. All is fine for past 3 years, but not first 3, where FBARs were not filed and de minimi interest on account not reported ($100 per year). I was just wondering how the IRS would audit FBAR for the first 3 years, without auditing the tax returns. I don't think the 6 year SOL would apply to me for tax.

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  29. For many immigrants who did not know about declaring their accounts, and who may have very small undeclared interests, OVDP is an extremely expensive option. For say $600 of undeclared income, which might translate into $200 of tax due on 6 years, the IRS asks to pay $20K or more lawyers fees, $7k in accountant fee to being bullied into accepting to pay 27.5% of the total balance or face huge FBAR civil penalties. Where is the rationale here? I don't see that as a fair option, even if the result of the opt out is a warning letter. Taxpayers (and lawyers!) need better guidance. It is despicable for the IRS not to do it and to instigate such level of fears.

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  30. Thank you for the insights.

    My last question is regarding the end of year report by Nina Olson which recommended significant changes in OVDI to make it much less onerous for small fish.

    Has there been any movement on this you might be aware of?

    thanks again

    Bob

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  31. Jack,


    Incredulous mentioned about immigrants with undeclared accounts. Immigrants often have part of their lives still stuck in the country of origin, since most of their family (parents, siblings, etc) are still there. That often mean they have financial affairs (bank accounts, etc) which are in that country for family reasons and not as tax havens.


    If an immigrant with squeaky clean past US returns but undeclared interest (say $2000 tax deficiency per year) from CDs in his home country makes complete and truthful non-OVDP disclosure. What would it take IRS to file criminal charges in case of an audit?

    ReplyDelete
  32. SSD,


    Generally, I think the practitioner community (including myself) believe that a good quiet disclosure in the absence of bad facts (very large amounts, entities to hide the account and other egregious evasive activity) will mitigate the possibility of criminal charges.


    The IRS says that, for offshore accounts at least, quiet disclosures do not achieve the benefits of a real noisy disclosure,the principal benefit being mitigation of the possibility of criminal charges. However, I think some representatives of the IRS have moderated that claim in individual statements and I think the practitioner community would be shocked that a good quiet disclosure with good facts resulted in criminal prosecution.


    As I analyze the overall area, if you have bad facts, OVDP without opt out is the only good option. It solves the criminal prosecution risk and mitigates the potential full bore penalties that could apply. For those with good or non-bad facts, then OVDP with opt out is an option as is, in appropriate cases, QD and GF.


    Looking at the limited information you provide about the specific facts and projecting from there, I would be surprised if (assuming the other facts are relatively benign) that there would be material criminal prosecution risk.


    This is obviously not legal advice because I have not been engaged and have not developed the facts necessary to give such advice. It is rather just an off the cuff best projection based on the limited facts.


    Best regards,


    Jack Townsend

    ReplyDelete
  33. Jack,

    - I am considering QD with help of a CPA. In case of an post-QD audit, I will have the CPA represent me. How does one know one needs services of a tax attorney at time of the audit? Does the examiner given an indication of criminal possibility to the CPA representing the taxpayer?

    - I read somewhere that IRS audit operates separate from the prosecution. And there is a high bar for that examiner to meet for the prosecution to even consider the case. Is that how it works?

    - You referred to "very large amounts" as an example of a bad fact. Would $400K be considered a "very large amount" for this purpose in your opinion?

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  34. SSD,


    I understand your need to have these answers, but I will provide comments rather than answers because answers can only come in the context of all the facts. Developing all the facts for good answers would require a lot of time and information. With that caution, I will offer some comments.


    First, if a taxpayer has material criminal prosecution risk, that taxpayer should join OVDP. The principle benefit of OVDP is to mitigate the criminal prosecution risk. That is why those persons without material criminal prosecution risk should consider OVDP along with other options -- they will not obtain the principle benefit of OVDP.


    Second, for persons without material criminal prosecution risk, an audit can be handled by a good CPA who is sensitive and alert for when to involve an attorney.


    Third, the auditor is not required to give notice that an audit has turned into a criminal investigation. Indeed, they usually do not tell, but alert practitioners often can sense when that occurs.


    Fourth, audits are separate from criminal investigations. There is indeed a high bar for an auditing agent to refer a case to CI for criminal investigation.


    Fifth, my comment about very large amounts was just focusing on one fact among a myriad of facts that go into a decision as to whether a case has criminal prosecution potential and/or major civil penalty (willful FBAR and civil fraud) potential. $400,000 depending upon other facts might be sufficient. You do have some other good facts with no entities or attempts to hide the account, but there could be negative facts.


    I would encourage you to find an experienced attorney and better calibrate your consideration in the context of all the facts that bear on these risks. It would be a mistake to walk away from this blog and these discussions believing that an inexperienced taxpayer can properly assess the risks. I list practitioners whom you might consider. I strongly recommend that you engage a practitioner near where you live so that you can have a face-to-face meeting to develop all the facts and get the best advice possible.


    I wish you the best.


    Jack Townsend

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  35. Jack,

    I had looked at your listed attorneys previously and not found anyone within driving distance of where I live.

    I had called another attorney whom I found online. He seems quite experienced with over 130 OVDP pending cases and over 10 completed opt-outs. He thought for case of my profile, opt-out would be way to go and did not see criminal risk.

    But on QD, he discouraged it for risk of higher penalties in case of audit. I tried to pin him down on the criminal risk for QD but he kept suggesting OVDP with opt-out.

    - So, I wonder, if there is no criminal risk with opt-out, would there be criminal risk with QD?

    - When I call an attorney, I wonder if there is desire to move folks in OVDP direction because they have practices in that area. Any thoughts?

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  36. SSD,


    There is no criminal risk on opt out. You mitigate the criminal risk by joining OVDP. Opting out does not change that benefit. The only issue on opt out is the financial cost -- whether the monetary civil penalty results on opt out are worse than the OVDP without opting out.


    I should note that the factors that might create criminal risk also create monetary civil penalty risk. So, if a taxpayer has material criminal risk, that taxpayer should join OVDP (thus solving the criminal problem whether opting out or not) and should not opt out because those risk factors create high risk for the civil monetary penalties.


    The IRS's announcements say that the taxpayer on opting out of the OVDP penalty structure gets an audit result for the civil monetary penalties (including most prominently the FBAR). If the taxpayer does not join OVDP and has no material criminal risk, the taxpayer's exposure is to audit in which, if it occurs, an audit result will be imposed. Same result as opting out. Hence, for the taxpayer with these characteristics, the IRS has not given any reason to believe that the civil monetary cost will be less if the audit occurs on opt out than it is if the audit occurs after QD or GF.


    I understand that getting a reasonable fix on whether you have material criminal risk is probably the most important decision in the process, because upon that hinges whether you have any practical option other than joining OVDP. You needs to consult with experienced counsel on that issue, because it requires consideration of many facts and factors and considerable experience and judgement.


    Best regards,


    Jack Townsend

    ReplyDelete
  37. Jack,

    I thought I read somewhere (may be on this blog) that IRS may be proposing a change to OVDP. In light of the TAS report to make it easier for taxpayers to come into compliance by having IRS be more acceptable to QD, I am hoping a less onerous program would come along soon.



    If I get into the QD now but later change my mind and get into OVDP (hopefully a better program then) what would be the downside of joining OVDP later, other than the accountant cost? Would the opt-out audit see not joining the program in the first place as willful act to avoid penalty?

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  38. SSD,


    I am not aware of the IRS proposing to make QD more acceptable or of a less onerous program in the offing.


    I don't understand your second paragraph, but I don't think a QD could be treated as an act of willfulness with respect to the original failure to file the FBAR(s),


    Jack Townsend

    ReplyDelete
  39. Hi Jack,

    In the event of a onerous penalty being assessed on a QD-related audit, what options does a taxpayer have?


    In increasing order of cost, I am guessing:
    - Seek Taxpayer Advocate Service help?
    - File an appeal? Need help of a CPA or attorney?
    - File a lawsuit with help of attorney?


    Can you fill in the details? e.g. if there different levels of appeal?


    Thanks.

    ReplyDelete
  40. Thanks Jack! I do not believe my case has any material criminal risk but just for reassurance, I may consult with experienced counsel.



    After studying my case, even if the counsel determines my risk is next to nil, he/she probably will not be willing to say my risk is 0% . How else can the counsel express a negligible risk to such a client? With adjectives like "small", "remote"? Hopefully something more objective. How would you do it?

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  41. NeedDirection,


    I assume you are talking about an onerous FBAR penalty on audit. The process usually involves:


    (i) IRS proposes the penalty after audit;


    (ii) prior to assessment the taxpayer has the right to an appeal with the IRS Appeals Office (might come after assessment if there is a short statute of limitations); and


    (iii) failing satisfactory resolution in Appeals, the Government will start collection measures. Collection measures will include,offsets of federal payments owed to the taxpayer. There is no statute of limitations on the Government's ability to offset. The Government may also file a collection suit (statute of limitations on the collection suit is generally 2 years). The IRS cannot use the normal IRS collection measures of lien and levy.


    (iv) after assessment, the taxpayer can pay some or all of the FBAR penalty and sue for refund. The suit will put the legality of the penalty in play. The suit can be brought either in the Court of Federal Claims or in the U.S. district court.


    The taxpayer should have counsel throughout the process -- from audit onward.


    Keep in mind that the willful FBAR penalty is not dischargeable in bankruptcy.


    And, also, I am just providing a brief discussion and not providing legal advice. You should seek individualized legal advice addressing your unique facts.


    I hope this helps.


    Jack Townsend

    ReplyDelete
  42. Jack, I did hear about one QD case with a bad (incomplete) disclosure turning into a criminal one. Do attorneys like yourself closely track QD/FBAR related criminal cases filed around the country? Or are there are far too many of them for attorneys to keep track of?

    ReplyDelete
  43. SSD,


    I usually say that the risk is not material, based on my experience and judgment. That means that unless the client wants no risk (in which case he should join OVDP), he can with reasonable confidence (although no guarantee) proceed with considering alternatives other than OVDP.


    I guess I should caution that achieving criminal prosecution mitigation is the principal benefit of OVDP, but it is not the only benefit. Even if a taxpayer has no material criminal risk, he or should could have material willful FBAR civil penalty risk. The willful FBAR penalty is up to 50% for a single year and can be multiple years. So, while it is generally true that one who has no material criminal risk has not material FBAR willful penalty risk, that is not always the case. Conceptually, even if willful meant the same thing it does in a criminal case as in a civil case, the trend in the cases -- an as yet undeveloped trend -- is to say that the burden of proof in the civil case is preponderance of the evidence, which means that the IRS might assert the willful civil penalty even where DOJ would not approve prosecution.


    Again, I think it is hard for lay people to deal with these issues, so do encourage you to seek counsel.


    Jack Townsend

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  44. SSD,


    1. I have heard about such a case as well. My impression was that that is an egregious case of not doing a real QD. A QD to be effective must not itself be a criminal act. For example, one should not file amended returns reporting less than all income from foreign accounts (or not correcting other errors on the original return) or file a delinquent FBAR reporting less than all foreign accounts. Practitioners have always known that a materially and knowingly false amended return creates more problems than it solves.


    2. I do keep track of the criminal cases in the spreadsheet that you can download in a page that can be accessed in the upper right hand of this blog. The spreadsheet includes only the criminal cases that come to my attention. But, I think it is probably most of the ones that ultimately get to sentencing or acquittal. There may be a number in the system that do not come to my attention before the resolution of conviction or acquittal. I am sure that there are others who keep track at some level, but don't know of any who make that information publicly available as I do. Periodically, the IRS will provide a list of certain of the criminal resolutions, but I think that is only a smaller subset of the whole, and is designed to repeat the IRS mantra that taxpayers with undeclared offshore accounts should get into OVDP soon.


    Jack Townsend

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  45. Jack, Given that each case has different facts, is it possible even for a seasoned practitioner to estimate with any degree of certainty what civil monetary penalties are likely in case of an QD/opt-out audit?

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  46. If the wilfulness standard for criminal prosecutions is as watered down as the one for civil cases, then presumably many taxpayers who go a route other than OVDP are playing the, "let's hope the DOJ won't waste time on minor prosecutions" lotto. Perhaps the odds for that lottery are better than the "hope the IRS won't audit or hope the IRS is reasonable" lottery but then again, the downside risk is much higher. Also, in certain cases, the OVDP is potentially more onerous than a pure wilfulness penalty, say where an taxpayer has assets that aren't FBAR reportable but whose value is included in the penalty base. Many expats might be subject to that (especially those who are delinquent in their general tax filings but who don't qualify for streamlined program).

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  47. SSD,

    The issue is probability, not certainty. A seasoned practitioner can in many cases give probability assessments that clients might find acceptable for action, based upon their own tolerance for risk.

    Of course there will be some cases in between where even good practitioners would say it is too close to call (or within a range that the probabilities might not be acceptable).

    Best regards,

    Jack Townsend

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  48. Jack, anything you have heard over the grapevine about IRS considering recommendations from Taxpayer Advocate Service?

    http://www.taxpayeradvocate.irs.gov/userfiles/file/Full-Report/Most-Serious-Problems-IRS-Offshore-Voluntary-Disclosure-Programs.pdf

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  49. Jack,
    "The taxpayer should have counsel throughout the process -- from audit onward."

    The "counsel" has to be a tax attorney or can CPA take care of this?

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  50. A good CPA can do it. By good CPA, I am talking about one with the judgment to know and if to involve an attorney. I would say, however, that among the CPAs that I know who do this type of work, they could handle it and, in most cases, would not have to involve an attorney.


    Jack Townsend

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  51. There was a Tax Notes piece on this, a quote from an IRS official about whether the OVDP was working right. That was back in February and nothing seems to have come from it.

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  52. I have not heard that the IRS is considering or will adopt those recommendations.

    At this point, I would expect to see no major changes in the design of the program, except perhaps (as the IRS has suggested is possible), certain banks could be excluded from OVDP or perhaps even the miscellaneous penalty rate could rise a bit -- say to 30%. I have not heard that that will happen, but we all recognize that is the possibility.

    Jack Townsend

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  53. Hello Jack quick question. I just joined the IRS Pre clearence program. After reading your blogs and other i think i made an error and should have stayed away from the OVDP program is their a way to get out of this program once you have send your information to Preclearence under ovdp?
    Thanks

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  54. I just answered this on another posting (you apparently posted your question twice).

    Jack Townsend

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  55. Rajesh NilakantanJune 12, 2014 at 11:57 AM

    Jack, In the context of your reply above, specifically "collection measures": Can IRS automatically like put their hands on one's 401K saving or US bank accounts? Home? etc... Will it be that easy for them?

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  56. Hello Jack,
    References to your reply above, Can you add CPA's you recommend? (Just like you have a list of attorney names up top right). Many Thx

    ReplyDelete

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