On February 24, 2015 I participated in an ABA Tax Section Webinar, “Answering Your Criminal and Civil Offshore Disclosure Questions.” On the Webinar panel were two IRS officials: David W. Horton, Director, IRS International Individual Compliance; and John C. McDougal, Senior Special Trial Attorney, IRS Office of Chief Counsel (Chief Counsel are the IRS in-house Attorneys).
Below I’ve paraphrased (not quoted verbatim) some of the comments of the two IRS officials without identifying who made what comment.
Criminal Enforcement
- The Department of Justice’s greater concern is over funds that originated in the U.S. as opposed to funds that were always offshore. Thus, U.S. profits and gains diverted to offshore accounts garner more attention on the criminal side than do foreign gifts or inheritances that were deposited into offshore accounts.
- Reliance on professional advice, once a defense, now has become evidence that the advisor and taxpayers were co-conspirators.
- IRS is following transfers of funds by so-called “leavers.” Who moved funds from UBS in 2009 and 2010 and views that foolish conduct as significant evidence of willfulness.
Swiss Bank Settlement Program
- Swiss Bank Secrecy laws still prevent banks in the program from turning over a client’s name unless:
- The client consents.
- A proper Treaty Request is made (must indicate fraud) such as where nominee entity was employed although a Treaty Protocol pending in the U.S. Senate would expose personal numbered accounts to being turned over.
- The banks must turn over the name and location of bank accounts to which “Leavers” transferred funds but not the name itself. With that information IRS will be able to identify the individuals by obtaining a John Doe Summons requiring the bank to turn over names.
- The banks in the program must close the accounts of U.S. depositors who fail to come into compliance with U.S. tax reporting.
- Banks in the program seeking to mitigate penalties are contacting customers to encourage them to enter the OVDP.
OVDP
- Most of the questions during the webinar concerned the Streamlined Process – see comments below.
- Preclearance of names is now taking much longer than when the Program first opened because IRS has much more data to go through in order to check a name.
- RSS Comment: That IRS has more data also means that IRS is more likely to discover a person’s identity.
- Valuations of included non-financial assets: IRS generally allowing no discounts (minority interest or lack of marketability) from fair market value as it views the inclusion of the value as “rough justice.” Any reasonable good-faith estimate of value is acceptable.
Streamlined Filing Compliance Procedures (or Streamlined Process)
- The IRS continues to see no value in offering examples of what sort of conduct it would view as willful or non-willful. Each determination is very fact specific and there is a large body of case-law is applicable. Thus, the call is up to the attorney. Nothing more will be forthcoming from IRS on the question of non-willfulness.
- Willful is one of those “know it when you see it” things.
- Ask yourself: Are you nervous about having no protection from criminal indictment, or about having to pay the civil fraud penalty or draconian FBAR penalties? If not, Streamlined is OK.
- Size of the account does matter but is not determinative other than at the extreme ends of the spectrum (very small being an indicator of non-willful conduct and very large being a strong indicator of willful conduct)
- If joint returns were filed both spouses must file under the Streamlined Process because a joint return must be amended with a joint return. That is because the tax is assessed on the return and not under a closing agreement as in the OVDP (where one or both spouses can enter).
- There is no acknowledgment of filing returns under the Streamlined Process because it is just a process for filing tax returns. Aside from the penalty relief it is just like filing a normal return.
- RSS Comment: But don’t make the mistake of thinking that Streamlined returns are ordinary returns. They are not. You are filing under threat of criminal prosecution if you do not meet the test of being non-willful, and of other charges if your Non-willfulness Certification is false or leaves out negative facts that make it misleading or if the returns you file are in any way false or misleading.
- IRS cashing of your check or sending a bill for additional interest is not an acknowledgment that your returns pass muster in the Streamlined Process. Your return can still be selected for audit later on and there is no process by which one can request an early audit.
- Taxpayers with accounts at listed banks (subject to the 50% OVDP penalty) can go Streamlined if non-willful.
- RSS Comment: In theory yes, but most with accounts at bad banks have engaged in conduct that would be viewed as willful (Nominee entity, structuring, loans etc.).
- Preclearance – Practitioners stated that some are submitting names preclearance even if they intend to go Streamlined, just in case evidence of willfulness is discovered.
- The IRS people discouraged this tactic. If non-willful why submit names?
- The reason is that the accounting and investigative work in reviewing statements for the Streamlined may turn up evidence of willfulness. If names are submitted you will probably have 50 days before the OVDP Letter is due. During that time you should have a better idea if you can, in fact, certify non-willfulness.
- You can also pull transcripts to ascertain if an audit has been commenced. But, the transcript may show an audit code before the audit has commenced. It is the sending of the audit notice and due process rights letter that commences the audit and disqualified a taxpayer from the Streamlined Process, not the entering of the code in the system.
- If a taxpayer is declined for OVDP in the names submission, he or she can still enter the OVDP if otherwise qualified, but believe that would be a rare case.
- The key element for IRS in ultimately agreeing or disagreeing with the non-willful certificates is when the taxpayer learned of the filing requirements.
- Those who learned of the filing requirement but stayed out of the OVDP for fear of the high penalty, but now want to avail themselves of the zero penalty (non-U.S. person) or 5% (U.S. person) would likely be viewed by IRS as willful.
- PFICs: There is no OVDP short-cut rule for PFICs in the Streamlined Process.
- Upfront Rejections from Streamlined: Are due mainly to the Certification on its face being insufficient and not reciting specific facts supporting the non-willful assertion. The IRS is not rejecting applicants merely because it disagrees with the conclusion that the conduct is non-willful. The IRS may, however, take that position if and when it audits the taxpayer’s returns.
- The taxpayer no longer has to be otherwise tax-compliant to file returns under the Streamlined Process. The returns filed can be delinquent returns.
Quiet Disclosures
- IRS is screening for amended returns filed outside the OVDP or Streamlined Process. So, taxpayers taking this route may expect an audit.
- May be applicable to persons if not worried about criminal charges or willful FBAR penalties and feel strongly that reasonable cause is present.
- Reasonable cause means not negligent.
- RSS Comment: perhaps for some U.S. persons. But, non-U.S. persons better off in Streamlined Process since less likely to be selected for audit.
RSS Comment
Each case requires a decision about how to proceed. These decisions are complex and require the assistance of a tax attorney experienced in these matters.
© 2015 by Robert S. Steinberg, Esquire All rights reserved
