A panel of practitioners from the American Bar Association Tax Section on May 8, grappled with the "one-size-fits-all" IRS's voluntary offshore disclosure program, finding that it is often ill-suited for some of their clients who may not have willfully evaded their tax obligations.
Speaking at the May meeting of the American Bar Association Section of Taxation, John McDougal, special trial attorney in the IRS Office of Chief Counsel explained that where taxpayers opted out of the IRS's voluntary offshore disclosure program in favor of a regular audit, the examiners were expected to look at all applicable tax years. Absent fraud, the statute of limitations is generally six years, although McDougal said that if there was an entity involved, and the entity failed to file information returns, "all bets were off" and the IRS could go as far back as it liked.
Background. On February 8, 2011, the IRS announced a new 2011 Voluntary Disclosure Initiative (OVDI) for taxpayers to disclose their unreported offshore accounts. To participate in the OVDI, taxpayers must file or amend their tax returns and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)) and pay all delinquent taxes, interest and penalties by August 31, 2011. The initiative covers tax years 2003 through 2010.
In exchange for participating in the OVDI, taxpayers with undisclosed offshore accounts can avoid criminal prosecution for their unpaid taxes and may be subject to significantly reduced penalties.
Under the OVDI, taxpayers will be subject to a 25 percent penalty on the highest aggregate account balance on their undisclosed account(s) between the 2003 and 2010. If the value of the undisclosed account(s) was less than $75,000 at all times during the tax years in question, the penalty is reduced to 12.5 percent. Moreover, in limited situations, a penalty of 5% may be imposed. Additionally, participants in the OVDI are required to pay an accuracy-related penalty equal to 20 percent of the underpayment of tax with interest for the tax years at issue and, if applicable, the failure to file and failure to pay penalties.
McDougal noted that the 2011 OVDI covers eight years instead of six under the 2009 initiative. "The Commissioner decided that it would be unfair to give people that didn't come in last time a walk on the two other years (2003/2004) that were included in the first initiative," he said. Also mentioned was the fact that the penalty under the 2011 OVDI was 25 percent as opposed to 20 percent under the 2009 OVDI.
With respect to the 5 percent penalty, McDougal said that taxpayers that did not open up the foreign account would be generally eligible for the reduced penalty, although if the bank required the taxpayer to open up the account to get it in their name, the IRS wouldn't hold that against taxpayers.
Voluntary disclosure vs. examination. McDougal said that agents were not to make any factual determinations with respect to disclosures on matters pertaining to willfulness and reasonable cause. Taxpayers seeking to have the IRS consider their arguments on willfulness or reasonable cause are required to opt out of OVDI and ask for an examination. The caveat, however, is that all penalties and all tax years are on the table in a regular examination.
Mark Matthews of Morgan Lewis & Bockius LLP, said that practitioners felt that the IRS viewed that everybody coming into the program has significant criminal exposure. In his view, the problem lies with clients that are in a gray area, where there may be no criminal exposure. The opportunity presented through the OVDI must be balanced against other civil penalties that may be faced if the taxpayer is detected on audit or otherwise. "The perception is that the agent's are leaning very hard to keep you in the program," he said, finding that agents pressure taxpayers by telling them that they will look back at several tax years if they opt-out of the OVDI.
Larry Campagna of Chamberlain Hrdlicka said that he believed that the OVDI makes a presumption of willfulness. "The FBAR penalty in particular, is the government's burden to prove willfulness," he said. "They can assess the penalty if they want to but they have to go to court and prove willfulness to collect the penalty." In his practice, Campagna said he sees many clients that don't fit the program very well because they are in some sort of gray area with respect to willfulness, but the client is also not willing to take a penalty hit of 25 percent. Quiet disclosures are also very problematic, he said.
Once taxpayers participate in the OVDI, agents do not have the flexibility to to mitigate the 25 percent penalty for reasons associated with reasonable cause or willfulness, McDougal said.
