Disparity In Treatment of Taxpayers Who Qualify For Transitional Relief Is Casting A Shadow On The New Streamlined Procedures

Many tax practitioners have become disenchanted with the IRS’s treatment of those who are transitioning from OVDP to the Streamlined Procedures. What is the source of this disenchantment? Very simply, the IRS is denying the nonwillful certification in a disproportionately high number of cases.

To make matters worse, the process of denial is somewhat of an enigma. In OVDP cases, the IRS has more than just the certification. It also has the Offshore Voluntary Disclosure Letter and the accompanying documents that make up the final submission. According to many tax practitioners, if the certification causes the IRS to doubt the taxpayer’s claim that he was nonwillful, then its default position is to deny transitional relief.

Therefore, as a practical matter, it appears as though the IRS only approves certifications in cases where nonwillfulness is clearly demonstrated. The lesson to be learned here is that a certification accompanied by a light statement that raises more questions than answers is woefully inadequate. Again, this applies specifically to taxpayers requesting transitional relief to the Streamlined Procedures. Whether the IRS will question the certification of taxpayers doing straight Streamlined submissions remains to be seen.

Of course, taxpayers who run into a roadblock with their nonwillfulness certification when attempting transitional relief can always opt out. As discussed in prior blogs, opting out is not for the risk-averse or faint of heart. Taxpayers opting out can expect to face an audit that is as probing as a rectal examination. At the same time, such an audit might inure to the taxpayer’s benefit. For example, the taxpayer might be able to make a stronger argument in favor of nonwillfulness by relying on documents and records that support that position. At the very least, the issue of nonwillfulness can be better developed. And by having all of the facts and circumstances before it, the IRS’s determination will be more thorough, accurate, and reliable. Or so one can hope.

Another potential benefit of opting out has to do with the lifting of a significant burden from the shoulders of the taxpayer. While a taxpayer must prove that he was nonwillful in order to take advantage of the Streamlined Procedures, just the opposite it true when opting out. In an opt out, the burden is not on the taxpayer to prove nonwillfulness but on the IRS to prove willfulness.

Before getting too excited, understand that when asserting penalties, the IRS can do – and often times does do – whatever it pleases. For example, it can arbitrarily assert a willful FBAR penalty just because it doesn’t like the color of your hair. But at the end of the day, the only way that the IRS can substantiate such a penalty is by proving willfulness in court. And that is easier said than done.

As to how applications for transitional relief are being evaluated, rumor has it that the decision is made by a committee. It is unclear who the committee is, what authority it has, and who the members are. In most cases, the decision of the committee is final when announced. In other words, there is no review or appeal of that decision. However, I’ve heard of at least one case where the practitioner was permitted to make a supplemental submission.

A recent article that appeared in “Tax Notes Today” sheds some light on this topic. The article was written by Andrew Velarde and is entitled, Practitioners Disagree on Fairness of Lack of OVDP Retroactivity, 2014 TNT 152-2 (8/7/14). The article brings to light the unfairness of denying transitional relief to nonwillful taxpayers who previously closed out their OVDI/Ps with Form 906. Two views are presented. One takes the latter view. The other does not find any injustice in denying transitional relief to this group of taxpayers.

With respect to the latter view, Larry Campagna, a tax practitioner, suggests that in the past, those who did not opt out had a good reason for not doing so. And that reason was the existence of multiple badges of fraud – which pushed the needle on the willfulness spectrum all the way to the willfulness pole. For this category of taxpayer, opting out would obviously not be a wise choice. And for that very same reason, the Streamlined Transition is not a viable option. Therefore, no harm no foul.

Josh Ungerman, another practitioner, offered a contrary view for why overwhelming number of nonwillful taxpayers did not opt out. This view, in my opinion, takes into consideration the practical realities of the situation experienced by most taxpayers. Mr. Ungerman argues that many taxpayers who entered OVDP were nothing more than “average Joes” who failed to disclose their offshore accounts for no other reason than the fact that they were oblivious to the reporting requirements. On the advice of counsel, they entered OVDP. While a taxpayer in this category was as strong a candidate as any for the opt out, what stopped him dead in his tracks was fear – the fear of the uncertainty of what awaited him in the opt out process.

Unlike the first category, this category is most deserving of streamlined treatment. In fact, a compelling argument can be made that they are even more deserving of streamlined treatment than those that have just recently jumped on the band wagon and made straight streamlined submissions. Indeed, they did not sit back on their laurels waiting to see if the IRS would unveil a new program that would be the “cure all” to their tax problems before coming out of the shadows.

Instead, they acted swiftly – obediently heeding the IRS’s warning and making a voluntary disclosure so that they could “get right” with the IRS and come into compliance with their U.S. tax obligations. But for as diligent as these “good soldiers” were, they were punished rather than rewarded. In what way? By being foreclosed from seeking transitional relief for no other reason than the fact that they already executed a closing agreement.

The practical effect of this was to deny them access to the more favorable penalty structure that exists under the streamlined procedures. Indeed, such taxpayers are now stuck with the onerous penalties, processing costs, and anxiety that have become the trademark of OVDP while those who sat on the fence waiting for something better to come along are now reaping the benefits of their indifference –no offshore penalty or a 5% offshore penalty. The biggest travesty in all of this is that in one fell swoop – i.e., by barring those who had already executed closing agreements from transitional relief – the IRS sealed this group’s fate once and for all. This gives new meaning to the expression, “No good deed goes unpunished!”
Describing the opt out process, the article says:

Under the opt-out system, taxpayers who were arguably non-willful could take such a position with the IRS and be subject only to small penalties if they were successful in their assertion. Last year an IRS official said the average foreign bank account report penalty in opt-out cases was only between $10,000 and $15,000.

The information reported above is necessarily anecdotal. To date, I’ve only heard from a small number of practitioners. I would appreciate any comments from readers who might be willing to share their personal experiences.

Original Post By:  Michael DeBlis

As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.


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9 comments on “Disparity In Treatment of Taxpayers Who Qualify For Transitional Relief Is Casting A Shadow On The New Streamlined Procedures

  • I have no doubt that OVD participants are being treated with prejudice by IRS agents and their committees. That’s why the IRS for every amnesty programs it creates must create two more to fix the problems of the first. Ridiculous.

  • I’ve just been advised by a reliable source that IRS agents handling taxpayers in the OVD programs are going in for some additional training. One can only guess what that might be, fiery hoop tossing?

  • I am one who disagrees with the USA who thinks I am within their grasp. I also have news for those oh so arrogant Democrats. You, your compliance vultures and idiotic laws are offensive to me, and I have no interest in “complying.” I will deny to the end any US connection (what an embarrassment) and want you to just go pound sand. My supposed “US Person” status is extremely UNWANTED and little more than a millstone around my neck if I were to capitulate to your arrogance.

    You are on the wrong side of history, and I will prevail. So get the hell out of my life and I’ll be really happy to never invest a penny in your $%*# country and never darken your doors again. Please give my apologies to those fine hospitality workers who have always treated me well in your country for the fact that I won’t be supporting them any more.

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