David Horton, acting deputy commissioner (international), IRS Large Business and International Division, who spoke at the annual Florida International Tax Conference in Miami on January 8, seems to have a more sanguine view of human nature than the assembled lawyers and accountants. Robert E. Panoff of Robert E. Panoff PA asked some government officials tough questions supplied by the audience.
Horton reported that while the IRS is still getting a steady flow of offshore voluntary disclosure program filings every month, that program has to end eventually. He anticipated that in the future, most taxpayers would get right with their tax collector and their God, so that the OVDP would no longer be necessary.
Mark F. Daly, senior litigation counsel in the Justice Department Tax Division, said that Justice is getting a lot of good information from the OVDP, under which taxpayers are required to identify their financial institutions and enablers. The OVDP is turning up recalcitrant taxpayers and those who have structured or hold dual passports. Non-Swiss banks and asset managers could also settle with the DOJ, he said.
Banks that coax their customers into the OVDP can reduce their settlement penalties. How does that work? How does a bank prove to the DOJ that its customers went into the OVDP? Daly could not say how data belonging to the DOJ would be shared, but he suggested that it could be combined with OVDP data. He and Panoff emphasized that the government has an enormous amount of data to be mined.
What if the taxpayer is a politically exposed person so that other issues arise? Daly responded that Justice would contact the relevant agency, such as the DEA or the FBI. If the offshore funds are the proceeds of crime, the taxpayer is not eligible for the OVDP. Can the taxpayer make a quiet disclosure? No, because the case can’t be cleaned up without the taxpayer admitting the crimes, according to Daly. He added that the relevant Justice section and the local U.S. attorney would have to be involved.
IRS criminal investigations have ramped up, although pure tax cases are not being emphasized. “It’s an exciting time to be in CI,” said Eric Hylton, director of international operations, IRS Criminal Investigation division. Hylton noted that the IRS is looking at professional enablers worldwide, as well as alternative banking platforms. CI has 16 attachés in 10 locations working to develop cases and informants. And the IRS will be looking at real estate bought by shell companies.
The IRS has begun sharing information with other countries under the Foreign Account Tax Compliance Act intergovernmental agreements (IR-2015-111 ). The IRS didn’t say which countries, but Mexico, which has been agitating for information about its citizens, was not among them. Prior coverage .)
LB&I is reorganizing yet again and will stand up in three weeks, so its agents will get more offshore cases. LB&I’s foreign payments practice will handle foreign financial institutions, as well as withholding and qualified intermediaries. Horton could not explain how LB&I would go about finding FFIs that hide from the IRS and don’t register. “We’re working on that,” he said. Presumably, U.S. withholding agents will demand a global identification number or withhold 30 percent on payments otherwise. The IGAs do not have separate sanctions.
The IRS’s streamlined filing compliance procedure was designed to accommodate nonresidents with home-country bank accounts. For them, there are no section 6662 or FBAR penalties. It requires only three years of returns. Horton reported that the IRS is looking more deeply at the more than 800,000 filers of Form 1040NR, “U.S. Nonresident Alien Income Tax Return”; matching Forms 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” to returns; and examining filers’ aggressive positions and questionable treaty interpretations.
Domestic residents who are not under audit or criminal investigation are also eligible for the streamlined program but must make an upfront payment of a miscellaneous offshore penalty of 5 percent of their highest foreign account balances. They effectively must file six years of returns because of the lookback period in the Internal Revenue Manual (http://goo.gl/X2euhA).
Every practitioner hopes to shoehorn his offshore-account-holder clients into the streamlined program. Indeed, the only taxpayers who don’t welcome the streamlined program are recent immigrants who think that 5 percent of a home-country bank balance is a stiff price to pay for a green card.
The IRS’s 2014 OVDP guidance provides transitional rules for non-willful taxpayers who entered the OVDP earlier, but could have been eligible for the streamlined program. Panoff wondered why they were incurring lower penalties than similarly situated taxpayers who completed the OVDP. (Prior coverage , .)
Horton explained that these taxpayers are still in the OVDP, so they will get criminal clearance and a closing agreement, while streamlined participants get neither. Criminal clearance and a closing agreement are worth paying for, the thinking goes. A streamlined participant could later get a notice of deficiency for penalties that are assessed as taxes.
Practitioners want the streamlined program to continue forever. The IRS says it won’t. The OVDP and the streamlined program could be terminated at any time, according to Horton. “I don’t believe they will last forever. These are not permanent programs. These are opportunities,” he said.
“We want to make it more and more difficult not to come in,” Horton emphasized. “Eventually the programs will go away.”
If a bank settled with the Justice Department, does that mean that it is automatically considered a facilitator for OVDP purposes, so that the 50 percent miscellaneous super penalty would apply? Yes, Horton responded. That is, if the bank was publicly identified on the foreign financial facilitators list as being under investigation before the taxpayer entered the OVDP, the higher penalty would apply.
But does foreign financial facilitator status mean that customers of such a bank are not eligible for the streamlined program? Not necessarily. If a customer can demonstrate that he is non-willful, streamlined treatment would be available, according to Horton. “Non-willful is non-willful,” he said.
The American Bar Association Section of Taxation wants a definition of willfulness. “The absence of any meaningful guidance on the definition of willfulness significantly complicates the task of preparing and submitting an explanation of the ‘specific reasons’ for a taxpayer’s prior compliance shortfalls and results in taxpayers and their advisors preparing more detailed explanations than might otherwise be necessary,” the lawyers griped in their report to the IRS.
Ain’t gonna happen. “We’re not going to define willfulness for you,” said Horton. Panoff noted that willfulness under the tax code is different than willfulness under Title 31, the federal criminal law.
What if the taxpayer is at the opposite end of the spectrum? Horton explained that agents in both LB&I and the Small Business/Self-Employed Division work offshore cases. “Any type of agent can make a fraud referral,” he said.
If a taxpayer takes the Fifth Amendment, will that be held against him? W. Robert Abramitis, SB/SE senior counsel, responded that negative inferences could be created by the taxpayer’s failure to come forward and explain. Cases are made by circumstantial evidence and objective facts. It’s not good if there’s nothing on the other side. It makes it difficult for decision-makers to set aside preconceived notions, he explained.
What could taxpayers’ representatives do better? Develop the facts, according to Abramitis. For example, if the claim is that the taxpayer has dementia, there should be medical records and affidavits. In many cases, the facts are not adequately developed, and people are throwing arguments at the wall, he commented. The law is clear; the case will rise or fall on the facts.
Horton echoed that taxpayers wishing to enter the streamlined program should not provide one-liner assertions. “Tell a story why. Give us enough to satisfy non-willful. Lay out the facts,” he said.