Tax Law Center Blog

Our office is a proud member of the New York State Bar Association (NYSBA) after reading their tax section’s detailed comments on the OVDI program. This is not an anti-tax group or self-interested association with radical comments on the OVDI program. On August 5, 2011, the New York State Bar Tax Section submitted written comments to the IRS Commissioner, Chief Counsel and Acting Assistant U.S. Treasury Secretary on how to make the OVDI 2011 fairer and more administrable. Readers can review or download the letter here.

The letter format is to comment on specific FAQs and we encourage readers to review the letter for those specific comments. Preceding the specific comments is the following:

We recognize that the Service cannot evaluate the willfulness of every taxpayer who wishes to participate in the 2009 OVDP or the 2011 OVDI and that is why the Services has created a mechanism for taxpayers to opt out of the programs and undergo an audit. We agree that, given the large number of voluntary disclosures, this is an appropriate way to evaluate the culpability of particular taxpayers who believe that they did not act willfully. However, we are concerned that certain statements have been made by Service personnel that strongly encourage taxpayers to participate in the voluntary disclosure programs or face maximum criminal and civil penalties under the law.* In addition, FAQ 15 states that “[taxpayers are strongly encouraged to come forward under the 2011 OVDI . . . Those taxpayers making ‘quiet’ disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.” While these statements and procedures refer to taxpayers who have not made voluntary disclosures, taxpayers and practitioners have expressed concern that taxpayers who opt out of a voluntary disclosure program will face the same level of scrutiny and skepticism by the Service as if they had never participated in the program in the first place. Indeed, many revenue agents in the field have indicated that taxpayers who opt out of the voluntary disclosure programs will have a very difficult time convincing the Service not to impose maximum civil penalties.

*E.g., “For those hiding assets offshore, there is an obvious reason to come in now. If we find you, you face harsher penalties and the possibility of jail time. If you come in voluntarily, you pay a steep price but avoid going to jail.” Commissioner Schulman’s Statement on the 2011 OVDI, February 8, 2011; “[H]arsh civil and criminal penalties could await those who engaged in quiet disclosure”. Statement attributed to the Service by Robert Goulder in “Quiet Disclosures Get No Love From IRS,” Tax Notes May 11, 2010.

As a result, many taxpayers feel compelled to stay in the voluntary disclosure programs and accept inappropriately large penalties because they fear that if they opt out, they automatically will be assessed with huge information return penalties. Even innocent taxpayers with meritorious cases are hesitant to opt out and face crippling assessments that are many times the value of their foreign account and that could render them insolvent in the hope that they can convince an agent that they did not act willfully. To remedy this inequity, we urge the Service to issues guidance clearly stating that, when a taxpayer opts out of either the 2009 OVDP or the 2011 OVDI, evidence regarding willfulness will receive a full and impartial review by revenue agents and any adverse determinations will be subject to full and impartial review by the Appeals Division of the Service.

Overall, the NYSBA letter is excellent and provides useful practical comments and constructive criticism. It is unfortunate that the IRS did not solicit such commentary before launching the OVDI program (the IRS generally solicits input from interested parties in promulgating IRS regulations and certain other matters). Such valuable input would have likely avoided the numerous updates to the OVDI FAQs. We should all expect more revisions and fine-tuning to the OVDI procedures, as result.