VIEWPOINTS

tax notes
Opting Out: The Solution for The Non-Willful OVDI Taxpayer
By Jeffrey A. Neiman
Jeffrey A. Neiman is a former federal prosecutor who received national recognition for handling complex, high-profile matters, including the prosecution of Switzerlands largest bank, UBS, for helping American citizens commit tax fraud. Neiman now practices in Jeffrey A. Neiman Fort Lauderdale, Fla., where he specializes in white-collar criminal defense and tax litigation. Neiman explains how the offshore voluntary disclosure programs would have generated increased compliance had the IRS made a distinction between the willful and non-willful violator and how the nonwillful violator can gain penalty relief by opting out of the program.

(C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

The IRS is on the brink of completing another disclosure program to bring Americans into compliance with their foreign bank account reporting requirements. However, as the 2011 offshore voluntary disclosure initiative (OVDI) ends on September 9, one cannot help but think how much more successful it could have been if taxpayers had been treated with a bit more flexibility and fairness. Its clear that the 2009 offshore voluntary disclosure program (OVDP) and the 2011 OVDI were huge successes. Tens of thousands of Americans participated in the programs. The IRS collected billions of dollars in unpaid taxes, interest, and penalties. Undeclared assets have been reported to the IRS and will be taxed for years to come. The landscape in tax enforcement has forever changed, and the Justice Department and IRS have broken the back of bank secrecy and obtained a treasuretrove of information that will provide fodder for criminal and civil investigations for the next 10 years. The programs achieved their stated goals of bringing offshore money back into the U.S. tax system and helping people with undisclosed income hidden in offshore accounts get current with
TAX NOTES, September 12, 2011

their taxes. However, had the programs treated American taxpayers more fairly, its possible that the IRS could have brought tens of thousands more Americans into compliance and collected billions in additional revenue. The programs required taxpayers to amend their income tax returns to report all previously unreported income, and in so doing, avoid criminal prosecution. They also required taxpayers to agree to a penalty of 20 percent of the additional tax due and to pay the tax, penalty, and interest. As far as those aspects of the program, there is no doubt that the tradeoff of penalty for a sound nights sleep was reasonable. The programs then required a taxpayer to agree to a penalty for failing to file a foreign bank account report. Except for a few taxpayers who resided overseas and who met other criteria, the penalty was 20 percent of the highest value of the foreign accounts in the OVDP and 25 percent in the OVDI. However, the take it or leave it 20 and 25 percent penalties imposed by the IRS on all taxpayers, regardless of their underlying conduct, made it very costly to come into compliance. The penalty applied whether or not the taxpayer knew about the requirement to report the foreign account. In tax litigation parlance, the penalty was applied equally to both willfully, non-willfully, and noncompliant taxpayers. The programs assume that just because the taxpayer had unreported overseas assets, the taxpayer knew of his legal obligation to report the overseas accounts and to file an FBAR, a form many tax practitioners had not even heard of before 2008. An overwhelming majority of American taxpayers with unreported assets overseas are not criminals, yet in the programs the IRS has treated all taxpayers as if they were Al Capone. The tax system in this country is overwhelmingly complicated. Mistakes, errors, and accidents happen and a taxpayer who failed to report assets for one of those reasons should not be treated the same as the taxpayer who has intentionally failed to report foreign assets. Willfulness is the cornerstone to any criminal tax matter and has been defined by the courts as intentionally violating a known legal duty. In the criminal setting, the government carries the heavy burden of having to prove beyond a reasonable doubt that a taxpayer acted willfully. The government will spend an overwhelming majority of its
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COMMENTARY / VIEWPOINTS

case in chief trying to prove willfulness by introducing evidence that the taxpayer dealt in cash, used nominees, lied to accountants, or maintained a double set of books. Absent those circumstances, the matter will most certainly not proceed criminally; instead, the taxpayer will be referred for civil examination. The OVDI and OVDP assume willfulness in order to avoid devoting countless resources to individually review thousands of taxpayer disclosures. While the IRS does not have unlimited resources, an expedited review process could have been established to compare the facts and circumstances of an individual taxpayers overseas account to a set of predetermined objective factors that would have allowed the IRS to assess a reasonable and fair FBAR-related penalty and avoided higher penalties for non-willful taxpayers. Why does the IRS assume willfulness? Money. If a taxpayer was unaware of his obligation to file an FBAR and failed to file it, the maximum penalty that can be imposed for non-willful failure to file is $10,000 per year. If a taxpayer willfully failed to file an FBAR, however, the maximum penalty that can be imposed is 50 percent of the account balance per year. By assuming willfulness and by threatening taxpayers with that draconian penalty, the IRS has created the appearance that the OVDI and OVDP programs are the deal of the century. The IRS has attempted to provide relief for the non-willful taxpayers by allowing them to opt out of the voluntary disclosure program. In fact, on June 1 the IRS announced specific opt-out procedures that should be followed. The procedures make clear that opting out comes with a hefty price. By opting out, a taxpayer takes the chance of a full audit and penalties in excess of what is being offered in the voluntary disclosure program. Although the words full audit strike fear in all taxpayers and tax professionals, those are chances worth taking when willfulness clearly does not exist. It is important to note that the FBAR penalty is not like other IRS penalties. The authority for the FBAR penalty is not derived from Title 26 of the code. Rather, its authority is derived from Title 31 of the U.S. Code. As a non-Title 26 penalty, the IRS can assess the FBAR penalty but it cannot collect it under the Internal Revenue Code with liens and levies and other IRS collection tools. Instead, the IRS is treated just like any other creditor. To collect the FBAR penalty, the IRS must make a referral to the DOJs Tax Division, which then must seek a judgment in a U.S. district court against the taxpayer. In any proceeding to collect the FBAR penalty, the taxpayer may assert a lack of willfulness as a defense and thus get his day in court.
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The recent efforts to combat offshore tax evasion have been unprecedented. As new regulations go into effect, it will become increasingly difficult for Americans to conceal assets overseas. It is a shame that the IRS will not view each case individually and receive with open arms taxpayers who want to come into compliance.

(C) Tax Analysts 2011. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.

TAX NOTES, September 12, 2011