The National Taxpayer Advocate (NTA) has issued a Taxpayer
Advocate Directive (TAD), followed by ensuing correspondence between IRS and
the NTA, alleging unfair treatment of certain participants in the 2009 offshore
voluntary disclosure program (OVDP). According to the NTA, a memo issued by IRS
on March 1, 2011 was inconsistent with earlier guidance from 2009 regarding
examiners' discretion to settle cases and the applicability of the 20% offshore
penalty for nonwillful violations.
The NTA characterized the memo as essentially presuming that all
taxpayers who avail themselves of the OVDP are tax cheats, and thus was a
switch from IRS's more nuanced original position. According to the NTA, this
left those who were merely trying to correct honest mistakes, who were perhaps
encouraged to participate in the program based on the earlier guidance,
effectively unable to pursue a reasonable cause defense.
Background on the OVDP. The first OVDP was announced by IRS
in 2009 and applied to those that voluntarily and timely disclosed unreported
offshore income for 2003 - 2008. In February of 2011, IRS unveiled a second
OVDP to give taxpayers with undisclosed income from hidden offshore accounts
for the 2003 - 2010 period the chance to get current with their taxes. The 2011
OVDP was originally available through Aug. 31, 2011 but was extended through
Sept. 9, 2011. It carried higher penalties than the original disclosure program
but the penalties could be mitigated under certain circumstances (see Federal
Taxes Weekly Alert 09/01/2011 for details.) IRS also recently announced a new
program that carries a slightly higher penalty (see article in yesterday’s
Newsstand e-mail about the reopening of the latest offshore voluntary
disclosure program).
If the taxpayer enters into the OVDP, and finds the offshore
penalty to be unacceptable, that he must indicate in writing the decision to
withdraw from or opt out of the program. Once made, this election to opt out is
irrevocable, and the taxpayer's case will be handled under the standard audit
process. The opt-out option may reflect a preferred approach in instances where
the results under the applicable voluntary disclosure program appear too severe
given the facts of the case. To the extent that issues are found upon a full
scope examination that were not disclosed by the taxpayer, those issues may be
the subject of review by Criminal Investigation (see article on 2011 Offshore
Voluntary Disclosure Initiative FAQ #51, covered in Federal Taxes Weekly Alert
02/10/2011.)
Background on Taxpayer Advocate Directives. The National
Taxpayer Advocate (NTA) has the power to issue Taxpayer Advocate Directives
(TADs) to mandate changes in IRS administration or procedure. This authority is
intended to resolve any potential disagreements with other IRS operations. (IR
98-30)
The authority to issue TADs applies to changes recommended to
improve operations or grant relief to groups of taxpayers, or to all taxpayers.
The action must be needed to protect taxpayers' rights, prevent undue burden,
ensure equitable treatment, or provide an essential service. A TAD will not be
issued to interpret tax law.
Generally, the NTA first issues a Proposed TAD to the chief of
the responsible area, with a set response date. That chief may agree to the
proposed action, submit a counterproposal, or explain why the action cannot
take place. The NTA may accept the response or work with the chief toward a
solution. The NTA can issue a TAD if not satisfied with the outcome. The only
way to appeal a TAD is for the Chief Officer of the function involved to go to
the IRS Deputy Commissioner. The NTA can also issue an expedited TAD without
first giving a proposed directive if it determines that a problem is immediate
and has a significant impact on taxpayers. (IR 98-30)
The issue. FAQ #35, which was released by IRS
in June of 2009 in association with the 2009 OVDP, asks whether examiners will
have any discretion to settle cases. The answer reads as follows:
“Voluntary disclosure examiners do not have discretion to settle
cases for amounts less than what is properly due and owing. These examiners
will compare the 20 percent offshore penalty to the total penalties that would
otherwise apply to a particular taxpayer. Under no circumstances will a
taxpayer be required to pay a penalty greater than what he would otherwise be
liable for under existing statutes. If the taxpayer disagrees with the IRS's
determination, as set forth in the closing agreement, the taxpayer may request
that the case be referred for a standard examination of all relevant years and
issues. At the conclusion of this examination, all applicable penalties, including
information return penalties and FBAR penalties, will be imposed. If, after the
standard examination is concluded the case is closed unagreed, the taxpayer
will have recourse to Appeals.”
On Mar. 1, 2011, an IRS memo limited the instances in which examiners
should exercise discretion in imposing a less-than-20% penalty. According to
the NTA, this shifted position effectively negates the consideration of whether
“taxpayers in the 2009 OVDP would pay less under existing statutes on the basis
of non-willfulness or reasonable cause.” Rather, such taxpayers could either
agree to pay more than they believed they owed, or withdraw from the program
and potentially face stiff civil penalties and seek criminal prosecution.
The NTA argues that, under FAQ #35, “total penalties that would
otherwise apply” should mean the total penalties that would be imposed after a
standard examination; otherwise, taxpayers could be possibly subjected to
excessive civil penalties and criminal prosecution and perhaps be worse off than
if they hadn't entered the OVDP.
The TAD and its progeny. In Taxpayer Advocate Directive
2011-1, dated Aug. 16, 2011, the NTA directed that the Commissioners of the
Large Business and International (LB&I) and the Small
Business/Self-Employed (SB/SE) divisions take the following actions within 15
business days and, within 10 business days, provide the NTA with a written
response describing the planned actions and any intent to appeal:
1. Disclose the Mar.
1, 2011 memo for OVDP examiners that addresses the use of discretion in 2009
OVDP cases on irs.gov (whether or not it is revoked, see (2), below).
2. Revoke the Mar. 1,
2011 memo and disclose such revocation.
3. Direct all
examiners that, when determining whether a taxpayer would be liable for less
than the offshore penalty under “existing statutes” as required by FAQ #35,
they should not assume the violation was willful unless the taxpayer proves it
was not. Direct them to use standard examination procedures to determine
whether a taxpayer would be liable for a lesser amount under existing statutes
(e.g., because the taxpayer was eligible for the reasonable cause exception)
without shifting the burden of proof onto the taxpayer.
4. Commit to replace
the Mar. 1, 2011 memo and all OVDP-related FAQs on IRS.gov with guidance
published in the Internal Revenue Bulletin, incorporating comments from the
public and internal stakeholders (including the NTA). It should reaffirm that
taxpayers accepted into the 2009 OVDP will not be required to pay more than the
amount for which they would otherwise be liable under existing statutes, as
currently provided by FAQ #35, and direct OVDP examiners to use standard
examination procedures to make this determination.
5. Allow taxpayers who
agreed to pay more under the 2009 OVDP than the amount for which they believe
they would be liable under existing statutes the option to elect to have IRS
verify this claim (using standard examination procedures), and in cases where
IRS verifies it, offer to amend the closing agreement to reduce the offshore
penalty.
In other words, the NTA asserted that IRS failed to properly
implement FAQ #35, which practitioners had interpreted as suggesting that an
examiner could consider a taxpayer's argument that his noncompliance was not
willful or was otherwise deserving of reduced or no penalties. In turn, this
resulted in inequitable treatment of taxpayers, in that it fails to distinguish
between true tax evaders and those who made honest mistakes.
In their response dated Aug. 30, 2011, Heather C. Maloy and Faris
R. Fink, the respective Commissioners of the LB&I and SB/SE divisions,
agreed to disclose the Mar. 1, 2011 memo referenced in (1) but otherwise
appealed the TAD. In contrast to the NTA's characterization of “total penalties
that would otherwise apply,” the Commissioners argued that the relevant
comparison should only involve “issues that can be resolved using the
information available during the certification of the voluntary disclosure.”
They claimed that the OVDP language makes clear that otherwise applicable
mitigation standards weren't intended to apply during a verification exam.
In her Sept. 22, 2011 response to the appeal, the NTA
re-asserted her primary concerns with the 2009 OVDP. She stated that, without
FAQ #35, the OVDP penalty structure essentially assumes that all participants
are tax evaders hiding money overseas, and doesn't account for those who are
seeking to correct honest mistakes. She further expressed skepticism at IRS's
“opt-out” option described in a June 11, 2011 memo, which provides that those
who opt out will be subject to a complete examination of all relevant years and
issues, then subject to all applicable penalties. In the end, the NTA
characterized IRS's actions as a miscommunication and called on IRS to create a
“fair process” to evaluate willfulness and reasonable cause, with the burden of
proof on IRS.
On Oct. 14, 2011, Steven T. Miller, Deputy Commissioner for
Services and Enforcement, sent a memorandum to the NTA agreeing to request (1)
and rescinding actions (2) through (5). He stated that the relief generally
sought by the NTA was provided in the existing opt-out procedures, which
expressly state that it may be preferable for certain taxpayers to opt out of
the 2009 or 2011 OVDP.
Decision now lies with the Commissioner. Deputy
Commissioner Miller's memorandum now elevates the issue to IRS Commissioner
Doug Shulman. It remains unclear how he will respond, although his public
pronouncements on the OVDP have been overwhelmingly positive to date, including
the recently issued IR 2012-5.
Documents related to this article can be accessed at the
following links:
Source RIA Newsstand 1/11/2012.
