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MSP #7: OFFSHORE VOLUNTARY DISCLOSURE (OVD)

The OVD Programs Initially Undermined the Law and Still Violate Taxpayer Rights.

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #7-1

Improve the transparency of the OVD and streamlined programs by:
a. Publishing OVD-related program guidance as a revenue procedure (or similar guidance published in the Internal Revenue Bulletin) that incorporates comments from internal and external stakeholders, and assigning interpretation of the guidance to national office attorneys whose advice would be disclosed to the public just like other Chief Counsel Advice (CCA).
b. Providing instructions to OVD program staff by incorporating them into the IRM; which incorporates comments from internal stakeholders and is disclosed to the public.
c. Publishing interpretations of the program terms by any IRS employees authorized to interpret them (e.g., by IRS attorneys and technical advisors) just like CCA.
d. More frequently updating the guidance on the IRS website with any clarifying interpretations rendered by technical advisors or other IRS employees to the extent those interpretations are not incorporated into other public guidance.

IRS RESPONSE TO RECOMMENDATION: The IRS believes that its current publication of the OVDI program terms and instructions are sufficiently transparent, and the current publication methods allow the IRS more flexability to incorpoate input from stakeholders than the Chief Counsel publication process. The IRS has published program terms and instructions for taxpayers and IRS personnel on irs.gov.  This includes extensive guidance for taxpayers in the form of Frequently Asked Questions (FAQs).  The FAQs reflect input and feedback from both external and internal stakeholders received since the first OVDP in 2009.  Over the course of the various versions of the OVDP, IRS representatives from multiple divisions and offices have met with both external and internal stakeholders.  While the IRS initially received some negative feedback from practitioners about the FAQs following the 2009 OVDP, subsequent feedback about the 2011 OVDI and 2012 OVDP guidance has been positive.  Since the inception of the first OVDP in 2009, the IRS has periodically updated the program guidance based on both external and internal input and feedback to make changes, clarifications, and corrections.  In addition, the FAQs have been updated periodically to correspond with other legal or administrative changes impacting program terms.  The FAQs allow the IRS to respond promptly to practitioner concerns and trends with submissions.  In addition to FAQs, the IRM provides guidance for IRS personnel handling OVDP cases.  The IRM provisions are published on irs.gov and are available to the public.  Thus, the OVDP guidance published on irs.gov reflects cumulative feedback from many internal and external stakeholders and allows the IRS flexibility to make changes, corrections, and clarifications as needed.  The formal guidance process in contrast would not allow for such flexibility.  Moreover, the public has been on notice that the program may be terminated at any time or that program terms may change at any time, as they did most recently in June 2014.  For these reasons and those previously provided in responses to similar recommendations in the 2011, 2012 and 2013 Taxpayer Advocate Reports, the IRS does not intend to adopt this recommendation.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS continues to receive complaints about the lack of transparency and due process the IRS provides in connection with the IRS’s OVD and streamlined programs.  Earlier this month, practitioners at a roundtable discussion also complained more generally about the IRS’s use of FAQs, observing the IRS can change, delete, or move them without notice and without preserving a historical record of the change.  Although the IRS has considered some stakeholder concerns through fora such as the recent roundtable, its refusal to invite comments and publicly consider them avoids transparency and accountability, as the public does not understand what comments the IRS has considered or why it has rejected them.  The “inconvenient” delay associated with formal guidance – cited by the IRS as a reason for not publicizing it – results from the IRS’s obligation to publicly invite comments and then to actually consider and respond to them.  When the OVD programs were first established, the IRS’s use of FAQs and undocumented procedures was perhaps understandable in light of such delay.  Several years later, however, it is difficult to find a legitimate reason for the IRS to continue to run these programs indefinitely using unpublished FAQ interpretations, secret committees, and avoidance of oversight by the Office of Appeals or any other entity.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #7-2

Allow taxpayers to elevate or appeal a revenue agent’s OVD and streamlined program determinations. At a minimum, the agent and anyone who advised him or her (e.g., a technical advisor or IRS attorney) with respect to a disputed assumption should be required to explain his or her reasoning to the taxpayer in writing and reconsider the advice in light of any new facts or analysis provided by the taxpayer.

IRS RESPONSE TO RECOMMENDATION: The certification process for OVDP cases involves multiple levels of review and approval.  Taxpayers participating in the OVDP may elevate issues and concerns to Exam management.  Similarly, agents may seek the advice of Subject Matter Experts (SMEs) (including Technical Advisors) and Counsel, but neither SMEs nor Counsel are required to explain their reasoning in writing to the taxpayer or provide the taxpayer an opportunity to rebut their advice.  This standard applies in both examinations and OVDP certifications.  Broadly, taxpayers participating in an OVDP have the same rights as taxpayers undergoing full examinations except for the ability to have their cases reviewed by the Office of Appeals (Appeals). The OVDP is a purely voluntary program, and the lack of review by Appeals is clearly disclosed in FAQ 49. FAQ 49 also notes that taxpayers may opt out and undergo an examination in order to receive consideration by Appeals.

The 2014 Streamlined Filing Compliance Procedures are very different from the OVDP in that they do not involve active IRS determinations of liability or penalties. Rather, taxpayers self-compute their tax liabilities (if any), and for SDO they compute the miscellaneous offshore penalty. The guidelines include: “Returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will not be subject to IRS audit automatically, but they may be selected for audit under the existing audit selection processes applicable to any U. S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources.” In the context of a potential examination after submitting returns through the Streamlined Filing Compliance Procedures, taxpayers would be afforded all routine procedural rights including review by Appeals.

For the reasons stated above, the IRS does not intend to adopt this recommendation.

CORRECTIVE ACTION: N/A

TAS RESPONSE: IRS employees can make mistakes unlikely to be discovered, except in connection with a scandal, when there is no transparency oversight or accountability, as remains the case with the OVD and streamlined programs today.  Notwithstanding the IRS response’s claim to the contrary, these programs offer a far different process than applied in examinations. Examinations are subject to appeals, audit reconsideration, and potential litigation, which give taxpayers more confidence examiners are trying to apply the rules correctly, consistently, and fairly during the exam.  The IRS also recently issued to the public an Interim Guidance Memo (IGM), which addresses how it will apply FBAR penalties in examinations outside the OVD programs.  This oversight and transparency is lacking in the OVD and streamlined processes.  When taxpayers feel the IRS has ignored the facts or applied its secret FAQ interpretations incorrectly, their only recourse is to opt out and give up the potential for settling on terms offered to similarly situated taxpayers.  Thus, these taxpayers have a strong incentive to accept seemingly unjust agreements, which many will continue to view as unfair long after these programs have ended.  As studies cited in the Most Serious Problem discussion have shown, such views are likely to reduce voluntary compliance.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #7-3

Allow taxpayers to amend their closing agreements to benefit from recent OVD-related program changes.

IRS RESPONSE TO RECOMMENDATION: There are several legal and policy reasons that preclude the IRS from reopening closing agreements entered into by OVDP participants wishing to benefit from the terms of the modified and expanded Streamlined Filing Compliance Procedures.  As a legal matter, under I.R.C. section 7121 closing agreements generally are final and conclusive.  Even if the closing agreements could be reopened, the statute of limitations on refunds in I.R.C. section 6511 would prohibit the IRS from refunding payments not made within the period specified in I.R.C. section 6511(b).  Closing agreements are used across the vast spectrum of tax cases, not just in OVDP.  Closing agreements represent the best deal for the parties (the taxpayer and the IRS) at the time they are entered into, and both parties are protected from any future changes that might have impacted the case but for the closing agreement.  Closing agreements provide taxpayers with certainty that even if the terms of the deal change, the IRS cannot demand more tax, interest, or penalties at a later time.  Since the first OVDP was announced in 2009, the miscellaneous offshore penalty has increased with each version of the program.  The closing agreement ensures that an OVDP participant will not be subject to a higher penalty when the program terms change.  Moreover, OVDP and the Streamlined Filing Compliance Procedures are different programs that were designed for different taxpayers.  The respective program terms and penalties were constructed accordingly.  OVDP participants pay a higher penalty than taxpayers who file returns through the Streamlined Filing Compliance Procedures, but in return they get the certainty and finality of a closing agreement, as well as a letter from the IRS Criminal Investigation Division stating that the taxpayer will not be recommended the for criminal prosecution.  For the reasons stated, the IRS does not intend to adopt this recommendation.

CORRECTIVE ACTION:  N/A

TAS RESPONSE: The last time the IRS created more favorable terms in connection with its OVD programs (e.g., the five and 12.5 percent rates), it allowed qualifying taxpayers who already had signed closing agreements to amend them so they were not disadvantaged by having come forward earlier.  The IRS response does not fully explain why it chose to penalize them this time by refusing to amend their closing agreements to offer the same terms as those who came forward later.  It cites a policy of finality that it offset last time in favor of equity, but does not explain why equity was less important this time.  It also cites a statutory limitation on issuing refunds long after amounts have been paid and returns have been filed, but that limitation would only affect a subset of those who would want to modify their agreements. The IRS’s apparent indifference to others who are affected by this decision underscores the importance of requiring the IRS to actually request and respond to comments before adopting policies – especially policies that seem to ignore taxpayer rights.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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