Monday, September 17, 2012

ABA Taxation Section Vents About OVDI Uncertainty

This past weekend, the powerful and influential Taxation Section of the American Bar Association met in Boston and to no one’s surprise, the offshore voluntary disclosure initiative was a front and center focus which practitioners used to voice concern over the issues we have been talking about in these pages for months. One group complained that months or years after a client was successfully closed out of the program, the IRS calls yet again to ask specific questions about a particular bank or banker.

Yet this should be no surprise whatsoever to any experienced practitioner. Remember that one of the collateral benefits to the IRS of agreeing to go easy on OVDI taxpayers has been the continuous receipt of nothing short of a treasure trove of names for agents to work which would hopefully lead to the real bad guys in this arena, the many Swiss and other tax haven bankers who traveled to the US to secretly recruit eager and willing US taxpayers who were more than happy to transfer vast sums of money offshore which they sought to hide from the IRS, even though as a business proposition, their chance of earning substantial dividends and interest was meager compared to what a US investor could earn by keeping his money here in the United States.

Many taxpayers who had been lavishly enjoying luxurious Swiss vacations after a quick visit to check up on their Swiss safe deposit boxes and numbered accounts jumped at the chance to pay a mere 20% tribute to the United States when the 2009 program was opened. A few really laughed up their sleeves at the opportunity to keep all their ill-gotten gains which for some went back to the 60’s. There were more than a few crocodile tears shed for their "good friends" in Lugano, Lucerne and Geneva who entertained them lavishly in both the US and in Europe when they were visited long after their closing agreements were signed by a special agent who reminded them that the quid pro quo for an IRS "get out of jail" pass was the promise to throw their "good friends"—their dear Swiss bankers, under the bus.

IRS special agents, probably the best financial crimes investigators in the federal government, are like kids in a candy store right now running down all the potential targets they have been given by thousands of OVDI customers who gladly served them up to the IRS to save their own skins.

Some of the practitioners who were referenced in today’s Tax Notes article on the Boston meeting

"voiced their fears that the IRS was "throwing the book" at taxpayers who opted out of the OVDI. One audience member said a revenue agent told her that it was the revenue agent's job to prove willfulness once the taxpayer had opted out. "
Voicing fears is one thing and speculation about the possibility of a rogue agent who may not have gotten the memo saying the IRS expects agents to treat "opt out" people fairly is another. This practitioner would rather place his hope in the quote later in the article attributable to John McDougal, SB/SE special trial attorney and division counsel, who said mitigation guidelines aren't binding, but are merely suggestions for an agent to consider.
"I can't tell you what Appeals is going to do . . . but I can tell you that FBAR penalties must be approved by [the chief counsel's office]," he said. "We don't want to set up penalties that we're going to lose in court," McDougal said.

That closing remark speaks volumes about the way the process is supposed to take place. It says two things: (1) we have yet to get a baseline on how Appeals is in fact administering the FBAR mitigation provisions of the Internal Revenue Manual and (2) the Commissioner and the Chief Counsel have wisely put in place, a framework under which the Office of Area Counsel has veto authority on the assertion of any FBAR penalties in opt out cases to make sure nothing  stupid slips through the cracks. When a Chief Counsel attorney says "we don’t want to set up penalties that we’re going to lose in court," the taxpaying public is entitled to read between the lines which really says: "we expect our clients [the revenue agents] to be reasonable in the assertion of their broad discretion to administer FBAR penalties. We are not eager to open the IRS up for a court to slap it down and publish an opinion which says the IRS has failed to act reasonably in the way it administers this program."

Coming next: (1) The Intergovernmental FATCA Agreements give away the store by allowing some taxpayers to "self-certify" their status as a U. S. Person and (2) Is it realistic for the U.S. to expect tax treaty partners to scrap their domestic privacy laws in order to make FATCA work? Good luck with that!


  1. A broken man on a Halifax pierSeptember 17, 2012 at 5:34 PM

    "Is it realistic for the U.S. to expect tax treaty partners to scrap their domestic privacy laws in order to make FATCA work? Good luck with that!"

    Looking forward to this installment. Looking at the question another way: what concessions is the US prepared to make in other areas in exchange for other countries offering to make concessions in their domestic privacy laws?

    More specifically, what trade concessions would the US have to put on the table for Canada to become open to the legal changes that would enable the Canadian banks to cooperate with FATCA? Is the US side serious enough about FATCA to put those concessions on the table, and, for example, live with the consequences to the domestic softwood lumber industry? Maybe not. I guess we'll find out.

  2. I have thought for a long time the "self certification" thing was a bad idea. One thing I have been arguing for months is the Canadian system and the existing US system in reverse of collecting NR4/1042's for all payees from all witholding agents and then routing them to the appropriate treaty partner is a much BETTER system. For one thing the witholding agent/bank is subject to some pretty explicit penalties for submitting incorrect information under both CDN and US law(respectively). One problem is the US has never really said which countries are good and share information automatically(other than Canada) and which are bad and don't(other than Switzerland and other non treaty countries). My hunch is their some countries think Russia and China were it is in fact the IRS which refuses to send 1042 data automatically. Then of course there is the fact that the non resident alient bank deposit reporting rule is "final" but not yet to take effect until Jan 1(Other than for Canada where it has been in effect for years).

    As I understand in terms of privacy law the QI program worked/works because the argument under the law was the QI was simply collecting you information on W8-BEN and W9 so they could clear the 30% witholding on US source income that would be collected by "default." Now what will be really fun is to see how US banks comply with the new Canadian QI rules(Canada is now the second country after the US to impose "QI"). Canada Revenue has already told the US Banking industry that all of their US resident customers are going to have fill a Canadian Tax form indicating that aren't residents of Canada and certify they are US residents subject to the treaty witholding rates or else get hit on their Canadian source by a full 25% witholding. Additionally the witholding certification form will have to be "refreshed" every three years just like US QI.

  3. Why did the US not assist Mexico when it sought to get US help in identifying the US held accounts of those non-resident foreign nationals who were engaged in drug trafficking and money laundering, by taking the money out of Mexico, and depositing it in US banks? What about that US commitment to the 'war on drugs'? What about the war on tax havens? Domestic US banks are profiting from truly illegal activities, providing tax haven services within the US, while the US insists on crushing our insignificant everyday legal post-tax, registered and government regulated savings accounts in Canada - and insisting that it is all the rest of the globe that needs the application of far-reaching US laws like FATCA, and we should agree to be penalized accordingly - on our legal transparent post-tax accounts. US banks can get legislators to oppose this - citing the effects on the economy, but ordinary US citizens living and banking legally in other countries can't get anyone to answer their letters and e-mails. We just don't have the huge dedicated legal departments, and the bankroll of illgotten gains to fund our efforts.
    ........"For decades the U.S. has served as a safe haven for the ill-gotten finances of corrupt foreign leaders and their ilk. Former foreign government ministers, military leaders, and corrupt heads of state have mansions, businesses, and bank accounts here. The banks who facilitate much of these activities are required by law to conduct “due diligence” in determining the source of funds for these “politically exposed persons,” but compliance is spotty."......


    "we're not generous enough to share with Mexico or Brazil or Venezuela or Russia when they want to tax their offshore wealth. I mean, Mexico has a worldwide income tax just like we do. Philippines has that kind of a worldwide tax. Many developing countries have tried to tax global income just like we do, because otherwise they end up just having to tax sales, or their, you know, poor people and middle class has to pay the cost of government.

    But they've gotten no cooperation from the U.S. Treasury in that regard. In fact, when Obama administration came to power in 2009, one of the first things that happened was that the secretary of the Ministry of Finance in Mexico wrote to Tim Geithner requesting that he share some of the same information that he was sending to Canada on Canadian depositors. He wanted the same information on Mexicans who had foreign accounts in U.S. banks. And Geithner never responded to the letter. The reason is it's a big business for U.S. banks, as well as for U.K. banks, you know, Swiss banks, to round up money from developing countries."

      ......."Criminal proceedings were brought against Wachovia, though not against any individual, but the case never came to court. In March 2010, Wachovia settled the biggest action brought under the US bank secrecy act, through the US district court in Miami. Now that the year's "deferred prosecution" has expired, the bank is in effect in the clear. It paid federal authorities $110m in forfeiture, for allowing transactions later proved to be connected to drug smuggling, and incurred a $50m fine for failing to monitor cash used to ship 22 tons of cocaine.".....

    2. "The 1970 Bank Secrecy Act requires banks to report all cash transactions above $10,000 to regulators and to tell the government about other suspected money-laundering activity. Big banks employ hundreds of investigators and spend millions of dollars on software programs to scour accounts.

      No big U.S. bank -- Wells Fargo included -- has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.

      ‘No Capacity to Regulate’

      Large banks are protected from indictments by a variant of the too-big-to-fail theory.

      Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.

      The theory is like a get-out-of-jail-free card for big banks, Blum says. "...........

      But the minnows and even slightly larger fry in OVDI, or wondering how to fit into the narrow guidelines from September 1st, are subjected to intense scrutiny that requires thousands of dollars spent on legal and tax counsel. "No fish too small to fry" is the IRS slogan, when the larger fish like the US banks can continue to profit - even after paying fines. No US bank authorities are going to jail or individually indicted and convicted under the Bank Secrecy Act, but our little registered savings are subjected to 6 years retroactive disclosure under FBAR, and now under FATCA, and confiscatory penalties based on entirely legal already taxed funds may be applied.

  4. “Is it realistic for the U.S. to expect tax treaty partners to scrap their domestic privacy laws in order to make FATCA work?”

    Also I think equal protection laws would come into play.

    Discrimination based on national origin is forbidden by s. 15 of the Canadian Charter of Rights and Freedoms.

    If the federal government (currently Conservative) were to invoke s. 33, the Charter’s “notwithstanding clause,” for the first time in history – in order to acquiesce to the wishes of the US government! – the opposition party (NDP) would have a field day! Basically the Conservatives would be handing them the next election.

  5. As you point out OVDI was a fantastic deal for criminals. The problem is that most people in the program are NOT criminals or even close!

    OVDI is a fantastic "make work" project for the legal and accounting community, but a bad deal for those honest people who simply have made mistakes out of justifiable ignorance.

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