In a regular tax examination, if a taxpayer is unable to agree to a resolution of all the issues in an audit, the taxpayer may reach an agreement on some of the issues and elect to take the unresolved issues to an impartial IRS Appeals Officer or settlement officer. As such, the IRS representative is authorized to make an offer of settlement based on the government’s "hazards of litigation" (its chances of losing the case in court). Under existing written protocols, unresolved cases are supposed to go to Appeals because examining agents and their managers are not supposed to "settle cases" even though they do it all the time. That’s because IRS managers get more credit with their bosses for having a high "agreed case" rate. It is illegal to evaluate case managers’ performance based on revenue collected. The IRS is more focused on the number of cases closed out as "agreed," either with "no change" or a taxpayer concession on the amount of income which should have been reported or deductions taken.
Under the OVDI Frequently Asked Questions on the IRS website, the last section, "Case Resolution" which contains the so-called opt out rules (FAQ’s 49 through 53) makes a brief reference in FAQ 49 to unhappy customers having the privilege of appealing a proposed IRS penalty after the "[imposition] of all applicable penalties," but even though offshore voluntary disclosures have been in the IRS pipeline for three years now, there has been scant talk by either the IRS on its website or in public pronouncements, or in practitioner war stories on LinkedIn, about any experience so far with IRS Appeals involving voluntary disclosures.
That’s because there aren’t any OVDI cases in Appeals yet. A highly reliable source recently told me that there are presently no opt outs in Appeals and if any of them manage to work their way there, they likely will be handled as Appeals Coordinated Issues to assure consistency. An Appeals Coordinated Issue (called "ACIs") is IRS-speak for alerting all local managers to not even think about settling the case on their own because the National Office has removed all discretion from local offices on these cases. Any willingness to settle any case under OVDI will be made exclusively by National Office compliance super-managers and their staff, the highest levels the Office of Chief Counsel, and the national director of Appeals.
My source also says that unless there are unique facts, those unable to resolve their matter through the opt out procedures should not anticipate a much different experience in Appeals. He also added that an inherited account is not a unique fact.
It is suggested that the practitioner make a realistic proposal in the opt out process. There is some bad case law emerging in this area on the definition of willfulness so practitioners should be careful about what they wish for.
My source also reminds me that the Department of Justice is no longer following the UBS process of issuing John Doe summonses and waiting to see what happens. They are getting intelligence directly from many sources. Moreover, my friends in the IRS criminal investigation division are telling me they have so many leads in potential substantial criminal matters they feel like kids in a candy store.
As of this writing we are about a year away from the time when all foreign banks are supposed to cough up the names and account numbers of their American depositors under FATCA. By then it could be too late for some who may have waited too long to enter OVDI. That said, the reality is, the government is simply too busy and too preoccupied chasing a cornucopia of real criminal tax guys with offshore shenanigans. Ironically, IRS CID simply has no time to chase after almost all the people who think they are at risk for a life of ankle bracelets or real hard time. The real challenge here for people with secret offshore accounts is to explore their potential civil penalty exposure if the IRS calls first.