Monday, March 10, 2014

Opt Out of Offshore Voluntary Disclosure Program? We Need To See the National Office Appeals Coordinated Issues Paper Now!

An emerging issue for practitioners engaged in the offshore voluntary disclosure arena is collecting intel on what exactly the field offices are being told by the National Office about how to resolve  opt out cases. A client can choose to opt out at any time assuming the IRS computers are talking to each other, but the preferred way to opt out according to the IRS is as follows:  first you get your client  preliminary clearance, then write “the Philadelphia letter,” followed by the submission of amended returns, delinquent FBARs, and penalty computation, etc. for the disclosure period so that the case is as fully developed as possible upon opt out. All this can take as long as two years. There will be a long wait for about a year just to get an agent assigned and fully developing the case to his or her satisfaction can take another year if there are unique issues. This happens if there are valuation issues, or difficulty in getting financial records from snarky foreign financial institutions.

We now have five years of offshore voluntary disclosures under our belt and a lot of people are uncertain about what the field personnel are being told about how to resolve these cases.

Appeals Coordinated Issues: It is safe to assume that offshore voluntary disclosure opt out cases are Appeals Coordinated Issues cases, which means an OVD opt out case cannot be resolved by any field manager who may try to do so without first “coordinating” with the National Office.  This is not to say that every single opt out case has to be reviewed at the highest levels, but rather every settlement of an opt out case is looked at by a lot of people up and down the chain of command either before or after the fact.

IRS managers who slip up here usually get yelled at really badly, sometimes multiple times.

There is a document floating around Washington and probably available to high level field managers all over the country which is probably called “Appeals Settlement Guidelines for Offshore Voluntary Disclosures.” We don’t know if anyone inside the IRS has leaked a copy yet but it will be just a matter of time before someone does or someone is first to file a FOIA request to get their hands on it.  For the most part, it is not privileged.

Quoting liberally from the IRM at Part 33 Legal Advice, Section 3, Appeals Settlement Guidelines, Appeals Settlement Guidelines (ASGs) are guidelines written by Appeals and reviewed by the Office of Chief Counsel to assist Appeals “in coordinating issues of broad impact or importance to ensure resolution on a consistent basis nationwide.” (Emphasis added)

In the National Office, Appeals develops settlement guidelines in “coordination” with the Examination function. IRS Counsel works with both functions to develop Coordinated Issue Papers (CIP). These CIPs are developed after hundreds of hours of meetings and attorney work to craft settlement guidelines “including addressing the hazards of litigation.”

That section of the Manual also talks about the format these carefully crafted memos are to contain. They are generally organized into two sections: a law and analysis section and a settlement guidelines section.

Since ASGs are available to the public, subject to certain exemptions under the Freedom of Information Act (FOIA), the settlement guidelines section must also be reviewed by the Office of the Associate Chief Counsel (Procedure & Administration) to insure that only privileged material is subject to redaction.

The National Office needs to release the Appeals Coordinated Issue Paper on Offshore Voluntary Disclosures as soon as possible.

It will be years before we get any case law on the myriad of OVDI issues which are now headed for litigation. More importantly perhaps, there is an emerging lively unofficial rumor mill amongst OVDI practitioners, some of which may be based in part on wishful thinking or perhaps even bluster, where client expectations may be artificially inflated once the opt out threshold is crossed.  Even more serious is the rumor that certain IRS posts of duty are more enlightened than others when it comes to “doing the right thing” in using common sense.

We Need Help From the National Office Now!:  The National Office should get off the dime and help us out here.  It should not take a FOIA request to see the Offshore Voluntary Disclosure Coordinated Issues Paper. Maybe some outside the box thinking would be in order and issue it for comment? The stakes are enormous. The decision to opt out or not often involves a dollar swing of high six figures exposure for a misstep. For most of these folks this is the hill they may choose to die on as the most significant economic event of their entire lives.