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Emails Offer Glimpses of IRS Insight on OVDP, Streamlined Filing

Posted on Apr. 11, 2019

Two internal IRS email exchanges show an agency that grappled with issues of streamlined filers lacking Social Security numbers and whether public announcements raised the penalty amount in the offshore voluntary disclosure program.

Tax Notes received the emails in March in continuing fulfillment of a Freedom of Information Act request. Both emails were partially redacted and involve written communications among John McDougal, then-special trial attorney and division counsel, IRS Small Business/Self-Employed Division; Daniel Price, an attorney with the IRS Office of Chief Counsel, Small Business/Self-Employed Division in Austin, Texas; and Bryan Stiernagle, program manager of the offshore compliance initiative.

In a July 2016 exchange, the IRS officials examined a proposal from Roy A. Berg, then of Moodys Gartner Tax Law LLP, highlighted in a Tax Notes article. The proposal sought to have the agency allow U.S. citizens abroad to obtain individual tax identification numbers (ITINs) in some situations so as to avail themselves of streamlined filing and its reduced penalty structure for previously unreported foreign assets. In the email exchange one unnamed official from the national taxpayer advocate's office called the suggestion “reasonable.”

McDougal pointed to section 301.6901-1(a), which allows ITINs only for individuals not eligible for SSNs, noting that the rule goes back many decades.

“The rule could of course be changed (with Treasury’s approval), but, as Mr. Berg points out, the result would be administrative chaos without significant system changes. One of the reasons is that there aren’t enough ITINs to go around. Congress has mandated the retirement of a large number of ITINs, and the relevant units of [Wage and Investment Division] are already stressed over dealing with that process,” McDougal stated in the email. “It is fair to add that we recognize the problem and have been trying to find a solution, including discussions with [the Social Security Administration] about possibly relaxing their rules. The bottom line is that there is no easy fix to this problem.”

Price also chimed in, agreeing with McDougal’s assessment and adding that in the case of U.S. citizen decedents, the Social Security Administration suggested applying for employer identification numbers.

The IRS had recognized publicly for several years the challenges potential streamlined filing applicants living outside the United States were facing in acquiring SSNs.

 Even Though Everyone Knew’

With OVDP having closed in September 2018, clues about its interpretation may be of greatest interest from a historical perspective.

According to a December 2015 email from McDougal, the disclosure that a bank is under investigation or cooperating, which would result in increased penalties under OVDP, “has to have been by the Government or in a public filing,” like a deferred prosecution agreement or a John Doe summons petition.

“I don’t think that an announcement by the bank would trigger the enhanced penalty unless it is in a formal proceeding,” McDougal stated. “So, for example, Credit Suisse clients could file with the normal penalty up until the settlement was announced, even though everyone knew the bank had been under investigation for years.”

Under OVDP FAQ 7.2, a taxpayer who is the client of or holds an undeclared account at one of the facilitators or financial institutions listed on the IRS website faced a 50 percent miscellaneous offshore penalty, rather than the standard 27.5 percent. That list originally consisted primarily of financial institutions, many of which entered into non-prosecution agreements under the Justice Department's Swiss bank program. While that program is now in its legacy phase, the terms of the program were recently used for defining information disclosure in the Justice Department’s deferred prosecution agreement with Israel’s Mizrahi-Tefahot Bank Ltd.

An institution or facilitator found itself on the higher penalty list if it was subject to a past or present investigation by the IRS or Justice Department connected to accounts beneficially owned by U.S. persons; it cooperated with the IRS or Justice Department in connection with those accounts; or it was subject to a court-approved John Doe summons concerning U.S. taxpayer accounts.

What constituted public disclosure for purposes of the increased penalty had been the subject of speculation among practitioners.

In the series of emails, an unnamed IRS technical adviser asked how a taxpayer that entered into the offshore voluntary disclosure initiative, the predecessor to OVDP, would calculate their penalty if their bank wasn’t yet on the IRS’s list, but it was public knowledge that the bank was taking part in the Swiss bank settlement program.

Although the name of the bank is redacted in the email, a link is provided to an article about Union Bancaire Privée from Reuters, which reported that in December 2013 the bank announced it would participate in the Swiss bank program, following up on a public announcement made in August. As of December 15, 2015, the Justice Department had not posted a settlement with the bank on its Swiss bank list, according to the email.

The Justice Department announced a resolution with Union Bancaire on January 6, 2016, which amounted to a penalty of more than $187 million, after the bank acknowledged its part in helping U.S. taxpayers evade tax in exchange for a non-prosecution agreement.

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