If you have been reading my previous newsletters you would know that I have grave misgivings about the IRS/OVDP. The reasons are as follows:
1) Under IRC sec 7525 there is no attorney-client privilege for criminal tax evasion (which means that if the OVDP submission is not accepted, the taxpayer is later ruled ineligible, or the taxpayer opts out all attorney-client communications may be subject to IRS/DOJ discovery and the attorney may gave to submit evidence against their US taxpayer client).
2) The criminal tax issues are poorly explained to all concerned. There is no guarantee that the IRS will not criminally prosecute the US taxpayer who submits the OVDP application. If the taxpayer submission is not accepted because unbeknownst to the taxpayer the IRS already has his name (from 3rd party sources) like the case of Ty Warner, the taxpayer is later ruled ineligible (like the Bank Leumi case in Israel) or the taxpayer opts out they are then subject to both IRS civil tax audit and criminal tax evasion prosecution. Taxpayers are unaware of these risks.
3) By submitting an IRS/OVDP application the taxpayer assures that the account may be wiped out (if the 50% miscellaneous offshore penalty applies) with little likelihood of any refunds if they leave or are refused entry to the OVDP.
4) The IRS plays both judge and jury i.e. they make a unilateral decision on whether to accept the taxpayer in the IRS/OVDP with no appeal rights, mediation rights and no taxpayer constitutional safeguards: due process of the law or equal protection of the law. In other words, the deck is stacked “against the taxpayer”.
5) The taxpayers submits evidence with no transactional or use immunity for the evidence submitted so the very evidence the taxpayer submits can then be used against them for prosecution for criminal tax evasion if they are declined for the IRS/OVDP (as happened to Ty Warner);
6) By entering the IRS/OVDP the taxpayer waives numerous constitutional rights: 4th amendment right to be free from unreasonable searches and seizures, 5th amendment right against self-incrimination, 8th amendment right against excessive fines, as well as the 6-year statutes of limitations for criminal tax evasion.
7) The IRS says the Offshore Voluntary Disclosure Program is a success and yet only 1% (an estimated 50,000 taxpayers) have chosen to participate out of an estimated 10m US taxpayers with undisclosed offshore accounts.
Why has the UK HMRC collected over $150B from offshore UK tax evaders and the IRS has collected less than $10B, when the UK has 1/5 the US population and a fraction of our gross domestic product?
Are the English/UK that much more effective than the IRS in collecting taxes due from offshore tax evaders (the #s certainly suggest so)?
The real issue is simple: the IRS estimates over $100B per year is lost from offshore tax evasion and they are not effective in tax collection for offshore tax evasion.
So what to do?
An alternative solution, which I have used with great success, needs to be considered:
1) A case-by-case client analysis of the facts. If the client is willful then the IRS/OVDP makes sense. What if the client is not willful? Who makes that decision? As you may know, the IRS Criminal Investigation Division makes that decision without any guidelines for what characterizes willfulness.
2) If the taxpayer had a good faith misunderstanding of the law because he was confused about the tax laws that applied, received poor advice from a third party (e.g. a Swiss banker), was impaired at the time due to mental cognition issues (e.g. substance abuse, brain trauma, depression) then under the seminal US Supreme Court case of Cheek v. US 498 US 192 (1991) a taxpayer’s good faith belief that he was not required to file tax returns negates the “intent element” i.e. scienter of the crime of tax evasion.
“A good faith misunderstanding of the law, or a good faith belief that one is not violating the law negates the willfulness element of a tax evasion charge (see: Standard Federal Tax Report Para # 41.318.034; Tax Research Consultant Sec. 66.050; Practical Tax Explanations Sec. 40,245)
The Taxpayer subject to a good faith misunderstanding of the law may file amended tax returns and FBARs, submit a declaration as to their good faith misunderstanding of the law, request a waiver of penalties for a reasonable cause exception, pay the income tax and any late filing/payment penalty due and avoid the IRS/OVDP entirely which saves them the 50% (or 27.5%) misc. offshore penalty, the 20% accuracy related penalty and, most importantly, does not jeopardize them by “flying right into the IRS radar” without constitutional protections, evidence immunity or extension of the statute of limitation for civil/criminal tax issues.