Tax Analysts Quotes Mark Matthews and Scott Michel on the Future of OVDP

Tax Analysts spoke with Mark E. Matthews and  Scott D. Michel concerning the possible termination of the IRS's offshore voluntary disclosure program. For the complete article, please visit Tax Analysts' website (subscription required).

Excerpt taken from the article "Will the Other Shoe Ever Drop on the OVDP?" authored by  Andrew Velarde and Nathan J. Richman.

Mark E. Matthews of Caplin & Drysdale Chtd., former chief of the IRS Criminal Investigation division, said that while some prosecutions have occurred after attempts at voluntary disclosure, the taxpayers in those cases generally failed to satisfy the IRM requirements. Despite the couched language, an effective disclosure satisfying the IRM requirements "will avoid a criminal investigation by IRS or DOJ except in an extreme case," he said, adding that he is not aware of a disclosure that the IRS regarded as valid being referred to the Justice Department.

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Matthews said one wrinkle for voluntary disclosures to the IRS is that IRS practices do not bind the Justice Department, which has its own voluntary disclosure policy. In theory, if the Justice Department independently finds a name, perhaps while investigating something else -- particularly something very serious such as a Bernie Madoff-like fraud scandal or a terrorism-related matter -- and decides that a tax charge would help the prosecution, it could disregard a voluntary disclosure to the IRS, even though the Justice Department "has, by and large, respected the IRS determinations on voluntary disclosures," he said. While the Justice Department Tax Division voluntary disclosure policy mostly operates in parallel with IRS policies, recent massive data turnovers to the Justice Department (such as from the Swiss bank program and the UBS AG settlement) have increased the possibility of the Justice Department discovering something before the IRS does, he said. (Prior coverage: Tax Notes, Nov. 1, 2010, p. 531, 2010 TNT 205-4; and Tax Notes, Feb. 1, 2016, p. 537, 2016 TNT 18-3.)

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'If It's Not Seriously Broke'

"It would be bad policy to abandon what is in place there now. There are some problems with it, and it doesn't fit everybody, but to me, from a government point of view, it is an avenue which encourages compliance and basically avoids, to a large extent, what they need to do on the examination function," Steven Toscher of Hochman, Salkin, Rettig, Toscher & Perez PC said, admitting that the IRS is probably spending more time than it would like to examine and certify submissions. "No one has offered to me a justification for why to get rid of it and what's going to replace it. . . . If it's not seriously broke, why fix it?"

Matthews said he has heard the suggestions that FATCA, like the Swiss bank program before it, will place enough pressure on people with undeclared foreign assets to voluntarily disclose to justify terminating the OVDP. "I don't think FATCA is going to end it for them," he said. "I think there are still large gaps out there on compliance and enforcement on FATCA, and this problem is going to still be with us in a global economy with the internet facilitating the opening of foreign accounts. This problem is with us for some period of time."

Information about offshore bank accounts and financial assets has been pouring in to both the Justice Department and the IRS for some time now from the OVDPs and the Swiss bank program, as well as from whistleblowers, settlements with category 1 banks, cooperators, treaty requests, and John Doe summonses. (Prior coverage: Tax Notes, May 2, 2016, p. 567, 2016 TNT 80-2; and Tax Notes, July 4, 2016, p. 59, 2016 TNT 125-2.)

Matthews said he has seen some audit activity and some grand jury activity that probably arose out of the government's analysis of that information. While it is not explicitly known where the government is getting the data, "I have the impression that we are seeing some investigative activity that is likely to be coming from data mining activities," he said.

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If the OVDP were to end, the government would lose two kinds of incentives for taxpayers to come forward with voluntary disclosures -- which may lead more taxpayers to attempt so-called quiet disclosures or simply sit back and hope the government never finds out, according to Scott D. Michel of Caplin & Drysdale. Taxpayers would no longer be able to benefit from the certainty of entering into a closing agreement with the IRS, or obtain the penalty certainty offered by the miscellaneous penalty alternative to most penalties, he said. "If your only alternative is a wide-open set of issues, I think the client calculus in terms of choosing to come in would be vastly different, especially if criminal issues are not likely present," he added.

Michel said it would be a good idea to make at least some pieces of the OVDP a permanent part of the IRS's voluntary disclosure practice, such as institutionalizing "the pre-clearance procedure in the way that it is now operative on the website for both offshore and domestic disclosures."

Lessening the Strain

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Matthews suggested an alternative to the 100 percent audit approach. "Although the IRS has made tremendous progress and made some significant improvements to processing, I do believe that they could still make this more efficient," he said, adding that while the OVDP has one of the highest rates of return for agent resources, it could be even more efficient.

Matthews described his alternative as a "spot-checking" system that would operate similarly to the discriminant function (DIF) formulas, which are used to select everyday returns for audit. The IRS could choose some undisclosed criteria for the complete review of all submissions it gets and pass on most others with a basic closing agreement saying that to the extent the submission is complete and accurate, the taxpayer is protected regarding the foreign accounts and income disclosed, he said. Some random portion of the unflagged submissions should be subject to complete review to "keep us honest," he added. Under that system, "I am going to prepare each one of mine under the assumption that an agent is going to review every line of it, but unbeknownst to me, behind the green curtain, they are going to only look at selected numbers of those," Matthews said.

Michel said that even if some things slip through under the spot-checking alternative, that might be an acceptable price to pay. "Given the level of resources that have had to be devoted to OVDP processing and diverted from other components of tax enforcement, one could have envisioned a policymaker deciding to accept that a few people would slip through undetected doing one thing or another but that a larger good would nonetheless be accomplished at a far smaller cost," he said.

Matthews said that if the IRS ends the OVDP, he hopes it retains the streamlined program.

What Have You Heard?

The IRS has consistently resisted practitioners' requests to provide more guidance on what constitutes a willful violation. In March, Caroline Ciraolo, head of the Justice Department Tax Division, argued that given the publicity of the voluntary disclosure programs, the criminal prosecutions, and ongoing investigations, it was becoming less credible for taxpayers to claim a lack of awareness of filing requirements to assert non-willfulness. (Prior analysis: Tax Notes, Jan. 18, 2016, p. 282, 2016 TNT 7-1. Prior coverage: Tax Notes, Mar. 14, 2016, p. 1268, 2016 TNT 45-7.)

Practitioners questioned the universality of that knowledge. Neiman said many people do not follow Swiss banking developments, and Ungerman emphasized the importance of analyzing situations on a case-by-case basis to account for the unsophisticated. Michel said he still sees non-willful cases, particularly with situations involving illness, declining mental health, or tragedy.

"There are people in the middle part of the country who don't read Tax Notes and BNA and The New York Times," Matthews said. "Their local newspapers don't cover this thing, not to mention the 7 million U.S. citizens who live abroad permanently."

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Michel noted that OVDP and streamlined submissions spiked following enforcement events such as the Swiss bank program and the implementation of FATCA but that they have since slowed. "Interestingly, though, some of our most interesting and complicated cases have come in recently where there is a very wealthy person living abroad who suddenly figures out that they've got U.S. tax issues," Michel said.