Alexey Manasuev attended the 2014 Joint Fall CLE Meeting of the American Bar Association (ABA) Section of Taxation and Section of Real Property, Trust & Estate Law, Trust & Estate Division meeting in Denver, Colorado held on September 18-20, 2014. Below is a brief summary of important developments with respect to the 2014 IRS Offshore Voluntary Disclosure Program (OVDP) and Enhanced Streamlined Filing Compliance Procedures.
2014 OVDP Streamlined Update – On September 20, 2014, Jennifer L. Best, Senior Advisor, Deputy Commissioner, Internal Revenue Service (IRS) Large Business & International Division, and John C. McDougal, Special Trial Attorney, IRS Small Business/Self-Employed Division provided helpful and long-awaited clarifications on various aspects of the modified 2014 IRS Offshore Voluntary Disclosure Program (OVDP) and Enhanced Streamlined Filing Compliance Procedures announced by the IRS on June 18, 2014. The two government officials spoke at the 2014 Joint Fall CLE Meeting of the American Bar Association (ABA) Section of Taxation and Section of Real Property, Trust & Estate Law, Trust & Estate Division meeting in Denver, Colorado.
Jennifer L. Best and John C. McDougal recognized the challenges presented by the new rules for delinquent U.S. taxpayers and acknowledged that some of the areas of the rules could have been misinterpreted by taxpayers and their tax advisors. They addressed several areas of the new rules. Importantly, they indicated that the IRS has been drafting additional guidance under the new rules and expects to release it in the next week or two. The guidance is expected to clarify certain areas of the rules that resulted in confusion and/or misunderstanding by taxpayers and their tax advisors.
The author recently published an article reviewing some of the areas of concern for U.S. citizens and green card holders residing outside the United States (mainly, in Canada). The entire article can be found here.
New Guidance Upcoming in the Next Two Weeks
John McDougal stated that the new guidance is expected to be released by the IRS in the next week or two.
Nonresidency Test Under the Foreign Offshore Compliance Procedures – No Relief and No Change
The nonresidency test under the enhanced Streamlined Filing Compliance Procedures, in part where it requires delinquent U.S. taxpayers to have spent at least 330 full days outside the United States, as one of the eligibility criteria to qualify for the program, significantly narrowed the category of U.S. taxpayers who may qualify under the new rules. Notwithstanding taxpayers’ and their tax advisors’ pleas and arguments to change the nonresidency test (for instance, by applying the Internal Revenue Code (IRC) section 911 entirely, with the bona-fide residency test), regretfully, the IRS decided that it will not change the eligibility requirements for the Streamlined Filing Compliance Procedures for delinquent U.S. taxpayers residing outside the United States. Jennifer Best mentioned that the program has been open to delinquent U.S. taxpayers since 2012 and any such taxpayers should have come forward long ago. When asked on how the narrowing the category of taxpayers qualifying for the program can be consistent with the IRS statements that the program should broaden the category of eligible taxpayers, Jennifer Best responded that the IRS indeed broadened the group of delinquent U.S. taxpayers eligible for the program by extending the program to U.S. taxpayers residing in the United States.
Ultimately, when developing the Streamlined Filing Compliance Procedures, the IRS was trying to find the right balance between making the processing of tax returns and applicable forms under the program as fast and as automatic as possible and ensuring that the government’s interests are adequately protected. In a way, adding the nonresidency test was a matter of administrative convenience. Plus, Jennifer Best pointed out, the delinquent U.S. taxpayers must only meet the test in one of the last three tax years. Apparently, she did not believe that this should be such a significant challenge.
Jennifer Best also mentioned that prior to releasing the changes to the 2012 Offshore Voluntary Disclosure Program (OVDP) and enhanced Streamlined Filing Compliance Procedures, the IRS received comments from taxpayers and their tax advisors requesting certain changes, including a variation of the nonresidency test. Naturally, taxpayers and their tax advisors always want more [the author’s statement].
It is unfortunate that the IRS did not change its mind about the nonresidency test. The IRS is expected to clarify that the reference to the IRC section 911 and the corresponding regulations was related to the determination of whether a taxpayer had U.S. home of abode. At least, taxpayers now will have certainty on this issue, which is also important.
Options for Delinquent U.S. Taxpayers who Fail the Eligibility Criteria for the Enhanced Streamlined Filing Compliance Procedures
John McDougal discussed the issue of ineligible taxpayers. In other words, what a taxpayer who does not qualify for the Streamlined Filing Compliance Procedures should do to become tax compliant (assuming such taxpayer is not applying for the OVDP)? In such case, she/he should simply file their delinquent tax returns and forms under general IRS assessment and examination procedures with the IRS service center. The taxpayer should include a statement explaining the reasons for filing the requisite returns and forms late so that the submission does not result in “quiet disclosure” – we all know that the IRS does not encourage the “quiet disclosure” practice. Although the abatement of penalties in such cases would not be automatic, and although the taxpayer may be selected for an examination, the taxpayer may still use defences (including reasonable cause exception) available under the existing tax authorities to request penalty abatement, as applicable.
TIN – Social Security Number (SSN) Application Processing Delays
One of the issues raised during the panel discussion was how taxpayers can protect themselves from the initial IRS contact when their SSN application pending. Unfortunately, John McDougal stated, the IRS does not have any ability to do anything about delays in processing the SSN applications. Taxpayers will not be provided any guarantees in this respect. Jennifer Best mentioned that it may be unlikely for such taxpayers to be identified if they have not been identified by the IRS as of now.
Non-Willful Conduct Guidance not Forthcoming
The upcoming guidance will not address the non-willful conduct issues. The IRS continues to believe that issuing the non-willful conduct guidance is not a good idea. It is understandable why providing some factors that go into the non-willful conduct determination may lead to massive filings using the same or similar grounds for non-willful conduct. At the same time, some guidance would be helpful, especially providing some clarity to the taxpayers on whether the “willful” standard under the enhanced Streamlined Filing Compliance Procedures may be less strict than that applicable under the existing tax authorities. In addition, it would be helpful to understand where the IRS stands on “willful blindness” issue.
Conclusion
It is very encouraging that the IRS acts so promptly on comments and suggestions submitted by taxpayers and their tax advisors. At the same time, the good news of certainty with respect to the nonresidency test is shadowed by the bad news of leaving the test as is. The author hopes that the IRS would reconsider its decision in the future.