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Partnership Proposed Regulations Re-Released

Today, the prior January 2017 partnership audit proposed regulations were re-released.  A pubic hearing is scheduled for September 18th with comments due by August 14th.  We will monitor the commentaries as they are filed and post them HERE.

Partnership Audit Guidance Soon?

On January 1, 2018 the new partnership audit rules become effective.  Proposed regulations were issued in January of this year to provide broad-based guidance on the implementation and operation of the new statutory regime, but those proposed regulations were withdrawn in the same month due to the new administration’s position freezing proposed regulations and requiring agency review before re-issuance.  With a little over six months to go before the new rules become effective, a considerable amount of uncertainty associated remains and regulatory guidance is desperately needed.  At this point, gaining an understanding of the proposed/withdrawn regulations is the best course of action, as there is no current indication that the proposed rules will be altered in a material way, if issued by the end of the year.

OVDP Campaign – Declines and Withdrawals

In January, the IRS released a list of 13 audit campaigns designed to focus resources on areas of concern for the IRS examination teams.  Since that time, additional campaign areas have been added to the list of IRS priorities.  Most recently, comments regarding the Offshore Voluntary Disclosure Program campaign have clarified the focus of this particular initiative.  Taxpayers selected for review will include those taxpayers who made an application for pre-clearance into one of the OVDP programs available since 2009, but were denied entry.  Historically, a denial occurred if the taxpayer was under civil examination, criminal investigation, or the foreign account activity was already known to the IRS or DOJ Tax Division.

The second prong of the campaign focuses on those taxpayers who withdrew from participation after receiving pre clearance but before acceptance into one of the OVDP programs.  Recent clarifications revealed that an “opt out” was not part of the campaign- given the fact that opt-outs or IRS removals made once the taxpayer was accepted into the OVDP, receive almost immediate civil examinations as part of the on-going OVDP procedure.

“While we have represented taxpayers who were denied entrance into the OVDP programs over the past eight years, a renewed focus on those individuals raises the stakes for this class of taxpayer,” said Jim Mastracchio, Chair of Dentons U.S. Tax Controversy Practice.  Under the campaign audit process, taxpayers will be evaluated as (i) subsequently compliant, (ii) requiring soft-letters for immaterial noncompliance, or (iii) regular examination process.  “It is the latter group of taxpayers with the most exposure to civil and possible criminal referral,” added Mastracchio.

We will provide additional information as this particular campaign progresses.  Questions regarding the OVDP process, Streamline program, or litigation of FBAR penalties can be forwarded to James.Mastracchio@Dentons.com, (202) 496-7251.

The Dirty Dozen – Top Concerns For 2017

With the tax filing season now open, the IRS has listed its top 12 tax scams and warned U.S. taxpayers that participation in these prohibited activities could result in civil and criminal tax exposure.

In addition to false refund claims, once again, Abusive Tax Shelters and Offshore Tax Avoidance made the list.  Below is a copy from the text of the release:

Abusive Tax Shelters: Don’t use abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2017-31)

Offshore Tax Avoidance: The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. The IRS offers the Offshore Voluntary Disclosure Program to enable people to catch up on their filing and tax obligations. (IR-2017-35)

The IRS Offshore Voluntary Disclosure programs offer a range of filing options, with many taxpayers qualifying for low or no penalties when coming into compliance.  If you have questions about the IRS programs and U.S. filing obligations, please contact, Jim Mastracchio (202-496-7251) or james.mastracchio@dentons.com.

Partnership Proposed Regulations Issued – New Audit Rules For Partnerships

The IRS has issued Proposed Regulations addressing the Centralized Partnership Audit Regime.  Back in November of 2015, statutory changes were enacted to replace the traditional audit rules for partnerships and replacing them with a new centralized partnership audit which, in most instances, places the tax liability at the partnership level rather than at the partner level.

Partnerships are pass through entities for US tax purposes and items of income, expense and credits are taken on the personal income tax returns of the individual partners.  Under the new statute, an audit of the partnership could result in additional taxes being owed at the partnership level rather than flowing through to the individual partners.

“It has taken over a year for the proposed regulations to be issued,” said James N. Mastracchio, Co-Chair of Denton’s Tax Controversy Practice, “and that is a good thing.”  The proposed regulations are “extensive” and “cover a number of issues that we face as advisors to our clients.” added Mastracchio.

There will be a long comment period with the ultimate effective date of the regulations to take place in early 2018.

Is Your Conservation Easement a Listed Transaction?

If you invested in a partnership or other passthrough entity, which provides pass-through deductions for conservation easements, that arrangement may be considered a “syndicated conservation easement” and a “listed transaction,”  and you may be faced with  new IRS reporting obligations.

According to Notice 2017-10, if you entered into this type of arrangement on or after January 1, 2010, and if that arrangement is “the same as or substantially similar to” the syndicated conservation easements described in the Notice, the “listed transaction” provisions of  §1.6011-4(b)(2) and §§6111 and 6112 become effective December 23, 2016.  If these provisions apply, you must disclose the transaction to the IRS, for each taxable year in which you participated in the transaction, provided that the period of limitations for assessment of tax has not ended on or before December 23, 2016.  Failure to disclose your participation can result in stiff civil monetary penalties.

Further, according to the Notice, promoters, material advisors, including appraisers, who make a tax statement on or after January 1, 2010, with respect to transactions entered into on or after January 1, 2010, have disclosure and list maintenance obligations under §§6111 and 6112. See §§301.6111-3 , 301.6112-1.  Failure to comply with these provisions also carries significant civil monetary penalties.

With the 2016 income tax filing season opening this month, this issue may affect tax returns filed in the coming months and requires a look-back to 2010 as well.  For questions regarding syndicated conservation easements, or listed transactions, please contact Jim Mastracchio at (202) 496-7251; james.mastracchio@dentons.com

 

Tax Court Finds Predictive Coding Satisfies Reasonable Inquiry Standard for Responding to Discovery Requests

The Tax Court recently denied the Internal Revenue Service’s (“IRS”) motion to compel the production of electronically stored information by Petitioner, Dynamo Holding Limited Partnership, which was not delivered as part of a discovery response based on the mutually agreed-upon use of “predictive coding.” Dynamo holdings, Ltd. v. Comm’r, Docket Nos. 2685-11, 8393-12. Predictive coding is an electronic discovery method that involves the use of keyword search, filtering and sampling to automate portions of an e-discovery document review. This method attempts to reduce the number of irrelevant and non-responsive documents that need to be reviewed manually.

The IRS and Petitioners had agreed that Petitioners would run a search for terms determined by the IRS on the potentially relevant documents. Petitioners used the predictive coding model to provide the IRS with a selection of documents that the model determined to be relevant.

The IRS, believing the response to be incomplete, served Petitioners with a new discovery request asking for all documents containing any of a series of search terms under a simple keyword or Boolean search, speculating that these documents were “highly likely to be relevant.”   Petitioners objected to this new discovery request as duplicative of the previous discovery responses made through the use of predictive coding. Petitioners contended that the predictive coding algorithm worked correctly, and that the 765 documents excluded as not relevant by the predictive coding algorithm, were properly excluded because they were outside the relevant time frame or otherwise are not relevant. The IRS thereafter filed a motion to compel the production of these documents.

The Tax Court denied the motion, asserting that it was predicated on two myths. The first of these stated myths was the “myth of human review” that “manual review by humans of large amounts of information is as accurate and complete as possible – perhaps even perfect – and constitutes the gold standard by which all searches should be measured.” The second myth was “the myth of a perfect response,” which is beyond the requirements of the Tax Court Rules. The Tax Court found that that the Tax Court Rules and the Federal Rules of Civil Procedure require only that the responding party make a “reasonable inquiry” when making a discovery response. The court explained that “when the responding party is signing the response to a discovery demand, he is not certifying that he turned over everything, he is certifying that he made a reasonable inquiry and to the best of his knowledge, his response is complete.”  As this standard was satisfied by Petitioners in their utilization of predictive coding to locate the relevant documents, the IRS’s attempt to expand e-discovery beyond the agreed upon predictive coding was unsuccessful.

The Ninth Circuit Holds Equitable Recoupment Not Time-Barred

In a taxpayer win, the Ninth Circuit recently reversed the Tax Court and held equitable recoupment was not time barred.  Revah v. Comm’r, No. 11-70211 (9th Cir. Sept. 17, 2014) (unpublished opinion).  Relying on longstanding precedent, the Ninth Circuit held the taxpayers were not statutory barred from applying for equitable recoupment because it’s permitted even with respect to an untimely refund claim.  Thus, even though the taxpayers failed to timely file their refund claims, “untimeliness is not a ground upon which the tax court may deny equitable recoupment.”  Id.

Equitable recoupment is a judicial doctrine that applies where one transaction or event is subject to two taxes based on inconsistent theories.  The equitable recoupment doctrine “allows a litigant to avoid the bar of an expired statutory limitation period” and “prevents an inequitable windfall to a taxpayer or to the Government that would otherwise result from the inconsistent tax treatment of a single transaction, item, or event affecting the same taxpayer or a sufficiently related taxpayer.”  Menard, Inc. v. Comm’r, 130 T.C. 54, 62 (2008).  To establish equitable recoupment a taxpayer must prove: (1) the overpayment or deficiency for which recoupment is sought by way of offset is barred by an expired period of limitation, (2) the time-barred overpayment or deficiency arose out of the same transaction, item, or taxable event as the overpayment or deficiency before the Court, (3) the transaction, item, or taxable event has been inconsistently subjected to two taxes, and (4) if the transaction, item, or taxable event involves two or more taxpayers, there is sufficient identity of interest between the taxpayers subject to the two taxes that the taxpayers should be treated as one.  Id. at 62-63.  In practice, taxpayers often have difficulty mounting arguments of equitable recoupment against the IRS, although the Government typically has more success in this area.

The IRS audited and made adjustments to the Revahs’ 1999 and 2000 tax returns related to inventory and bad debt, and resulting in a decrease in the net operated losses the taxpayers reported on their 1997 and 1998 returns.  The taxpayers accepted the adjustments assuming that, as the examiner acknowledged, they would be able to reduce income in 2001 through amended returns.  After the exam and in 2005, the taxpayers filed amended returns in accordance with the examiner’s adjustments, but the refund claims were denied as untimely.  The taxpayers petitioned the Tax Court for relief asserting the equitable recoupment doctrine.  The Tax Court (Judge Cohen) found the taxpayers’ inability to use the NOLs to reduce tax liabilities was not the result of the inequitable application of inconsistent theories of taxation contemplated by the equitable recoupment doctrine, and thereby denied the petition.  The Ninth Circuit reversed and remanded in favor of the doctrine’s application, illustrating that there is hope for future taxpayers seeking to offset current IRS liabilities with past credits under the doctrine.

Circuit Split In Summons Procedures

As part of the examination process, the IRS has wide latitude to obtain documents, records, or other information from a taxpayer.  The IRS normally requests and receives information informally.  Other times, however, the IRS resorts to a more forceful tact—an administrative summons.  This approach has teeth, as the federal district courts have statutory authority to compel compliance.

To have a summons enforced in federal district court, the IRS generally must satisfy four prima facie requirements established fifty years ago by the Supreme Court in United States v. Powell.  Those requirements are: (1) the investigation must be conducted for a legitimate purpose; (2) the summons must be relevant to that purpose; (3) the IRS must not already have the information sought; and (4) the IRS must have followed the administrative steps required by the Internal Revenue Code.

Recently, in Jewell v. United States, the Court of Appeals for the Tenth Circuit focused on the fourth requirement.  Code section 7609(a)(1) provides special administrative procedures for third-party summonses (e.g., the IRS summons person A regarding person B).  One of these specified procedures provides that “notice of the summons shall be given to any person identified [person B in the example above] . . . no later than the 23rd day before the day fixed in the summons as the day upon which such records are to be examined.” (emphasis added).  In Jewell, the government admitted that the taxpayer had not received the statutorily-prescribed notice.  Thus, as the Tenth Circuit phrased it, “[t}he resulting question is whether we are free to disregard the statutory requirement.”

The Tenth Circuit’s inquiry focused first on the interpretation of the section 7609(a)(1) 23-day notice requirement.  Was notifying the taxpayer mandatory?  The Tenth Circuit rejected the government’s arguments to the contrary, concluding that Congress intended to require mandatory notice.  The court noted that the authority cited by the government “did not disturb the age-old precept that ‘shall’ means ‘shall'”.

The Tenth Circuit’s inquiry then focused on whether the notice requirement was an “administrative step” under Powell.  Looking at the common meaning of the term, the court concluded that the 23-day notice provision was an administrative step, as contemplated by Powell.  The court concluded that the summonses at issue should be quashed.

Although the 23-day requirement and the Powell requirements both seem rather straightforward—and we agree that the Tenth Circuit is correct—the Tenth Circuit’s opinion created a circuit split.  As the court acknowledged, five other circuit courts have declined to apply Powell in the same manner.  The First Circuit has acknowledged that the IRS must comply with all required administrative steps, but allowed enforcement of a summons where only 21 days of notice was provided.  The Second, Sixth, and Eleventh Circuits are willing to excuse the notice defect where the taxpayer is not prejudiced.  And the Fifth Circuit has allowed enforcement of a summons to avoid elevating “form over substance.”

With such disparate approaches being taken by different circuits, this issue could find its way to the Supreme Court next term.

Notice 2013-78: IRS Proposed Significant Changes to Competent Authority Procedures

U.S. tax treaties generally permit taxpayers to request assistance from the U.S. government to alleviate double taxation or taxation otherwise inconsistent with tax treaties.  The component of a government that handles these requests is typically known as the “competent authority”.   Competent authority provisions are usually contained in a particular treaties’ Mutual Agreement Procedure (“MAP”) article.

The IRS, on November 22, 2013, released Notice 2013-78, proposing a revenue procedure (to supersede Rev. Proc. 2006-54) and providing updated guidance related to requesting U.S. Competent Authority (“Competent Authority”) assistance.  The proposed revenue procedure is also intended to “improve clarity, readability, and organization” and reflect IRS structural changes that have occurred since 2006.  The changes contained within the notice are, in some cases, substantial.

One of the key changes is that, in certain situations, a taxpayer seeking Competent Authority assistance must file a “pre-filing memorandum”.  These situations include, but are not limited to, certain issues relating to a foreign-initiated adjustment of more than $10 million, a taxpayer-initiated position (e.g., a request for refund), the taxation of intangibles, and requests for discretionary limitations of benefits relief.  The pre-filing memorandum must, in the case of a foreign-initiated adjustment, explain the factual and legal basis of the action and describe the steps undertaken in the foreign country and any communications with the foreign competent authority regarding the matter.  Additionally, the pre-filing memorandum must state whether the taxpayer wishes to have a pre-filing conference with the Competent Authority and propose at least three possible dates for such a conference, whether or not the taxpayer wishes to have a conference.

That is, the Competent Authority could require a pre-filing conference–something not provided for in current guidance.  Pre-filing conferences could, however, prove helpful to taxpayers, because the Competent Authority can provide preliminary advice, although such advice is advisory only.

The proposed guidance also greatly expands the Competent Authority’s ability to expand the scope a matter.  Under current guidance, a taxpayer may use a procedure known as the Accelerated Competent Authority Procedure (“ACAP”) to request the expansion of a matter to subsequent taxable periods, if the same issues exist in those periods.  Current guidance also requires the consent of the IRS field office with jurisdiction over the matter.  Under the proposed guidance, however, the Competent Authority is not required to obtain IRS field office consent or even wait for a taxpayer’s request for an expanded scope.  Instead, the proposed guidance permits the Competent Authority to seek to include other years where it is “feasible, practicable, and in the interest of sound tax administration to do so.”  The proposed guidance further provides that the Competent Authority may expand the scope of issues because of its “strong interest in resolving all potential .. . issues in a timely manner”.

Under the proposed guidance, taxpayers must think far in advance whether they wish to seek Competent Authority assistance.  If the IRS memorializes in writing an examination resolution (e.g., a resolution with IRS Examination that is memorialized in a Fast Track Settlement Session Report, a Form 870 waiver, a Form 870-AD offer, a closing agreement, or any other similar agreement) relating to a U.S.-initiated adjustment, it may be too late.  The Competent Authority will accept a request for its assistance relating to U.S.-initiated adjustment memorialized in a such a resolution only if the terms of the resolution are agreed to by the Competent Authority, in writing, prior to its execution.  If the Competent Authority disagrees with the resolution, the Competent Authority will request that the examination team and the taxpayer amend the terms accordingly.  With respect to Fast Track Settlement proceedings, the Competent Authority will accept a MAP request relating to a U.S.-initiated adjustment only if the Competent Authority was named as a participant, and given a reasonable opportunity to participate, in the proceeding (and related IRS meetings).

The proposed guidance also shrinks the time in which a taxpayer may request IRS Appeals assistance through the Simultaneous Appeals Procedure (“SAP”).  Through SAP, as the procedure’s name suggests, IRS Appeals considers the same issues simultaneously with the Competent Authority.  Current guidance provides that a taxpayer may request IRS Appeals assistance, at any time, after filing for Competent Authority assistance.  Under the proposed guidance, a taxpayer has only 60 days after the Competent Authority accepts the taxpayer’s request for assistance.

On the whole, the proposed guidance is intended to make the Competent Authority process more efficient.  If the guidance is issued in its current form, seeking Competent Authority assistance will be more difficult for taxpayers as they will have to decide earlier to request Competent Authority assistance.  Lastly, the Competent Authority would be granted substantially greater powers such as requiring pre-filing conferences and expanding the scope of its assistance to other years or issues.

Anticipate Litigation, Check. Anticipate Communications Between a Testifying Expert and Parties Other than the Taxpayer or the Taxpayer’s Attorney, Ch…Wait, What? To Involve Counsel, Or Not To Involve Counsel Is the Question.

Taxpayers continually find themselves facing decisions that will end up being scrutinized during future IRS examinations, and courts have repeatedly found that such concern, coupled with other factual indicia, can satisfy the “anticipation of litigation” requirement for work product protection under Federal Rule of Civil Procedure (“FRCP”) 26(b)(3).  (For a seminal case on this topic, please see United States v. Adlman, 134 F.3d 1194 (2d. Cir. 1998)).  The U.S. District Court for the District of Delaware recently grappled with this issue in a Government action to enforce several IRS summonses related to an examination of a $4.5 billion worthless stock deduction claimed by Vivendi S.A.’s U.S. subsidiary, Veolia Environment North American Operations, Inc. (the “Taxpayer”), during the 2006 tax year. See United States v. Veolia Environment N. Am. Operations, Inc., D. Del., No. 1:13-mc-03 (Oct. 25, 2013).  The taxpayer previously provided 600,000+ pages of bates-stamped documents to the Government in response to more than 25 summonses and hundreds of Information Document Requests during the examination of the Taxpayer’s 2004-2006 tax years.  Approximately 300 withheld documents remained at issue.

In Veolia, the Court found the Taxpayer adequately established their anticipation of litigation during the transaction’s 2006 planning stages.  The Court was specifically persuaded by the Taxpayer’s 2006 retention of outside counsel to advise on litigation possibilities, a Private Letter Ruling request on certain aspects of the transaction, the Taxpayer’s participation in a pre-audit program for the IRS to review the transaction, the Taxpayer’s audit history, and the amount of the claimed deduction.  Interestingly, the Court even opined that if the government’s contention that the Taxpayer had a history of engaging in similar transactions in the ordinary course of business was true, work product protection could still apply given the facts of the case.  This was all consistent with aspects of the established case law on the anticipation of litigation issue.

Unfortunately for the Taxpayer, the Government’s claims and the court’s analysis did not stop there.  During 2006, the Taxpayer retained a French valuation firm to provide a risk exposure analysis on the transaction and identify and supervise U.S. valuation experts that could prepare valuation reports to substantiate the claimed deduction.  One firm was retained in 2006 and produced a pre-transaction valuation report that supported the claimed position and another firm was retained in 2007 to provide a second valuation report to buttress the argument.  These reports were prepared independently and both were ultimately provided to the Government to support the claimed position.

The Government argued that the Taxpayer’s provision of the two valuation reports made their preparers testifying experts under FRCP 26(b)(4) and any communications that relayed factual data to the testifying experts were not protected according to FRCP 26(b)(4)(C)(ii). The first point was not heavily disputed, and the Taxpayer appears to have provided significant amounts of information to the Government during the examination.  Regarding the second issue, the Court focused on the privilege log and held that some of the documents presented therein appear to be factual communications to testifying experts that are not protected under the work product doctrine.  Importantly, the Court also stated that FRCP 26(b)(4)(C) and its protections did not extend to parties other than the Taxpayer or the Taxpayer’s attorneys.  That final point may have been moot in Veolia, given the court’s indication that the referenced communications constituted facts and data; however, it raises an important aspect of the rule to be mindful of.

The number of litigated summons cases involving privilege and work product claims continues to increase.  And the pace of new cases may continue to grow given the IRS’s new IDR policy, which promises to increase significantly the numbers of summonses that are issued.  For taxpayers and tax advisors, this is an area of concern that should be closely monitored.

Can the IRS Circumvent U.S. Law by Issuing a Treaty Request?

Shortcuts to identifying the “soft spots” of a tax return have long tempted the IRS. Those shortcuts are generally quite controversial and have included the aggressive use of penalties to force a reasonable cause defense and the resulting disclosure of privileged materials and, as another example, transparency programs such as Schedule UTP that arguably strain the credibility of the IRS’s policy of restraint with regard to tax accrual workpapers. More recently, with the increasing prevalence of complex, cross-border transactions having multi-jurisdictional tax consequences, there is often a paper trail of tax analysis strewn around the world that is providing the IRS with a new temptation. Would the IRS be tempted to quietly make a treaty request in an attempt to circumvent U.S. privilege protections and obtain the materials without the fuss of a privilege fight? Unfortunately, the IRS and foreign taxing authorities have succumbed to this temptation, and it is something that practitioners should be aware of. The propriety of any such request must be carefully scrutinized and the appropriate interventions should be considered.

Indeed, the IRS has used treaty requests in lieu of following the administrative summons process (as well as its own internal directives) in order to bypass procedural safeguards for the taxpayer to attempt to obtain privileged and protected documents that would otherwise be unavailable to the IRS under U.S. law. This premature and improper use of treaty requests violates two core principles contained in most bilateral tax treaties, and in articles 18-26 of the Convention on Mutual Administrative Assistance in Tax Matters and article 26 of the OECD Model Tax Convention and its Commentary.

First, the issuance of a treaty request to circumvent domestic law is improper and objectionable because the requested nation is not obligated to employ procedures or obtain information that is at variance with or not obtainable under the laws of either country. This means that, for example, where the U.S. issues a treaty request, the same procedural safeguards that exist in the U.S. would also effectively be available with respect to the request. Additionally, the privileges and protections that exist in the requested country also apply. Under U.S. law, the IRS has broad authority to issue a summons for the production of documents or testimony relevant to the purpose of ascertaining the correctness of a return or determining the liability of any person or any internal revenue tax. But the IRS is subject to specific limitations. Significantly, pursuant to United States v. Powell, 379 U.S. 48 (1964), a summons is not enforceable unless it is (1) issued for a legitimate purpose; (2) the material sought is relevant to that purpose; (3) the information sought is not already within the possession of the IRS; and (4) the administrative steps required by the Internal Revenue Code have been followed. Further, the IRS is limited to materials in the possession, custody, and control of the summonsed party and is not entitled to documents that are privileged or protected under U.S. law, including the attorney-client privilege, attorney work product protection, and the privilege against self-incrimination. A requested nation will not employ measures to circumvent these U.S. laws. As noted in the OECD Commentary, one nation cannot take advantage of its treaty partner’s information system merely because it is wider than its own. Thus, a treaty request at variance with the U.S. law, including those discussed above, should be denied.

Second, the issuance of a treaty request before exhausting domestic measures is a clear violation of the international authorities and is grounds for rejection of a request. Under U.S. law, a summons is not self-enforcing. Instead, if the summonsed party fails to comply with the summons, the U.S. government must bring an enforcement action in the appropriate federal district court. And, both the taxpayer and the recipient of a summons have the right to protest the enforcement of a summons by filing a petition to quash in federal district court. The administrative summons procedures thereby provide the prerequisite mechanisms for a court to review the legitimacy of the summons and/or whether the claims of privilege are well-founded. The IRS cannot circumvent a taxpayer’s privileges or right to have a court review these claims by simply pursuing the documents through a treaty request because a request made prior to exhausting the domestic administrative summons procedures should be denied.

The premature and improper issuance of a treaty request merely shifts the burden of potentially protracted and costly disputes to a foreign nation, attempting to force the foreign nation to interpret and decide U.S. law. In addition to the potentially resulting prejudice against the rights of the taxpayer, this shifting aspect is itself clearly an inappropriate imposition on a treaty partner. See article 26 of the OECD Model Tax Convention and its Commentary. Treaty partners are usually quite receptive to these arguments by the objecting taxpayer in intervention proceedings.

IRS Announces Third Special Offshore Voluntary Disclosure Initiative

The Internal Revenue Service (IRS) announced on January 9, 2012 that it has reopened its voluntary disclosure initiative for the third time, in response to the US government’s continuously widening investigation of foreign banks relating to unreported offshore accounts of US persons. This third special disclosure initiative follows the IRS’s 2009 and 2011 Offshore Voluntary Disclosure Programs (OVDPs) and is available to those taxpayers who did not file in time for the 2009 or 2011 OVDPs. As in the past the OVDPs are designed to bring offshore money back into the US tax system and help individuals with undisclosed income from hidden offshore financial accounts get current with their taxes. This program allows individuals with previously unreported foreign financial accounts to significantly reduce their exposure to substantial civil tax penalties and, in many cases, to eliminate the possibility of criminal prosecution. Foreign accounts include assets held in offshore trusts, foundations, corporations and other entities.

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“Strategies for Managing Parallel Proceedings with Fifth Amendment Implications,” Inside the Minds: Strategies for Criminal Tax Cases

The DOJ Tax Division has long recognized the efficacy of parallel criminal and civil proceedings and actively pursues them in its current endeavor at increased enforcement. Parallel proceedings often present complicated issues that create additional challenges for taxpayers and their attorneys. When a parallel proceeding is pending, the invocation of the Fifth Amendment by either the taxpayer, a tax advisor, or other non-party witness can create adverse implications in a subsequent proceeding.  Taxpayers and their attorneys must carefully navigate the risk of an adverse inference against the taxpayer under the circumstances of the particular case.  The well-informed attorney can prepare to face all of these issues and effectively navigate the specific facts of his or her case.  The following discussion will explain and analyze: the effect of a party’s invocation in independent proceedings, the effect of a party’s invocation in parallel proceedings, the implications of a non-party’s invocation, and whether an invoker can waive the privilege and later testify.

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