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Taxpayers Putting Pressure On Courts to Establish The IRS’s Burden Of Proof In Offshore Disclosure Cases

Recently, the U.S. Fifth Circuit Court of Appeals, in Bernard Gubser v. IRS, et al., was asked to overturn a recent U.S. District Court’s decision. The case involved the appropriate burden of proof the Internal Revenue Service (IRS) must meet when the IRS asserts a willful failure to file penalty for the Report of Foreign Bank and Financial Accounts (FBAR). At issue is whether the IRS must meet a clear and convincing evidence standard to establish willfulness or whether the appropriate measure is the lower preponderance of the evidence level of proof.

The District Court’s dismissed the initial suit for lack of standing. A group of taxpayers filed an amici curiae brief with the Fifth Circuit urging the Court to reverse the District Court’s decision due to the perceived harm that the uncertainty of the burden of proof could cause taxpayers who made an error in failing to file the FBAR, but who believe their oversight was not willful. This comes at a time when an unprecedented number of District Court cases will be filed for FBAR violations due to the inability of many taxpayers to achieve relief through the IRS Appeals process.

The Streamline Program Turns Two

The Streamlined Filing Compliance Procedure (SFCP) is now two years old. The SFCP was designed for taxpayers whose failure to disclose their offshore accounts was “non-willful,” due to a lack of understanding or knowledge of reporting requirements for U.S. persons. Unlike the full blown Offshore Voluntary Disclosure Program (“OVDP”), the SFCP places the burden of proving that the taxpayer’s noncompliance was willful on the IRS once the taxpayer has asserted that their non-compliance was not willful. Taxpayers who’s tax returns and informational filing requirements satisfy the SFCP are only required to file tax returns for the previous 3 years and FBAR’s for the previous 6 years while taxpayers in the OVDP must file tax and information returns and FBAR’s for the previous eight years.

One point of contention for taxpayers who entered into the OVDP before the SFCP was introduced in 2014, and whose noncompliance would have qualified them for the SFCP, is that they should be able to switch to the SFCP and take advantage of the reduced penalties on the income tax liability and file only 3 years of income tax returns. While the reduced miscellaneous penalty is available under the OVDP by requesting transitional relief, such relief is not guaranteed and often denied.

Recently, a group of taxpayers brought suit in the Washington D.C. District Court to challenge the IRS’s position that taxpayers who were enlisted in the OVDP prior to the implementation of the SFCP, cannot have their matter transferred to the SFCP. The taxpayers in this case contend they were being treated unfairly under this system as they were no different than those who came forward later in time and entered the SFCP.

Unfortunately, the court did not decide the merits of the case. Rather, the court held that the suit hinders the IRS’s ability to make decisions regarding the enforcement of tax liabilities and dismissed the suit as being barred under the Tax Anti-Injunction Act (26 U.S.C. § 7421), which prohibits suits that restrain the assessment and collection of taxes.   This case highlights the difficulties that can arise when the Service creates settlement programs independent from regulatory oversight and commentary.

Major Deadline Approaching to Minimize Exposure for Unclaimed Property Liability

Delaware corporations and other business entities have a limited opportunity to minimize and liquidate exposure to Delaware unclaimed property liability by enrolling in Delaware’s Voluntary Disclosure Agreement Program. The VDA program permits companies not under audit to voluntarily disclose and pay the amount of unclaimed property without interest or penalties. To obtain the maximum benefit of the VDA program—a waiver of all interest and penalties on reported property from transactions in 1996 and later, and an exclusion of property arising from transactions that took place prior to 1996—a company must enroll by June 30, 2013. An audit could otherwise subject a company to liability for transactions that took place as far back as 1981, plus interest and penalties which could double the amount due.

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Kate F. Buckley and Sara R. Werner, members of Dentons’ Corporate practice, co-authored this article.

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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