July 29, 2009 - Phil Hodgen

Is the IRS sneaky or sloppy with the new amnesty procedure?

The IRS process for starting an amnesty application for an offshore bank account has an interesting thing in it. You tell me: sneaky or sloppy?

The process up to now

The process for an amnesty application up to now has been pretty clean. Start the voluntary disclosure process, go all the way to the end, and get presented with a closing agreement. You agree to that? Sign and pay. Taxes, penalties calculated per the amnesty offer, interest. You’re done.

If you don’t like the closing agreement (because, oh, hypothetically you balk at the galaxy-sized penalties in relation to the peanut-sized tax liability for unreported interest), you then have a choice. You can opt out of the amnesty program and try your luck with the normal audit process.

This is spelled out in the IRS’s FAQ (warning! PDF), which says:

28. If the taxpayer and the IRS cannot agree to the terms of the closing
agreement, will mediation with Appeals be an option with respect to
the terms of the closing agreement?

No. The penalty framework and the agreement to limit tax exposure to the most
recent 6 years are package terms. If any part of the penalty framework is
unacceptable to the taxpayer, the case will be examined and all applicable
penalties may be imposed. Any tax and penalties imposed by the Service on
examination may be appealed, but not the Service’s decision on the terms of the
closing agreement applying the penalty framework.

Pretty simple, eh? They are saying the amnesty process is a package deal, take it or leave it. But they’re also saying you can try your luck on the Wheel of Fortune (Warning! YouTube! Kay Starr! Old Fabulous Music!) that is the IRS audit process.

Is that all out the window?

The new process and the letter

The new process has a letter to be signed by the taxpayer (warning: Word document). It is pretty clearly designed for IRS triage purposes, to save the Criminal Investigations unit a lot of unnecessary work.

But the letter has some sneaky/sloppy language in it. Read this:

To be included with all letters:

By signing this document, I certify that I am willing to continue to cooperate with the Internal Revenue Service, including in assessing my income tax liabilities and making good faith arrangements to pay all taxes, interest, and penalties associated with this voluntary disclosure.

The interesting part is helpfully highlighted for you by mygoodself.

So what do they mean by that? If a taxpayer signs this letter, is the taxpayer locking himself/herself into paying the amnesty penalties? That would be on interpretation of someone promising to pay “. . . penalties associated with this voluntary disclosure.”

Is the taxpayer prevented from rejecting the amnesty package and going for possibly lower penalties under the normal audit process?

What I’m doing

I think the IRS was sloppy. I don’t think they mean to stop taxpayers from rejecting the amnesty package and going for a ride on the Wheel of Fortune.

I plan to rewrite their sample letter to my satisfaction. 🙂

Next action @ you

You, with the offshore bank account problem. Give me a call at +1-626-437-2500 (mobile). Let’s clean up the mess.

US Real Estate Investments Voluntary Disclosure