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Tax Notes Quotes Zhanna Ziering: Uncertainty May Weigh Down New Voluntary Disclosure Regime

February 18, 2019, Tax Notes

The IRS’s new voluntary disclosure rules can be summed up in one word — “uncertainty” — and practitioners facing myriad different client matters are questioning the efficacy of the program if more clarity isn’t forthcoming.

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Uncertain Waters

Zhanna A. Ziering of Caplin & Drysdale argued that the new guidelines had removed the structured ability to resolve a case.

“Because of so much uncertainty inside the program, it’s very hard to measure if you don't have criminal exposure or it’s minimal. It’s very hard to measure if you're better off in or out,” Ziering said. “The only identified benefit is in the ability to get a closing agreement . . . but this closure really hinges on the ability to reach a resolution with the IRS,” she said, adding that disagreement on even a technical issue would leave the taxpayer in the same position as if they didn’t engage in the program.

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About Those Penalties. . . .

One outstanding issue following the release of the guidance concerns how penalties will be assessed on the five years that don’t have the highest liability, according to Ziering. She wondered whether the fraud penalty would be in lieu of other penalties or if taxpayers would face accuracy-related penalties on the other years as well.

“When you try to make a decision of what to do, you want to try to calculate exposure upfront and there’s not much discretion left there that if we can just clarify some of it, it will be very helpful to discuss a taxpayer's options,” Ziering said.

Ziering also had questions over how FBAR penalties would be implemented.

The guidance simply states that willful FBAR penalties will be asserted under existing guidelines. Those guidelines state that in most cases, the total penalty for all years will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts, though if the facts warrant it, a penalty of up to 100 percent of the balance may beimposed. For non-willful penalties, examiners will typically recommend one penalty per open year. That penalty is capped at $10,000.

Ziering said it was unclear if non-willful penalties might still be imposed on taxpayers for years not accounted for in the imposition of the 50 percent willful penalty.

. . .

In December 2018 an IRS official caused a stir when describing a hypothetical in which an examiner asserts a civil fraud penalty for the last three years of the disclosure period and a willful FBAR penalty totaling 65 percent of the highest aggregate balance in all foreign bank accounts. This came after the IRS and the taxpayer couldn’t settle on the proper passive foreign investment company tax calculations. Under the facts of the example, the taxpayer’s position was made in good faith and the taxpayer was cooperative. The IRS has tried to dissuade practitioners from arguing that the exam team’s actions were retaliatory.

But even that detailed hypothetical left an open question for Ziering.

“Let's say you have a scenario where . . . out of the six years, you have an issue in one year, but the other five are OK. Would it be possible to get a closing agreement of five years and only take on one year to Appeals, or is it all or nothing?” Ziering asked.

It is still too early to decipher how the new guidance will work in practice, and the government shutdown may have delayed further guidance, Campagna surmised. Still, both Ziering and Campagna said they hope at least some additional guidance would be forthcoming from the IRS.

For the full article, please visit Tax Notes’ website (subscription required).

Excerpt taken from the article “Uncertainty May Weigh Down New Voluntary Disclosure Regime” by Nathan J. Richman and Andrew Velarde for Tax Notes.

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