In 2009, the Service introduced its first Offshore Voluntary Disclosure Program (“OVDP”). As a result of this program, more than 50,000 taxpayers have come forward and disclosed offshore financial accounts. In a news release issued by the IRS on January 28, 2015 (IR-2015-09), it reported that the government has collected over $7 billion from this initiative. In addition, as we know from the Zwerner case (reported in my blog on June 16, 2014), the Service has conducted thousands of civil audits relating to offshore financial accounts, resulting in the collection of taxes and penalties in the “tens of millions of dollars.” Last, the IRS has not been shy about pursuing criminal charges against taxpayers who fail to disclose their offshore financial accounts. In fact, the IRS reports that it has collected “billions of dollars in criminal fines and restitutions” since the introduction of the OVDP.
One may wonder whether the government’s offshore compliance enforcement activity will slow down as a result of the recent slashing of the Service’s budget. Reading the statements made by the IRS in the January 28, 2015 news release, the answer appears to be no. In fact, the announcement proclaims:
The IRS remains committed to our priority efforts to stop offshore tax evasion wherever it occurs. Even though the IRS has faced several years of budget reductions, the IRS continues to pursue cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil.
IRS Commissioner John Koskinen recently stated that: “Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order.” Consequently, the Service announced that the OVDP “will be open for an indefinite period until otherwise announced (emphasis added).” While the OVDP may be a good means for taxpayers to get their houses in order, tax practitioners need to fully inform their clients about the program and its impact on their situation before placing them into the program, including:
- The reporting rules and the cost of compliance. Even under the OVDP, taxpayers routinely feel they are being overcharged/penalized by the government for doing nothing wrong. Clients need to be fully informed of the rules relating to foreign financial accounts and the costs of noncompliance.
- OVDP flaws. The OVDP is not without flaws. Its rules are not perfect. In fact, in many instances, the rules are unclear and/or incomplete, and application is blemished with subjectivity, potentially leading to unexpected results. Caution is advised!
- Penalties. If a taxpayer’s disclosure is incomplete or inaccurate, the taxpayer may be faced with hefty civil and/or criminal penalties.
- Closure Time. The OVDP, especially given continued IRS budget cuts, can be a lengthy process. From the time a complete submission is filed with the IRS, it can take months to close the matter. This can be unnerving to taxpayers, especially in light of the huge civil and/or criminal penalties that can result from noncompliance.
There are at least four (4) takeaways from IR-2015-09:
- The IRS, despite huge budget cuts, intends to remain focused on offshore financial accounts.
- The OVDP appears to be here to stay (or at least until the Service announces otherwise).
- The OVDP does not generate prompt results. Patience is required.
- While the OVDP may be a good mechanism to resolve offshore financial account noncompliance, it is not without flaws. Tax practitioners need to adequately advise clients about the program and the applicable law so that they are fully informed before submitting an OVDP application.
Continuation of the OVDP is generally good news for taxpayers. As stated, however, it is not the most taxpayer friendly voluntary tax compliance program. Consequently, tax practitioners need to: have a good understanding of the OVDP and the applicable law; they need to fully advise clients of their compliance obligations, including the costs and risks of noncompliance; and they need to fully inform clients about the OVDP, including the timing, risks, and liability, before making a submission to the program.
As reported in my January 20, 2015 blog post, the IRS continues to take strong blows to its body in terms of budget setbacks. President Obama, however, as part of his administration’s 2016 budget proposal issued on February 2, 2015, plans to end some of the pain being imposed on the Service. His budget proposal, if enacted, would infuse over $12.9 billion into the Service’s coffers during fiscal year 2016. This represents an increase of approximately $2 billion over the fiscal year 2015 IRS budget.
The budget enhancement proposed by President Obama is targeted to be used for many worthy efforts, including enhancing taxpayer service, enhancing information technology (e.g., creating and implementing a new online tax filing system and taxpayer payment options), and improving the Service’s tax compliance/enforcement capabilities.
These budget expenses are clearly worthy. Consequently, it is difficult to debate enhancing the IRS budget in this manner. The $2 billion query that follows, however, is where our government will get the additional revenue to fund this cause. Unless other government agency budgets get slashed, the answer to this question most certainly has to be tax increases. This is not an acceptable answer for most taxpayers and lawmakers. It will be interesting to see what lawmakers do with this portion of the President’s budget proposal.
Stay tuned for further commentary on the President’s 2016 fiscal year budget proposal.
President Obama’s 2016 budget proposal includes provisions which, in the aggregate, increase income tax revenues by approximately $650 billion over 10 years. At least three of the proposed tax increases will be of concern to a broad spectrum of taxpayers:
1. President Obama proposes to increase both capital gains and dividend tax rates to 28%. This rate hike will apply to many taxpayers. It represents an increase of approximately 40% over the previous rate of 20% that came into play in 2013, and an increase of approximately 87% over the previous rate of 15% that we enjoyed from 2003 to 2013.
2. President Obama proposes to abolish a taxpayer’s ability to obtain a basis step-up upon receipt of an asset from a bequest. Also, he proposes that bequests and gifts be treated as realization events, triggering a capital gains tax. His proposal also provides that decedents would be allowed a $200,000 per couple ($100,000 per individual) exclusion for capital gains. There would be a separate exclusion of $500,000 per couple ($250,000 per individual) for personal residences. The President proposes to exclude tangible personal property and family-owned and operated businesses from this tax change.
3. President Obama proposes to return the estate tax rules to the 2009 laws. This would result in the unified credit being reduced from the current $5.43 million level (indexed for inflation) to a $3.5 million level (without an inflation index).
These three changes to the income tax code alone would raise $208 billion over 10 years. Time will tell whether lawmakers will enact this part of the President’s budget proposal. While these provisions will certainly raise tax revenues, they appear to be counter to the administration’s goal of creating a “simpler, fairer and more efficient tax system.” If these proposals are pushed forward, the President’s budget proposal will likely face significant turbulence.
On February 2, 2015, President Obama published his 2016 budget proposal. It proclaims that “[a] simpler, fairer, and more efficient tax system is critical to achieving many of the President’s fiscal and economic goals.” While some tax practitioners may debate the claim that the tax provisions embedded in the President’s budget proposal make the tax system simpler, it is a certainty that a significant number of tax practitioners will question the fairness of these provisions.
As in the past, the President’s budget proposes that “wealthy millionaires” pay no less than 30% of their income in federal income taxes. To facilitate accomplishing that goal, President Obama suggests these taxpayers be prevented from making charitable contributions to reduce their tax liability. He states: “…this proposal will act as a backstop to prevent high-income households from using tax preferences to reduce their total tax bills to less than what many middle class families pay.”
This provision of the budget proposal will definitely not receive broad support from the charitable organization community. Taking away the tax deduction resulting from charitable contributions certainly does not motivate taxpayers to transfer their wealth to charities.
Whether a charitable contribution deduction is a tax preference item is open to debate. A charitable contribution certainly does not seem to be “a tax preference” item. All taxpayers generally benefit in the same manner by this deduction. Shouldn’t taxpayers receive a tax deduction for wealth transfers to charities? Don’t we want to incentivize taxpayers to fund charitable needs through contributions? Eliminating this deduction for certain taxpayers may generate billions of dollars of tax revenues, but it will definitely impair charitable organizations from obtaining much needed funding. For this reason alone, hopefully lawmakers will resist removing the charitable contribution deduction from the tax code.
Contributions To College Athletic Programs
College sports fans—whether you are wealthy or not—buried in the President’s budget proposal is a provision that eliminates the deductibility of the charitable contribution you are required to make as a pre-requisite to purchasing tickets for college sporting events. Most colleges will not be pleased with this proposal! While President Obama has talked about this type of tax reform in the past, this is the first time we have seen it in one of his budget proposals. The provision, if enacted into law, is estimated to generate over $2.546 billion in tax revenues during the period of 2016-2025. Like the elimination of the charitable deduction for “wealthy” taxpayers, this provision will result in charities being the biggest losers.
Stay tuned! Time will tell whether lawmakers will adopt these proposals.
Larry J. Brant is a Shareholder in Garvey Schubert Barer, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; New York, New York; Washington, D.C.; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- "Developments in the World of IRC Section 1031 Exchanges Including the TCJA," Oregon Society of Certified Public Accountants (OSCPA) Forest Products ConferenceEugene, OR, 6.22.18
- "Evaluating the Built-in Gains Tax for C to S Conversions After TCJA," New York University Summer Institute in Taxation – Advanced Conference on Subchapter SNew York, NY, 7.26.18-7.27.18
- "S Corporation Distributions – The Ins and Outs," New York University 77th Institute on Federal TaxationNew York, NY, 10.21.18-10.26.18
- "The Tax Cuts and Jobs Act – What It May Mean to Your Clients," Estate Planning Council of Portland Mini-SeminarPortland, OR, 11.7.18
- "S Corporation Distributions – The Ins and Outs," New York University 77th Institute on Federal TaxationSan Diego, CA, 11.11.18-11.16.18