As reported in the blog Angloinfo.com, there appears to be a growing concern that the IRS is revoking acceptance into the Offshore Voluntary Disclosure Program, aka Offshore Voluntary Disclosure Initiative, for a variety of reasons. Here is the blog article.
Should I Enter the Offshore Voluntary Disclosure Program?
Making the decision to enter the Offshore Voluntary Disclosure Program (OVDP) is fraught with anxiety, numerous questions and significant trepidation. The most significant benefits of entering the OVDP are that criminal charges, the potential for the 75% civil fraud penalty, as well as penalties for FBAR and other information returns are essentially waived by the Internal Revenue Service (IRS) in exchange for a fixed penalty framework. Read through the FAQs and you will learn about the possible penalties that can apply outside the program as compared to if one enters the OVDP.
Since 2009 which marked the start of the IRS first voluntary disclosure program for unreported offshore income and assets, over 35,000 taxpayers have entered the initiative. Each of the three IRS Offshore Voluntary Disclosure programs has required the filing of 8 years’ of back tax returns and FBARs. In addition, volumes of supporting documentation are required. Choosing this option is very time-consuming and generally is very expensive, both in terms of professional fees and penalties. These programs, however, are a welcome relief for taxpayers who face a real likelihood of criminal penalty sanctions.
IRS Withdraws Acceptance Letters
Imagine the dismay of many taxpayers this past week when they learned that the IRS sent correspondence to their tax lawyers informing them that their clients who had previously received acceptance letters into the program were now disqualified from participation. Here’s what happened:
Under the rules of the OVDP, anyone entering the program must do so before they are under IRS audit or criminal investigation, before receiving any correspondence from the IRS regarding unreported foreign accounts and before the IRS receives their name from a cooperating financial institution. The basic premise underlying all of these exceptions it that it is too late to seek amnesty protection if the IRS already knows that you have been noncompliant. Taxpayers entering the program go through an elaborate procedure involving a “pre-clearance” to make sure they are not on any IRS list of persons with unreported accounts. You can read about the pre-clearance process and preliminary acceptance into the OVDP at FAQ’s 23 and 24.
The problem with the current slew of OVDP participants whose acceptance was revoked, is that no one knows how or when the IRS will receive information from a cooperating financial institution. What happened in these cases is that information from banks revealing the identity of US clients with offshore accounts (it is guessed that the relevant banks are Bank Leumi and Mizrahi Tefahot Bank Ltd) sat for stretches of time in the IRS maze of bureaucratic paperwork and computer terminals and was not accessed until many months after the acceptance letters had already been sent. One tax professional believes that the ”numerous” post-clearance disqualification letters are due to a miscommunication between the Criminal Investigation Unit of the IRS that administers the OVDP, and the Department of Justice Tax Division, which had received the banking information and records leading to disqualification from the program.
Many clients whose participation was revoked had already submitted a complete OVDP disclosure package including amended returns, FBARs, account information, as well as tax, penalty and interest payments. Some had been in the OVDP for 6 months before receiving news of their revocation letters from the IRS. They are now subject to a full IRS audit as well as possible criminal prosecution and the most severe FBAR and other draconian penalties.
Revocations Will Breed Further Mistrust Of the OVDP
The revocation letters certainly increase the already significant distrust of the IRS which has previously been accused of “bait and switch” in the OVDP initiatives. If one cannot rely on the IRS acceptance letters, one has to question the entire reason for having a “pre-clearance” and acceptance process in the program. Professionals have expressed dismay over this recent development and cannot understand why the IRS would yank away an acceptance from a repentant taxpayer who was “trying to do the right thing”.
This newest OVDP fiasco certainly puts taxpayers contemplating “coming clean” through OVDP in an even more difficult position: Damned if they do; Damned if they don’t.
Another worrisome development just brought to my attention by a tax colleague who is dealing with the situation involves investigations of facilitators after the closing agreement has been signed. The IRS Criminal Investigation Division is pushing to interview taxpayers that have completed the OVDP to obtain information about any professionals or other parties who assisted them with their offshore accounts / entities. I understand that such taxpayers are told if they do not cooperate, they might be removed retroactively from the OVDP. This problem may possibly be due to the fact that the IRS and Department of Justice did not raise the questions about facilitators before signing a closing agreement with the relevant taxpayers. This is a shortcoming that should be borne by the Government for its failure to find out such information before closing, and should not be addressed by threatening taxpayers post-facto.