Issues in Tax Controversy - Commentary on Tax Enforcement, News & Developments

On June 26, 2012, the Internal Revenue Service (“IRS”) released new FAQ’s on the current Offshore Voluntary Disclosure Program (“OVDP”) . The IRS opened the current OVDP on January 9, 2012, but, other than announcing the new FBAR penalty of 27.5%, had not issued updated guidance, leaving practitioners and taxpayers to rely on the 2011 program FAQ’s and a January 2012 news release for details on the program.

Unlike the 2009 and 2011 programs, the current program does not specify a range of years for the disclosure period.  Instead, the disclosure period is “the most recent eight tax years for which the due date has already passed” and does not include “current years for which there has not yet been non-compliance.” 

Another new feature of the current OVDP is that it has no set end date.  The IRS has reserved the option to change the terms of the program, undoubtedly to make them less favorable, or to end it entirely at any time.

The new FAQs are available here: new%20FAQs.pdf

The IRS also announced that it will provide special procedures for US citizens living abroad who failed to file US income tax returns and FBARs but have little to no U.S. tax liability.  This special procedure will be available September 1.  Details have not been provided. 

The IRS also increased its estimate of the amount of money it has recovered through the three iterations of the program to $5 billion.

Please contact Jay Nanavati at 202-861-1747, jnanavati@bakerlaw.com, or Jim Mastracchio at 202-861-1650, jmastracchio@bakerlaw.com, if you have any questions regarding this post.

Baker Hostetler’s lawyers have handled hundreds of voluntary disclosures through the 2009 and 2011 Offshore Voluntary Disclosure Programs (OVDI).  Recently, the IRS has announced a third OVDI, this time with no defined termination date.

The OVDI programs provide important protections for those who might face criminal prosecution for unreported income or unfiled informational returns.  The OVDI programs also provide certainty regarding the level of civil monetary penalties that will be imposed.  In the current OVDI Program, penalties are relatively high (although they are somewhat lower than a civil “fraud” penalty), and there is no leeway for appeal or negotiation in the Program.  It is a relatively rigid process in which the taxpayer is required to provide certain information at certain times.  In addition to taxes and interest, accuracy penalties are imposed at a rate of 20% of the tax liability, plus 27.5% of the fair market value of the offshore assets giving rise to the unreported income. 

It has been our experience that certain taxpayers may be able to lower their civil monetary penalties through a non-OVDI audit process.  For such taxpayers, the taxpayer can withdraw or “opt out” from the program at the appropriate time after making the required disclosure to the criminal tax authorities.  This approach may be beneficial if there are substantial legal issues or doubt may be raised as to a taxpayer’s liability for particular amounts.  What is best depends on the taxpayer’s situation and his or her specific facts.

In particular, we learned in the previous OVDI Programs that some taxpayers, including certain immigrants, should carefully consider entering into the OVDI Program and then opting out.  One potential benefit of opting out may be the possibility of obtaining certain retroactive restructuring relief, an outcome that may not be available to taxpayers in the formal OVDI Program.  While not everyone can obtain a dramatically better result or retroactively restructure their holdings, paying close attention to a taxpayer’s particular facts and circumstances has the potential to create a less negative outcome.

An article discussing the IRS position on retroactive relief for OVDI taxpayers can be found here: http://www.bakerlaw.com/files/Uploads/Documents/News/Articles/TAX/2011/TaxNotesToday_Littman_Nydegger_3-2011.pdf

A brief description of the article appears here:  http://www.bakerlaw.com/articles/littman-and-nydegger-publish-article-tax-analysts-tax-notes-today-3-9-2011/

Today, the IRS announced an extension until November 1, 2011 for taxpayers who did not file TD F 90-22.1 (FBARs) forms in prior years.  For those taxpayers who only had signatory authority over a foreign account and did not own the account in 2009 or prior years, additional time has been granted to gather the necessary information to file the old FBARs.

This is a helpful development for many taxpayers who are attempting to gather information from financial institutions where the there was no ownership. 

The IRS on two prior occasions extended the deadline while it considered its position.  See Notice 2011-54 for the current reporting obligations.