In recent remarks made by IRS Commissioner John Koskinen on June 3 at the 2014 OECD International Tax Conference in Washington, D.C., Koskinen indicated that the Service will most likely modify in the “very near future” its offshore voluntary disclosure program to better account for the “law-abiding instincts of most U.S. citizens” who want to comply with their tax obligations and remedy past mistakes. This is particularly evident with respect to the “many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives,” Koskinen stated. The Commissioner added that “[W]e have been considering whether these individuals should have an opportunity to come into compliance that doesn’t involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas.”
What about U.S. residents or citizens residing in the United States with offshore accounts? Koskinen also gave hope to those taxpayers as well where their acts of noncompliance “clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn’t involve the threat of substantial penalties.”
The Commissioner wanted to “re-strike” the balance between enforcement and voluntary compliance now, given that FACTA’s operative date of July 1 approaches. That is true but the discretion to be exercised on when a particular taxpayer will be entitled to more favorable treatment on penalties and avoiding prosecution or at least the threat of prosecution is solely held by the Internal Revenue Service and also, particularly with FBAR litigation, with the Department of Justice.
Commissioner Koskinen delivered on his “promise”. On June 18, 2014, in FS-2014-6, the Service released a fact sheet highlighting three of if its offshore voluntary disclosure programs which have resulted in over 45,000 voluntary disclosures from individuals who have paid in approximately $6.5 billion in taxes, interest and penalties that had accrued from prior years’ violations. It also republished, as modified, its FAQs on the OVDI programs.
On June 18, 2014 the Service released to the press that it will allow certain eligible (“non-willful”) U.S. taxpayers to participate in its streamlined filing compliance program. The change was one of several made to the OVDI, including, unfortunately, increasing the miscellaneous offshore penalty from 27.5% to 50%. The IRS revised its “frequently asked questions” and “transition rules” as to the streamlined program. Commissioner Koskinen stated that the modifications are designed to increase taxpayer eligibility for the compliance program.
2009 Offshore Voluntary Disclosure Program (OVDP)
The IRS announced the 2009 Offshore Voluntary Disclosure Program (OVDP/OVDI) in March 2009. It offered taxpayers an opportunity to avoid criminal prosecution and a settlement of a variety of civil and criminal penalties in the form of single miscellaneous offshore penalty. It was based on existing voluntary disclosure practices used by IRS Criminal Investigation. Generally, the miscellaneous offshore penalty for the 2009 program was 20% of the highest aggregate value of the unreported offshore accounts from 2003 to 2008. Participants were also required to file amended or late returns and FBARs for those years. In the 2009 OVDP the IRS received 15,000 disclosures prior to the Oct. 15 closing date that year. It resulted in the collection of $3.4 billion in back taxes, interest and penalties. It also led to another 3,000 disclosures after the closing date.
2011 Offshore Voluntary Disclosure Initiative (OVDI)
While the 2009 program resulted in many disclosures and furthered the investigation of many individuals and financial institutions that facilitated non-compliance with U.S. tax law, the rules were modified somewhat in 2011. Of course the Department of Justice’s pursuit of U.S. taxpayers holding accounts with Swiss banks by forcing the banks to disclose the names and bank information of its U.S. clients did result in the delivery of many U.S. taxpayer identities. Those individuals are generally not eligible for OVDI relief unless they approached the Service prior to the DOJ’s receipt of their names and accounts.
The 2011 OVDI was announced in February, 2011 and continued until September 9, 2011. One change was to increase the penalty amount to 25% pf the miscellaneous offshore penalty on the highest aggregate value of unreported offshore accounts from 2003 to 2010. In addition, some participants were eligible for special 5% or 12.5-% penalties, depending on the severity of their noncompliance. The Service announced that the 2011 OVDI drew 15,000 disclosures and resulted in the collection of $1.6 billion in back taxes, interest and penalties for the 70% of cases that were closed that year.
In January 2012, the IRS revised the terms of the 2011 OVDI program and made it permanent until further notice. Under the 2012 Offshore Voluntary Disclosure Program, participants pay a penalty of 27.5% of the highest aggregate balance or value of offshore assets during the prior eight years. The 5% or 12.5 % penalties remained in effect for certain taxpayers. In June 2012, the IRS added an option to the existing disclosure program that enabled some U.S. citizens and others residing abroad to catch up on their filing requirements and avoid large penalties if they owed little or no back taxes. This option took effect in September of that year. According to government statistics, this 2012 program has drawn 12,000 disclosures since its inception.
2014 Changes to Offshore Programs
In June 2014, the IRS announced major changes in the 2012 offshore account compliance programs, providing new options to help taxpayers residing in the United States and overseas. The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations. The new guidance expanded the streamlined procedures for non-willful taxpayers and changed the OVDP program for taxpayers who may have engaged in willful non-compliance.
The government announced that all three voluntary programs have resulted in more than 45,000 voluntary disclosures from individuals who have paid about $6.5 billion in back taxes, interest and penalties.
Frequently Asked Questions and Answers; as Effective For OVDP Submissions Made on or After July 1, 2014.
To provide background into the OVDP program in general and incorporating some of the recent changes, the first 6 FAQs, as modified, are summarized below.
Q1. Is the new announcement introducing a new offshore voluntary disclosure program?
IRS Answer. No, it’s a continuation of the 2012 OVDP with modifications. Unlike the 2009 OVDP and the 2011 OVDI, the 2014 OVDP has no set deadline for taxpayers to apply. However, the terms of this program are subject to change at any time. For example, the IRS may increase penalties or limit eligibility in the program for all or some taxpayers or defined classes of taxpayers — or decide to end the program entirely at any time.
Q1.1 Were any significant changes made to the 2012 OVDP? If so, what are they?
IRS Answer. Among the changes made to the 2012 OVDP are:
• A 50% offshore penalty applies if either a foreign financial institution (FFI) at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation. See FAQ 7.2.
• As described below, FAQ 17 filing of delinquent FBAR reports, has been replaced and superseded. See “Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets”.
• FAQ 18 concerning filing certain delinquent international information returns has been replaced and superseded. See “Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets”.
• The reduced penalty structure under former FAQs 52 and 53 has been eliminated due to the expansion of the Streamlined Filing Compliance Procedures. See “Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets”.
• FAQs 31 through 41 pertaining to the asset base to which the offshore penalty applies have been modified to promote clarity and consistency of application.
• FAQ 23 has been modified to require additional information for preclearance by Criminal Investigation.
• The Offshore Voluntary Disclosures Letter and attachment have been modified.
• FAQ 7 has been modified to require that the offshore penalty be paid at the time of the OVDP submission.
• FAQ 25, as modified, requires account statements be provided for all FFI accounts regardless of account balance and to provide that voluminous documents not requiring original signatures may be submitted on CD or DVD.
• Certain FAQs have been deleted as moot: 16, 17, 18, 19, 51.1, 51.2, 52, and 53.
Q1.2 What is the effective date of the modified FAQs (on the Service’s website)?
IRS Answer. For all new submissions made on or after July 1, 2014.
Q1.3 What if an individual applied for OVDP relief (mitigation) prior to the effective date of the modified FAQs and the case is still “open”, i.e., it has not be resolved via a closing agreement (Form 906). Can the individual request consideration under the modified program?
IRS Answer. Yes. An individual who has previously made an OVDP submission prior to July 14, 2014 may elect to have his case considered under the modified FAQs as part of the 2014 OVDP. This is accomplished by formal written request by the taxpayer or his representative and filed with the IRS examiner assigned to the case and further provided that all documents and information required by the modified FAQs is submitted. See, e.g., FAQ 25. If no examiner has been assigned to the case, the election needs to be filed along with any supporting or required documents with the IRS, Austin, TX.
Q1.4. What if the taxpayer applied under the OVDP prior to the effective date of the expanded Streamlined Filing Compliance Procedures. Can the individual request consideration under the modified rules which expand the Streamlined Filing Compliance program?
IRS Answer. Yes provided the taxpayer qualifies for “transitional treatment”under the terms of the Streamlined Filing Compliance Procedures applicable to the taxpayer’s situation.
Q2. What is the objective of the OVDP program in light of the modifications made in the notice and the expansion of the Streamlined Filing Compliance Procedures?
IRS Answer. The programs have the same objectives as the prior programs to bring in taxpayers with undisclosed foreign accounts and assets, including those held through undisclosed foreign entities to avoid or evade tax into compliance with the tax law of the U.S. and related laws.
Q3 What is different about the modified procedures, i.e., how do they differ from the IRS’s longstanding voluntary disclosure practice or the 2009 OVDP and 2011 OVDI?
IRS Answer. Voluntary Disclosure is a longstanding practice of the Criminal Investigative Division of the IRS. It processes and reviews “completed” voluntary disclosures in deciding whether to recommend to the Department of Justice (DOJ) that a taxpayer be criminally prosecuted. When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice for any issue relating to tax noncompliance or failure to file a Report of Foreign Bank and Financial Accounts (FBAR report, Form TD F 90-22.1). The Department of Justice will exercise final authority with respect to the recommendation. It is also possible that an AUSA may wish to proceed with a criminal case or grand jury investigation in certain instances.
The current OVDP is a “counterpart” to the CID’s general Voluntary Disclosure Practice. Like its predecessors, the 2009 OVDP, which ran from March 23, 2009 through October 15, 2009, and the 2011 OVDI, which ran from February 8, 2011 through September 9, 2011, the current OVDP addresses the civil impacts of a taxpayer’s voluntary disclosure of foreign accounts and assets by defining the number of tax years covered and setting the civil penalties that will apply. Unlike the 2009 OVDP and the 2011 OVDI, there is no set deadline for taxpayers to apply. However, the terms of this program may change at any time, e.g., changing the amount of penalties to be impose or eligibility to be included in the program, or terminating the program entirely.
Q4. When should a taxpayer make a voluntary disclosure (under the OVDP)?
IRS Answer. U.S. taxpayers owning undisclosed FFIs and assets, including through undisclosed foreign entities, make a voluntary disclosure with the express purpose of becoming compliant, avoid substantial civil penalties, and generally to hope to eliminate the risk of criminal prosecution for all issues relating to tax noncompliance and failing to file FBARs. See FATCA, FFI reporting under §6038D, exchange of information under tax treaty or TIEAs.
Were a taxpayer to bypass the OVDP filings and simply file amended returns or file through the Streamlined Filing Compliance Procedure in a “quiet disclosure”, the Service cautions in the notice that such actions do not do not eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.
Taxpayers who do not submit a (formal) voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.
Q5. Where a taxpayer doesn’t file under the OVDP what civil penalties is the taxpayer subject to?
• FBAR Failure to File Penalty. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully (knowingly or perhaps even recklessly) failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance of the FFI per violation. 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
• Violation of Section 6038D. Starting with respect to 2011 income tax returns, Form 8938 requires a taxpayer to report his interest in cerain FFIs, certain foreign securities, and interests in foreign entities. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
• Violation of Sections 6048 or 6039F.
o U.S. transferors of funds and other property to and owners of foreign trusts and certain other persons must file information returns under §6048. See also §§6048(d)(2), 6048(d)(4). A trust is a “foreign trust” unless a U.S. court is able “to exercise primary supervision of the trust’s administration” and a U.S. trustee has “authority to control all substantial decisions of the trust.” See §§7701(a)(30)(E), 7701(a)(31)(B). The reporting concerns three types of taxpayers: (i) U.S. persons who create or transfer property to a foreign trust; (ii) U.S. persons who are “grantors” of a foreign trust under the grantor trust provisions; and (iii) U.S. beneficiaries in receipt of distributions from foreign trusts. See §6048(c). The information required to be reported must be on Form 3520 (Annual Report to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) that is filed with the individual taxpayer’s U.S. income tax return. Separate filings are made with respect to each foreign trust. See also Form 3520-A (annual return by grantor of foreign trust). A “responsible person” must file a notice of a “reportable event” on Form 3520, such as the “creation of” a foreign trust, a U.S. person’s transfer of “money or property (directly or indirectly) to a foreign trust” whether this transfer occurs during the transferor’s lifetime or at death; or the death of a U.S. citizen or resident if the decedent was the owner of any portion of a foreign trust under the grantor trust rules or the decedent’s gross estate includes any portion of a foreign trust. See §679.
o A U.S. person (other than certain §501(c)(3) organizations) who receives purported gifts or bequests from foreign sources in excess of $10,000 per year (as indexed for inflation) is required to file a report of having received the gift in accordance with §6039F. See Rev. Proc. 2011-52, 2011-45 I.R.B. 701, §3.35 ($14,723 threshold for reporting (aggregate) foreign gifts/indexed for inflation)).
The penalty for the failure to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35% of the gross reportable amount, except for returns reporting gifts, in which case the penalty is 5% of the value of the gifts per month, up to a maximum penalty of 25% of the gifted amounts.
A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5% of the gross value of trust assets determined to be owned by the United States person.
• Violations of Section 6038 and 6046. A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under §§ 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
• Violations of Sections 6038A and 6038C. A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
• Violation of Section 6038B. A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under § 6038B. The penalty for failing to file each one of these information returns is 10% of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
• Violation of Section 6046A. A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under §6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
• Civil Fraud. Fraud penalties may be imposed under §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75% of the unpaid tax.
• Failure to File Penalty. A penalty for failing to file a tax return imposed under § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5% of the balance due, plus an additional 5% for each month or fraction thereof during which the failure continues may be imposed. The penalty does not exceed 25% of the balance of tax due.
• Failure to Pay Amount of Tax Shown on Return. A penalty for failing to pay the amount of tax shown on the return under § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5% of the amount of tax shown on the return, plus an additional .5% for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25% of the unpaid balance.
• Accuracy Related Penalty. The Service may also impose in certain instances an accuracy-related penalty on underpayments imposed under § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20% or 40% penalty.
Q6. What are the potential criminal charges that a taxpayer may be subject to for concealing foreign assets and/or income, etc. if not accepted in the OVDP and subsequently is subject to IRS examination.
IRS Answer. Possible criminal charges related to tax matters including tax evasion or concealment of the payment of tax (26 USC § 7201), filing a false return (26 USC § 7206(1)) and failure to file an income tax return (26 § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371). There are also mail and wire fraud provisions that could be invoked. (18 U.S.C. §2).
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
Transitional Relief Under the Streamlined Filing Compliance Procedures. The announcement made by the Service as to “transitional relief” under the Streamlined Program was also published in Q&A format.
Q1. What is the purpose of transitional treatment under the OVDP?
IRS Answer. Transitional treatment under the OVDP may allow taxpayers currently participating in the OVDP who meet the eligibility requirements for the expanded Streamlined Filing published on June 18, 2014, with the opportunity to remain in the OVDP while taking advantage of the favorable penalty structure of the expanded streamlined procedures.
Q2. When is a taxpayer considered by the IRS as currently participating in an OVDP for purposes of qualifying and receiving transitional relief?
IRS Answer. A taxpayer will be considered to be currently participating in an OVDP for purposes of receiving transitional treatment if: (i) before July 1, 2014, the taxpayer has mailed to IRS CID his OVDP voluntary disclosure letter and attachments (OVDP FAQ 24) and (ii) as of July 1, 2014, the taxpayer has (a) remained in OVDP but not yet completed the OVDP certification process where a Form 906 Closing Agreement has been fully executed by the IRS; or (b) the taxpayer opted out of OVDP but had not received a letter initiating an IRS examination and enclosing a Notice 609; and (c) a taxpayer who, as of July 1, 2014, has completed the OVDP certification process where a Form 906 Closing Agreement has been fully executed by the Service will not be considered as currently participating in an OVDP and is ineligible for transitional relief treatment.
Q3. What is the outcome under transitional relief where a taxpayer made a request for OVDP pre-clearance before July 1, 2014 but has not yet made a full voluntary disclosure.
IRS Answer. In such instance, a taxpayer will not be considered as currently participating in OVDP for purposes of qualifying for transitional treatment unless, as of July 1, 2014, the taxpayer has mailed to IRS CID his voluntary disclosure letter and attachments as described in OVDP FAQ 24. Therefore a taxpayer who makes an offshore voluntary disclosure per FAQ 24 on or after July 1, 2014 will not be eligible for transitional treatment under OVDP despite the fact that he may have made a request for OVDP pre-clearance prior to July 1, 2014.
Q4. Can a taxpayer qualify for transitional relief where he submitted an OVDP disclosure prior to July 1, 2014 but the case was removed from OVDP by the IRS?
IRS Answer. In such instance, i.e., where a taxpayer’s case has been removed from the OVDP by the IRS, the taxpayer will no longer be eligible for transitional relief.
Q5. What is the effect if the taxpayer files and receives transitional relief treatment?
IRS Answer. Where approved by the IRS, taxpayers currently participating in the OVDP who meet the eligibility requirements under the Streamlined Foreign Offshore Procedures will not be required to pay the Title 26 miscellaneous penalty prescribed under the OVDP to continue participation in the OVDP but instead will be subject to the miscellaneous offshore penalty terms of the Streamlined Domestic Offshore Procedures.
Q6. How does a taxpayer obtain transitional (relief) treatment?
IRS Answer. The response is that the taxpayer is not required to opt out of the OVDP to receive transitional relief treatment but must provide to the IRS: (i) if not already submitted, all submission documents required under the voluntary disclosure program in which the taxpayer is currently participating, e.g., 2009 OVDP, 2011 OVDI, and 2012 OVDP; (ii) a written statement in proper certification form required under the Streamlined Filing Compliance Procedures signed under penalty of perjury certifying his non-willfullness with respect to all foreign activities/assets, specifically describing the reasons for the failure to report all income, pay all tax, and submit all required information returns, including FBARs, and if the taxpayer relied on a professional advisor, the name, address and phone number of the advisor and a summary of the advice, and (iii) full payment of tax, interest, and any accuracy-related, failure to file and/or failure to pay penalties that would be due under the OVDP, if not already made.
The required information must be provided to: (i) the IRS examiner currently working on the taxpayer’s OVDP; (ii) or if there is no current examiner working on the taxpayer’s OVDP, send the information to the Austin OVDP Unit at: Internal Revenue Service Offshore Voluntary Disclosure Unit– Streamlined Waiver Request, 3651 South IH-35, Mail Stop 4301 AUSC, Austin, TX 78741.
Q7. Is transitional relief treatment automatic?
IRS Answer. As you may have expected, the IRS response is “No”. The IRS must agree that the taxpayer is eligible for transitional treatment and must agree that the available information is consistent with the taxpayer’s certification of non-willful conduct.
Q8. How will the IRS process the request by the taxpayer for transitional treatment.
IRS Answer. Each request for transitional treatment will be reviewed to determine whether the taxpayer is eligible, the taxpayer’s certification of non-willfullness is complete, and the information available is consistent with the certification. The examiner assigned to the case will make an initial determination and the manager of the examiner must agree. A central review committee may also review the determination. In central review committee situations, the examiner is required to document the facts and rationale for the determination, document the taxpayer statement of facts, and prepare a summary of the case. The central review committee will review the file, etc., and the examiners determination and rationale to determine if it is consistent with other determinations made across the IRS.
The central review committee, upon completing its review, will advise the examiner of its concurrence, non-concurrence or additional actions required to process the request. The decision of the central review committee is final and may not be appealed. There are no appeal rights within the OVDP in general, including transitional treatment. Where the IRS does not agree that the taxpayer is entitled to transitional treatment, the case remains governed with the OVDP. Where the OVDP miscellaneous offshore penalty is unacceptable to the taxpayer, the taxpayer may opt out of the OVDP and choose to have the case resolved in an examination process.
Q9. Where a taxpayer files for and receives transitional treatment, how will the rest of the OVDP case be handled or affected?
IRS Answer. All other terms of the OVDP in which the taxpayer is participating in will continue, including, but not limited to: (i) the OVDP disclosure period, which remains the same; (ii) an executed Form 906 Closing Agreement is still required; (iii) payment of accuracy-related, failure to file and/or failure to pay penalties, if applicable, are required; and the (iv) the alternative mark-to-market PFIC computation will continue to be made available.
A Few Comments
The real question with all this transition treatment “stuff” is whether the Service will be able to thoughtfully and correctly determine in each instance, and from a policy standpoint, on a consistent basis as well, what is “willful” evasion and what is only “non-willful” evasion. Does motive and “evil intent”, otherwise not necessary to obtain a felony conviction for tax evasion or false return, or a civil fraud penalty, enter into the picture? What about “willful blindness” or “recklesslessness”?
It seems that under this program, it is the taxpayer and the party submitting the affidavit (instead of the government in a civil fraud case (“clear and convincing evidence”) or criminal case (“beyond any reasonable doubt”) that will have the burden of proving and persuading the Service’s examiner or CRC review, that he was “nonwillful” in his noncompliance (evasion).
Given this burden of proving “non-willful”, does the taxpayer take any risks by trying to file for non-willful status? The answer presumably is “yes”. In many instances, willful blindness or even reckless disregard for rules and regulations may be sufficient for penalizing a taxpayer, perhaps, in some instances it may be sufficient for an adjudication of guilty in a criminal tax case. Consider whether a taxpayer who checks the box “no” as to not having foreign bank accounts on his income tax return(s) can be considered as acting “non-willful” under the transitional relief or under the Streamlined Filing procedure. But it would seem that in many if not most instances, non-compliance in the offshore bank account situation will include an erroneous check of “no” on the foreign bank account question. Perhaps its only the uninformed heir of a foreign bank account held by a grandparent or a foreign trust for many years and then is distributed to such U.S. individual will satisfy the “non-willful” standard. Another illustration of the type of “non-willful evasion” that would qualify for transitional treatment could be a dual citizen who never lived in the U.S. and was completely unaware of the FBAR and other filing requirements and reported his offshore bank account interest income to his home country. But what if such person paid no tax at all on the account? Does that make such person’s failure to comply with his home state’s tax law evidence of “willfulness” for transitional relief.
Another question is undoubtedly going to surface and that is “what is the harm in applying if I am rejected for transitional relief”? Well, for starters, what about the “false statements” provision in the Code, §7206?. If a false affidavit is submitted, at least in the eyes of the Service, does this increase the likelihood of a criminal investigation and recommendation for prosecution? What if there is other evidence from bank personnel and accountants, lawyers, etc. over there in Europe who heard incriminating statements made by the taxpayer. Bringing those parties forward to rebut the statement of “non-willfullness” may have an adverse consequence to the taxpayer. It should….in other words, the non-willful statement should not be construed to invite self-serving statements of contrition when the Service wants to know if the taxpayer was innocent or unknowing of his responsibilities. Just hearing the sales pitch from foreign bankers and investment advisors on avoiding (evading) US tax should be enough to dissuade someone from seeking “non-willful” status. Shouldn’t it? Oh, before we end, what if the lawyer advising the client has reason to belief the client knew he was violating the law but has him sign the affidavit hoping the qualify for leniency? Well, the prudent advisor would never do that would he? Consider, nevertheless, §7207 (submission of false document).
This posting is solely made for informational purposes only and is not intended in any way to constitute the rendering of legal advice to the reader. Please consult with your tax counsel if you have any questions as to the government’s new notices.