Tuesday, March 8, 2011

IRS Memo re Processing OVDI Cases (3/8/11)

On 3/3/11, the IRS Deputy Commissioner for Services and Enforcement issued a memo to guide LB&I and SBSE personnel regarding the application of the penalty framework for the OVDI.  The memo is here.  The guts of the memo is this:

Effective as of the date of this memorandum for all offshore voluntary disclosures received after the close of the 2009 Offshore Voluntary Disclosure Program (2009 OVDP), you are authorized until further notice to execute agreements to resolve the tax liabilities related to offshore issues of taxpayers who make voluntary disclosure requests in the following manner:

(1) Assess all taxes and interest due for the years 2003 through 2010 (exception: for accounts opened or received within this period, assess all taxes and rnterest due starting with the year the account opened or was received). Require the taxpayer to file or amend all returns, including information returns and Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly known as an "FBAR", and all other documents set forth in the Submission Requirements. 
(2) Assess an accuracy-related penalty on all years (no reasonable cause exception may be applied), and assess failure to file and failure to pay penalties when applicable.

(3) In lieu of all other penalties that may apply, including FBAR and information return penalties, assess an offshore penalty equal to 25% (or 12.5% or 5% if the required conditions are met) of the amount in foreign financial accounts/entities and the value of foreign assets acquired with untaxed funds or producing untaxed income in the year with the highest aggregate account/asset value.

(4) If a taxpayer meets all four of the following conditions, then the offshore penalty is reduced to 5%: (a) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account); (b) has exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address; (c) has, except for a withdrawal closing the account and transferring the funds to an account in the United States, not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). For funds deposited before January 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it will be presumed that they were.

(5) If a taxpayer is a foreign resident who was unaware that he or she was a U.S. citizen, then the offshore penalty is reduced to 5%.

(6) If a taxpayer's highest aggregate account balance (including the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) in each of the years covered by the 2011 OVDI is less than $75,000, then the offshore penalty is reduced to 12.5 percent.
Examiners and their managers have no authority to negotiate different offshore penalty percentages for 2011 OVDI cases.
The reduced rates mentioned in (4) and (6) are available for the 2009 OVDI program.

For additional information on the OVDI, see the links to the right of this blog.


  1. Under the 2009 OVDP, revenue agents had the ability, pursuant to FAQ #35, to look at the penalties that would otherwise have been imposed, and compare those penalties to the 20% account balance penalty. If the "otherwise" penalties were penalties for non-willful failure to file the FBAR, i.e., $10k per year for six years, and if that $60K was less than the 20% penalty, then the revenue agent could impose the $60k penalty rather than the 20% penalty. There is no such provision in this new 2011 OVDI guidance.

  2. Jack

    The memo mentions 2010, but it seems to be a total non brainer for anyone who intends to apply for the OVDI to file a 2010 return (or file for an extension with a check to stop the interest clock), and file an FBAR for 2010 (so that 2010 would not be included in the consideration for highest balance year). Would the IRS really include 2010 in penalty calcuation in that case ? I believe they did not so for 2008 in 2009.

  3. Asher

    From glancing at the FAQ, it seems like one has the option of backing out and going back to the regular penalty procedure at the end. In that case, if non-wilfuless can be establised, then the penalty would be 10K for 6 + 3 years of amended returns. Or 10 * 5 years + 2 years of amended returns if 2010 is filed in time. This assumes no other penalties for not filing other returns and no other issues in a full examination.

    Its a tradeoff at the end, but it doesn't seem there's any harm in going in for the OVDI for someone who is otherwise eligible, since the person involved can fallback to the regular penalty regime.

    For smaller accounts, the 12.5% penalty will likely compensate for even a smaller NW penalty. For larger accounts, the NW penalty would be much smaller, but the IRS may be less willing to accept non-wilfuless. One should also add legal and other fees if the person involved wants to take this to appeals.

    The regular penalty scheme is likely to be much better for taxpayers who own assets such as real estate that have no FBAR reporting requirement but maybe subject to the penalty.

  4. Jack, I had a domestic account in country X before i came to US. Starting 2006, I started sending W2 savings into this account. No withdrawals, just deposits from US. Once money reached the savings account, I would request to create certificate of deposit. These CDs even though have a different account number, are still linked to same savings account. Now my question.
    1) Can I consider the savings account & the CDs as one account/entity as they are all linked for FBAR purposes?
    2) Will this qualify for 5% penalty as I as such did not withdraw any money but just internal money transfer into CD's or sometimes transfers into spouse account. Note: for spouse acct i understand i'll be paying the 12.5%, question is will my account qualify for 5%.


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