Thursday, July 7, 2011

Do Amended Returns Submitted under OVDP 2009 and OVDI 2011 Really Have to be Complete and Accurate? (7/7/11)

The answer, as you might suspect, is yes.

FAQ 7 says (in part):

• Provide complete and accurate amended federal income tax returns (for individuals, Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts).
Some have read that perhaps this really means that the amended returns need to correct only erroneous reporting or failure to report with respect to the U.S. tax noncompliant foreign accounts and foreign assets, so that other errors unrelated to foreign noncompliance (e.g., ommitted domestic income, erroneous deductions, etc.) do not have to be corrected.

My cut is that any amended returns submitted (whether signed or not) have to be correct and complete until and unless the IRS publicly says that correct and complete does not mean correct and complete for the program and that incorrect and incomplete amended returns will be accepted as correct and complete if the U.S. tax noncompliant foreign accounts and assets are reported correctly even if there is other uncorrected noncompliance.  (I can't imagine the IRS announcing that, but that is its choice; in the meantime, I think great risk would be taken to submit incomplete and incorrect amended returns.

Note in the foregoing regard that, even if you can get the agent to accept unsigned returns for processing (I understand that has happened), submitting the unsigned returns with the representation (express or implied) that they are correct and complete could still raise the specter of 18 USC 1001.

And, of course, it goes without saying that amended returns submitted in hopes of making a quiet disclosure must meet the correct and complete requirement of the jurat on the return.


  1. Jack,
    I agree 100% with this. To confer I can state that during my 2009 OVDP process the Kovel CPA and my attorney called me a number of times while preparing my amended returns. Almost all the questions asked of me had to do with non offshore issues. Clearly they were making sure the entire amended returns were accurate and complete. All the offshore information was input by the attorney and CPA as they obtained the records directly from the bank. I have no clue how closely IRS looks at the non offshore issues. It would be tragic to be thrown out of voluntary disclosure if IRS found issues that proved to be wrong. It could open the door to a bad outcome. I do not think you can understate the seriousness of complying with the program 100% even though IRS sometimes seems to make up the rules as they go. As disclosers we are at their mercy. At least it felt that way. Also note that in the final 906 IRS reserves the right to look again at non offshore issues. Great post.


  2. Jack in your experience, if no omissions are made but there are minor math errors in the calculations within a 100$ then would that be considered inaccurate and the whole submission rejected?

  3. Hi All, Do we need to submit all original schedules forms (itemized deductions etc.) as a part of package? I thought we need to submit the original return (1st 2 pages of 1040 form) and any modified schedules like Schedule B for added interest etc.

    I somehow have lost my 2003 return and was planning to order a transcript from IRS. Can I use a transcript to amend my 2003 return as part of OVDI?

  4. complete and accurate or not -- it is your best understanding (certainly forget accounts with major holding is more a willful act -- may lead to criminal prosecution). otherwise, i don't see any reason for IRS to reject package with minor mistakes. They ask you to redo your return.

    Kick your out from OVDI would not make IRS easier as well. How much effort and money/time they would have to spend to take you to court ?

    It seems to me the opt option is more on the taxpayers side..

  5. I have all returns of previous years in PDF format. Howover, I don't remember when did I efile or mail the forms (for some years I efiled and other years I snail mailed).

    Hence I don't remember the day I signed the original forms.

    Can I just take print out of those PDF, leave them unsigned then create 1040X and sign 1040x ? Or should I also sign the original 1040 printouts (taken from PDFs) ? Any suggestions ?

  6. i think original 1040 is for reference for OVDI processing. no need to sign at all. 1040x is your new return -- that must be signed.

    IRS should have all your previous filed forms anyway..

  7. I have a question about an account for which I cannot get a statement. Can I just use approximation with explanation on how I arrived at that ? Amount is under $1000.

  8. Jack and I were discussing a situation where a client in the OVDI has some domestic tax issues that may need to be "cleaned up" also. The question is whether the offshore disclosure should also include the domestic issues.

    Somewhat surprisingly, the OVDI FAQs are silent on this issue. There are a few fine points to work through, but I agree with Jack's conclusion that the offshore disclosure should include the domestic issues.

    I don't think that a client would be well-served to take the position that an offshore disclosure under the OVDI should only be limited to the offshore noncompliance. As Jack mentioned above, a client should not sign amended returns that the client knows to be incorrect or incomplete. Moreover, one of the conditions for the client's participation in the OVDI is that the disclosure be truthful and complete. I would not advise taking the position that the offshore disclosure was truthful and complete, and that the condition of truthful and complete is only limited to the offshore context and not the domestic issues.

    It is also important to keep in mind that disclosing the domestic issues will allow the IRS a greater look back period. Normally, the IRS can go back three years in an audit. Within the context of the OVDI, however, domestic issues as far back as 2003 (like the offshore issues) are now subject to IRS scrutiny.

    As part of the OVDI, taxpayers are required to sign IRS Form 872 which extends the Statute of Limitations back to 2003. This Form 872 extension is a "general" waiver and is not limited to the offshore issues alone. In addition, the Form 906 which is the Closing Agreement that completes the voluntary disclosure, includes the following language:
    "this closing agreement does not prevent the IRS from auditing taxpayer for the years 2003 through 2008 and proposing adjustments unrelated to offshore financial arrangements".

    The bottom line is that if you are cleaning up offshore noncompliance via the OVDI, you should also clean up any domestic tax noncompliance as well.

  9. I had a question about which asset statements to include in the OVDI package. Hope this is the correct thread for this question:

    Hello all -

    Does anyone know if we need to submit asset statements for the assets that we interpret to be tax compliant with the OVDI package (step 3)? What if the agent reviewing our package deems it to be tax non-compliant? There are a number of open questions about what happens to assets that are purchased using after-tax money that was deposited into a foreign account that is non-compliant (FBARs not filed and interest income, however small, not declared due to oversight)?

    Also, what if there was rental income, but it was completely offset by mortgage interest and HOA dues, resulting in passive activity loss for all years covered by OVDI?

    In general, should asset/account statements be included for all assets, even those that we interpret to be tax compliant (but the IRS can interpret them otherwise)?

  10. Interesting points. I just assumed that when I did the OVDP amended returns that all issues needed to be corrected, domestic or international, if required. And that is what I did. In fact, before I produced the long laundry list of documents they wanted which included copies of the recently filed 1040x, I went through the effort of re-auditing all my work again to assure that any mathematical errors or omissions/additions were reported. I found a few mistakes I had made, and I reported those with the information which was sent in for the audit. All those adjustments in the IRS or in my favor went into the final tax adjustment form 4749A.

  11. Hi All, For Itemized deductions that we did in 2005, 2006 - do we need to have the receipts etc. to back up those deductions. We have been keeping receipts usually for the last 3 years per statute of limitations. Do you folks expect that IRS will audit minor itemize deductions ($15-16K when standard deduction was $10.3K) in details for past 8 years?

  12. I don't think that the IRS will do a full audit of the amended returns and therefore will focus only on those things which appear out of line. Indeed, even for the OVDI items that will be scrutinized, I suspect that the agent's incentive to dig deeper will be related to what appears out of line. As with amended returns under the regular IRS voluntary disclosure practice, it is important that the amended returns (and, in the case of OVDI, the entire package submitted), be done professionally and in a way which suggests that deploying audit resources on these amended returns (and the rest of the package) is probably not a good expenditure of the IRS' limited resources.

  13. Jack, I agree with your last comment that the Revenue Agent will likely not conduct a full audit of the amended return. Agents have told me that their review "does not constitute an examination", but rather a "verification" of the data provided by the taxpayer on the amended return (e.g., checking the foreign income against the foreign bank statements, but not going line-by-line down the return).

    Nevertheless, some agents scrutinize the amended returns more than others. If the amended returns are prepared correctly - and they should be, of course - then they should be able to withstand extra scrutiny. In some cases, the extra scrutiny may be an opportunity to argue for additional credits/deductions for the taxpayer.

  14. Sounds to me that they are trying to avoid the OVDI review being considered an examination for purposes of Section 7605(b). That subsection provides:

    (b) Restrictions on examination of taxpayer. No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.


    If that is correct, then the scope of the review -- certainly for non-OVDI matters -- should be even lighter than a normal audit.

  15. I think that is correct. Also, an "examination" may give rise to greater taxpayer rights, the right to an appeal, for example. As we know, there is no appeal within the context of the OVDI.

  16. i made capital loss in 2003 (due to dot com bubble). i lost all the docs (most in 1999/2000). but i still had the detail price (paid and sold). just wonder if they would ask me to provide these. The trade company has also been out of the busniess. there is no way I can get docs.

    i guess the only thing they do not allow me to use it as loss -- certainly this is not a case of cheating/fraud.

  17. ------- PETITION on CHANGE.ORG ---------------

    Reduce unfair penalities in 2011 OVDI filings (FBAR)
    I just signed the following petition addressed to: IRS.

    Reduce unfair penalities in 2011 OVDI filings

    Unfair penalities are mainly affecting middle class immigrants who have accounts oversees and wants to come clean. The current penalities of 25% on accounts with aggregate balance over $75000 is unfair and is making a lot of immigrants not participate in the program. There is no cheating involved here, just the fact that they did not know about the obscure FBAR filing deadlines and tax implications.

    IRS 2011 Offshore Account Voluntary Disclosure is the last best chance for people who have offshore accounts, but did not know all the complicated rules on filing FBAR's yearly, to come forward and rectify the mistakes.

    Many immigrant taxpayers, for instance, inherited accounts established decades ago and were simply unaware of the FBAR requirement applicable to an account that they never even set up. To presume that such a taxpayer willfully disregarded his FBAR obligation is wrong and unfair.

    I encourage IRS to consider the following Immediately:


    2. Reduce the penalities so that more immigrants can come forward

    3. Increase the aggreate balance requirement from $75,000 to $150,000 for 12.5% penality from the current 25% penality

    4. EXTEND the FILING DEADLINE from Aug 31, 2011 to Dec 31 2011

    [Your name]

  18. Need some urgent advise please. My taxpayer sent OVDI package two months back and we did not correct domestic tax issue. My domestic tax issue correction will result in an additional tax of < $3,000. We were completely unaware of this aspect (I wish my taxpayer had advised me of the opportunity to fix that minor domestic tax issue).

    Can we send an updated / corrected package before the deadline, with an honest explanation that we did not think that domestic tax issues can also be packaged along with the offshore tax issue? Again, honestly, I did not know.

  19. "Can we send an updated / corrected package before the deadline, with an honest explanation that we did not think that domestic tax issues can also be packaged along with the offshore tax issue? Again, honestly, I did not know."

    Did you find an aswer to you question. I am in almost simmilar situation. What did you do?

  20. To last two anon posters,

    Every time when you sign your return, it is all based on your understanding/knowledge/belief as truthful. When you find out problem later, you can always amend/correct as long as you do it before IRS finds out.

    I do not see any problem if you want to correct your package after submission and I have revised mine a couple of times, and I am not sure it is still 100% accurate, but I can only assume it is based on my understanding/knowledge/logic/

    Nothing to worry about it...

  21. @ Anonymous said... October 26, 2011 12:25 AM

    Nobody can really give you a perfect answer. Personally, I am also unsure about a couple of items I submitted in my package and have noticed things I want to correct.

    Based on Jack's and my own tax lawyer's read, IRS is not looking for foot faults but for a good faith submission. I had called the OVDI hotline regarding my own issues and they told me that a good faith submission will be accepted. They advised me to wait until an examiner is assigned and bring it up with the examiner. Thats what "Just Me" who participated in OVDP 2009 ended up doing as well.

    The risk you run with sending in continous amends is (i) increasing your profile (ii) Confusing the IRS as you have not asked for an extension but and are now submitting additional documents.

    I would really wait until an examiner is assigned.

  22. ij,

    You sent amended returns several times. Each time you were sending in some updated returns did you sent corrected returns or amendeded of already amended, even though not processed.

  23. "You sent amended returns several times. Each time you were sending in some updated returns did you sent corrected returns or amended of already amended, even though not processed. "

    Yes, my first package was sent out in April. just two days later I found out that in one year, I misplaced a working copy of 1040X form which was not complete but signed. So I sent the corrected one right away with a letter of explaining

    Then in Jul/Aug. I learned that I should do PFIC way for mutual funds, so I made my 2nd corrections. All 8 years of 1040X were updated. I am sure it is far from perfect, but I did my best, and let IRS to have a final say --

  24. ij,
    Still no word from an examiner I presume? That is about 8 months from submission. I would think that an April submission would be one of the early ones. Of course there were some 3000 late OVDP applicants that got defaulted into OVDI. I hope you get resolution soon and I hope it is a good result for you.


  25. Anon123,

    Thanks, mine was early submission, but the corrections was done rather late. So I might not be on the April entry list.

    I think the tax part has to be done by end of 2012 as we all sign the form to let IRS to assess tax for earlier years (extension to the end of 2012). I think the tax part may take time for accuracy. The penalty on base is painful but easy part (we all know the peak value of offshore in the 8 years).

    As some have said, it is not only the money loss, also valuable time, for me if it is two years, that is almost my 10% of remaining life gone. Without this issue being resolved, it is such an uncertainty in life.


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