Wednesday, January 4, 2012

Protecting the Refund Statute of Limitations for those in OVDI (1/4/12)

I state the issue of this blog in layman's terms first.  The issue is whether the statute of limitations for refund claims might upset the normal expectations of persons entering the OVDI program.  The answer to that question is perhaps.  I will try to explain more detail below, but the problem is the way the tax statutes of limitation work.  Just as the statute of limitations may prevent the IRS from assessing tax that might have otherwise been due for a year barred for assessment, so the statute of limitations prevent the IRS from refunding a tax paid for a year barred from filing a refund claim.  The protective fix for the potential problem -- and it really may only be a potential problem rather than a real one depending upon future administration of OVDI and the opt out procedures -- is for the taxpayer to file a written protective refund claim (formal or informal) within the normal statute of limitations for refunds of any taxes paid pursuant to the programs or the opt out  procedures.

Let me illustrate the problem in an example.  Taxpayer A joined the OVDI program on August 1, 2011.  Taxpayer A submitted the OVDI package on September 9, 2011 (the extended due date for submission).  Along with the package, the taxpayer calculated and remitted by check the income tax, income tax penalty and interest on the income tax and income tax penalty for the years 2003 through 2010.  Pending further processing, the IRS posts the payments as calculated to the respective years pursuant to the taxpayer's calculations.  (I have some anecdotal evidence that the IRS may be doing an interim posting to the year 2007 for all amounts paid, even  if according to the taxpayer's calculations they relate to years other than 2007; let's set that aside for later consideration and just assume that the IRS posts to the years 2003 forward as the taxpayer has indicated.)  That means that some portion of the tax, penalty and interest gets allocated to tax years beyond the normal three year statute of limitations on assessment.  Although we are talking here about refunds, the statute of limitations on assessment is important because, although, inside the programs, the statute of limitations is irrelevant, if the taxpayer opts out of the program, the IRS will only be able to assess tax for the years that are otherwise open.  That means any tax allocated to years that are otherwise closed for additional assessments is, under the law, an overpayment of tax that should be refunded.

Those of you that have paid attention so far may wonder whether all years from 2003 forward are open because of the Form 872 that the taxpayer was required to execute and send in with the OVDI package (or sooner if an extension was requested).  Keep in mind in this regard, that inside the program, the statute of limitations is irrelevant; if the taxpayer wants the penalty regime inside the program, the taxpayer must agree to pay for the years 2003 forward without regard to the assessment statute of limitations; that is just the deal.  In this light, the Form 872 is relevant only if the taxpayer opts out of the civil  penalty settlement inside of the OVDI program.  Then, the taxpayer is subject to the normal audit regimen and the statutes of limitations -- both on assessment and refund -- are quite important.  So, focusing on the opt out regime, what exactly does the Form 872 do with respect to years that are otherwise closed.  I hope you have asked the question -- what the hell is he talking about?

Technically, without getting into the legal lore, the Form 872 can keep open the assessment statute of limitations for years that were otherwise open at the time the Form 872 was executed by both parties (i.e., on the date of the last signature, being the IRS's).  (Now, how many of you in the program have received back signed Forms 872; and, if so, did you make a note of the date of the IRS's signature?)  For example, this means that, although the Form 872 may state that it covers 2003, it really does not cover 2003 unless the year 2003 were otherwise open for assessment when the IRS signed the Form 872.  Now, what does otherwise open mean?  Well, it means that, in this example, 2003 would not be otherwise open unless the taxpayer had committed fraud in the filing of the 2003 year return.  This is because the statute of limitations on assessment is generally 3 years unless one of two exceptions apply -- a 6 year statute if the taxpayer omitted 25% of the gross income and an unlimited statute if the taxpayer committed fraud.  As to the year 2003, even a 6 year statute would not apply, so, as noted, the 2003 year is not open if the 2003 return did not involve fraud.  This means that, although the Form 872 purports to cover 2003 it does not unless the IRS can prove fraud by clear and convincing evidence.  And, the Form 872 also, for years it purports to cover, provides a special statute of limitations for refunds -- being 6 years after the end of the nominated extension of the statute of limitations on assessment.  That too will not apply if the Form 872 is not effective to extend the statute of limitations for assessment.

Now, we come to the statute of limitations on refunds which was the initial point of concern.  First, I review the general rules of on statutes of limitations on refunds.  A claim for refund for tax paid has to be made by the later of three years of the date the return was filed or two years from the date the tax was paid.  If the latter rule applies, the amount of the refund is limited to the amount paid in the two years.  Focusing on the 2003 year example we have considered above, this would mean that the three year prong has long since expired and the taxpayer can obtain a refund only by making a claim within 2 years of the date of payment of the tax.  The tax paid with the original return is long since outside the 2 year period.  So we are talking about the tax paid as a result of joining the program.  Remember that, along with the final package, the taxpayer was required to compute and pay the tax, penalty and interest for all years from 2003 forward.  So the tax thus paid will be subject to this rule that the taxpayer must claim the refund within two years of the date of payment.  Of course, assuming that the taxpayer correctly and computed the payment for the years (including 2003 in this example), then the taxpayer who stays in the program will not be entitled to a refund in any event.  But the taxpayer who opts out may stand to lose his refund of the 2003 taxes (if indeed the IRS applies the calculated amount to the 2003 tax liability) unless he or she claims the refund in the refund statute of limitations period (i.e., 2 years from the date of payment).  This should not be a real problem if the IRS processes the opt out in a reasonable amount of time so that the taxpayer knows that he or she is entitled to a refund in time to protect the statute of limitations by filing a claim for refund (assuming that he or she is aware that he or she needs to protect the statute of limitations).

But, what if there are delays?  What does the taxpayer do to protect his or her right to any refund that might ultimately be determined to be due on the opt out?  I suggest that taxpayers and their practitioners consider the following protective measures.

1. The ultimate protection will be to file a protective 1040X before the two year refund statute of limitations applies (2 years from the date the taxpayer paid the tax, penalty and interest pursuant to the OVDI program).  This would be appropriate for years where the statute of limitations on assessment is otherwise closed on the date the Form 872 was signed by the IRS.  This will require that the practitioner at least think about the possible application of the exceptions to the normal three year statute of limitations periods on assessment.

2. A fall back position would be for the taxpayer to submit within the two year period a formal writing stating specifically that, in the event settlement acceptable to the taxpayer is not otherwise reached, the taxpayer claims any refund that he or she is entitled to for the years covered by the payments.  The IRS and courts will generally recognize some written documents in the IRS files that clearly show the taxpayer was claiming a refund.  A protective 1040X would be the best protection, but a straight-forward letter making the claim protective would probably work.  (Taxpayers pursuing this alternative should seek the guidance of an attorney in drafting the letter to pursue this opportunity.)  This type of letter could be submitted at any time before the refund statute of limitations closes.

3. Finally, if the taxpayer does neither of the above (or some reasonable equivalent), the taxpayer could always argue that the nature of the  program as reflected in the IRS's public pronouncements and in the written communications between the IRS and the taxpayers contemplated that, upon opt out, the taxpayer would be refunded the tax, penalty and interest for otherwise closed years.  Of  course, a taxpayer advised of the risk should take one of the two measures noted above and not have to try to rely upon the gambit in this third paragraph, but if it is all you have, go for it.


  1. Jack,

    Thank you for this. This is an important factor for anyone considering opt out.

    As I am not a tax professional, I wonder what you mean by a "protective 1040X". If a taxpayer has filed a 1040X and paid the taxes on Sept, 9, 2011 as part of the OVDI submission, does that mean the same or another 1040X has to be filed before Sept 9, 2013?

  2. Geeze. There is always some "gotcha" with these guys!!

    Thanks for posting this Jack and taking the time to work through the scenarios. It has me thinking if my OVDP 906 reconciliation refund might be in jeopardy related to these issues, as the date of my overpayment of taxes in years 2003,2004, and 2005 is approaching 2 years ago now as of January 20,2010.

    If I read you right, the Statue of limitations for refund runs out on Jan 20,2012. I better do something on this issue and not just passively wait until February as suggested by my TAS Case Officer.

    Thanks for drawing my attention to the issue. I do not understand what a "protective 1040X" would be, as I have already filed 1040X, but think I will follow your advice on item number 2. Although, I would have to think my previous correspondence to my Examiner should have covered that, but...humm. I would probably would be foolish to just assume that they will do the "right" thing and refund my money without using the refund SOL as an excuse to keep it. If they do that, then SOL takes on a new meaning. :) Now just to find the right address to write to.

  3. Jack,

    This is extremely helpful for anyone who is wondering whether to opt out and whether tax money from a 'closed' year would be refunded.

    What about FBAR penalties on opt out ? The IRS asked for an extension on those as well, but on opt out, I presume one would go back to the normal SoL, which means that 2003 and 2004 would be closed. However, 2005 does not close till June 30th this year. If the opt out happens after June 30th, is 2005 still open for the IRS ? I assume so.

  4. 'Just Me', your situation might be somewhat different. You already signed a closing argument, so I think in that case, the original SoL may not apply.

  5. To Anon5% @ January 4, 2012 7:46 PM

    The 1040X that you filed inside the program (i.e., with the OVDI package) was a 1040X reporting additional tax for years 2003 forward. Inside the program, the IRS can accept and apply that tax and related penalty and interst pursuant ot that 1040X. However, if the taxpayer opts out, then the IRS can apply that 1040X only if the statute of limitations is open; if the IRS applies the tax to a year that is closed, the taxpayer is entitled to have it refunded (except perhaps -- and this is a really esoteric point -- in those cases where the IRS had the money before the statute closed, which is not the case here). So, in order to have that tax refunded the taxpayer would have to file a further 1040X claiming the refund. (By the way, the 1040X operates as a claim for refund when it shows an overpayment.)

    As I suggest in the body of the blog entry, however, the taxpayer might consider with his counsel a shortcut to 1040Xs claiming refunds a letter to the IRS stating clearly in writing that, in the event of an opt out and the application of tax (including penalty and interest) to otherwise closed years, the taxpayer states clearly that he or she should obtain a refund. If this approach is taken, I would take extra steps to assert that it is a claim for refund (e.g., put in caption and bold-face, etc.).

    Another option is to put a tickler out to address the issue 23 months after the payments were sent in under the OVDI program. By that time, I suspect, most OVDI cases will have been resolved either inside the program or, on opt out, outside the penalty program, and the right to any refund would have been resolved with the resolution of the case. It is only critical for those cases that drag on beyond the 2 year refund limitatiion period.

  6. To Just Me @ January 5, 2012 2:17 AM

    I don't think you have to worry about any refund that is reflected as due in the 906. That would be sufficient writing to constitute at a minimum an informal claim for refund that the IRS and the courts would likely honor.

    See my prior comment about the 1040X which can be a claim for refund.


    Jack Townsend

  7. Interestingly, with respect signature of Form 872 by the appropriate IRS official, we were informed, in at least one 2011 OVDI submission, that the IRS would not sign the Form 872 submitted with the OVDI packet because it contained years that were already closed according to his manager! That IRS group stated that the Form 872 was to be included in the OVDI packet only for that OVDI tax years that were still open. Sort of wild considering the IRS OVDI website includes a template form 872, which includes all years back to 2003 and makes no mention of this conclusion. But apparently they are sticking to this position (at least for now). At any rate, I thought I would share.

  8. Joe, thanks for your experience on this. The truth is that the Form 872 is relevant only for the opt outs (people who accept the OVDI penalty regime will pay regardless of the statute of limitations). And, the all-inclusive years on the standard form for the consent on the web site covers early years that, in most case probably are not still open.

    Now, I suppose what he is saying is that the taxpayer should have modified the Form 872 to include only years otherwise open (in the taxpayer's judgment). Since few taxpayers would admit fraud (don't need to in the program and should not on an opt out), most taxpayers had they known to modify the consent would have included only 3 years as of the date they sent it in (and even one of those years could drop off by the time the IRS signed it).

    But, I think that a court called upon to interpret the Form 872 including all years since 2003 would probably say that it covered only those years that were open at the time the IRS signs the Form 872 and that the other years are barred even though they are included in the Form 872.

    Thanks for your comments.


  9. Jack

    Do you have any thoughts on the FBAR SoL under opt out ? I think it would apply to all years that were open when the form was signed by the taxpayer even if 2005 or 2006 become closed by the time of opt out.

  10. To Sleeper @ January 5, 2012 2:36 PM I think the Form 872 would be valid only when the IRS signs it. So, it would cover only years for which the statute of limitations on assessment were otherwise open on the date the IRS signs.

    The statute of limitations on refunds is different. But, the Form 872 provides that, for periods which it covers (i.e., the open years when IRS signs), the taxpayer has an extended period for claims for refund. But, keep in mind that the 2 year period will still likely apply.

    Jack Townsend

  11. Jack

    Thanks for your response, but I wasn't asking about Form 872 for the tax penalties, but about the FBAR penalty. There was an ad-hoc form to extend the SOL for that too (and the IRS did not countersign and send it back), and I was wondering whether on opt out, all years open at the time the OVDI participant signed would remain open, or only those that are open at the time of opt out e.g. for a person who opted out on July 1st 2012, 2005 would also be closed.

  12. I don't think there is definitive information about the effect of an extension of the statute for the FBAR. In contrast, as to the Form 872, the Code specifically allows the consent to extend and there are plenty of cases and other relevant information defining how it works. There is none of that for the FBAR penalty. So, I think the answer will be that general common law concepts may apply. I am not an expert on general common law statute of limitations concepts, but I seem to recall that a statute of limitations can be unilaterally waived but I think the presence on the form of the place for the IRS's signature would suggest that the waiver occurs only when the IRS counter-signs. I don't think the date of the opt-out is relevant.

    Jack Townsend

  13. Hi,

    I am in the OVDI 2011. Have anybody who sent their package in May - June been assigned an agent so far?

    Thank you

  14. Anonymous January 5, 2012 6:09 PM,

    According to the update from sktaxes in Dec 1st week, all his cases applied in June'11 have got
    their closing agreements.

  15. Jack

    Practically, do you think that most people who opt out would really be able to claim a refund for tax/penalty from earlier 'closed' years ? Assume tax was due for say 2007, 2006,2005 but there is no indication of fraud or substantial understatement that would allow the IRS to collect the tax under normal SoL.

    My feeling is that in such a case, during the opt out process, the IRS would use the threat of the non wilful FBAR penalty to coerce/induce people to pay taxes due for closed years. To put it another way, if a taxpayer were to insist on normal SOL for taxes, and save save $5000, in the process, the IRS would say that's fine, we'll just charge you a non wilful FBAR penalty of $1/year (well below the 10K per account per year they could collect).

    I don't assume any evil intent on the part of the IRS here, but it seems to me they would fight hard to keep any actual taxes and interest due even from closed years, and would wield the FBAR penalty to compensate the government for any tax loss.

  16. Just a few comments. Keep in mind that this is not legal advice to your because I do not have a balance knowledge and understanding of whatever fact situation you imagine in posing your comments. These are thus just rough observations based on you very limited comments.

    1. Yes. Persons who opt out will have barred years. The barred years are all those except (i) the last three years, (ii) the last six years if there was a 25% omission of gross income (usually not the case, but could be the case), and (iii) civil fraud.

    2. Fraud would permit going beyond 3 years; substantial understatement (unless you meant by that the 25% omission)) would not. Civil fraud is a substantial burden for IRS to investigate and prove.

    3. It is not that the taxpayer will insist on the SOL. The IRS may not lawfully assess a tax for a year barred by the SOL. Keep in mind that, inside the program, you are just settling issues and the statute of limitations does not matter. Outside the program the IRS cannot lawfully assess for a barred year.

    4. I can't guarantee that the IRS will not use the egregious FBAR penalties (either willful or, in the case of multiple accounts, nonwillful), but I don't think it will. That is a risk. You need to have a lawyer help you assess that risk.

    5. Keep in mind that a person having significant risk of the willful FBAR penalty and its civil fraud counterpart for income tax should not opt out in the first place. Except in the most extreme of cases where either opting out or not opting out is obvious, you should not make the opt out decision without good legal advice specific to your facts.

    Jack Townsend

    1. Jack

      Different responder here. I think what Opter-Out was saying was that the IRS could use the FBAR penalty as a proxy for taxes in years barred by the SOL. That is what I think the in lieu of penalty is primarily intended to cover. On opt out, the IRS cannot collect those taxes, but they can ratchet up the FBAR penalty to cover 'tax loss'. In the final analysis, it is a negotiation process between the taxpayer and the IRS, and I think the IRS will try to collect any tax that might be due, even if they don't say so explicitly.

  17. Hi-

    I recall a comment with respect to the 2009 OVDP- I cannot recall if it was in writing - that if amended returns were filed and the amended return reported an overpayment for a closed tax year like year 2003, then the IRS would not pay the refund nor apply the overpayment towards another year for which tax was due. Statute of limitations was the bar.

    The IRS later sent a check for the closed year. Was this a mistake? A change in policy (doubtful)?

    I have heard that other taxpayers who filed amended returns under the "quiet disclosure" scenario also received refunds for closed years. Again, a mistake?

    Another thought - the closing agreements for the 2009 OVDP described the penalty paid as a miscellaneous penalty for year 2007 although the penalty for for the OVDP period. Might an error in treating all amended returns as part of the offshore VD as "2007" cause the IRS system to generate a refund?

    Has anyone received a refund for a closed year?

  18. OVDIunknownoutcomeAugust 6, 2012 at 12:57 PM


    I am in OVDI 2011. IRS just sent me a request for payment for the year 2008 though all payment was made and posted to the year 2007. What do I do now?

    I have not been assigned an agent yet? Jack do you have any thoughts? Should I make the requested payment and then pursue it when I am assigned an agent?

    Any help is appreciated.

  19. I would (i) send a letter in response to the IRS notice saying what you had done and that the money is there awaiting proper allocation in OVDI; (ii) I would copy that letter to the last address to which you received something from the IRS (or, if later, the address to which you sent the OVDI package); and wait.


  20. Jack - I am having a heated discussion with a government tax lawyer about the fact the SoLs need to be executed by both parties before the SoL runs out in order to be valid. We are discussing Form 872 outside of OVDI. The tax lawyer is on the side of truth and justice when it comes to OVDI so I have given him the references to this blog entry and the information in the blog entry in Federal Tax Procedures. Is there a regulation that I could cite to him that would prove this? Is there a precedent from some case? He claims to have never heard of this.

  21. The IRS tax lawyer apparently does not know what he or she is doing. Section 6501(c)(4) requires an extension by agreement which means, by definition, that it is not effective until the last party signs. Furthermore, the law is clear that signing after the statute of limitations expires cannot revive an expired statute of limitations.

    You might check the blog on the Federal Tax Procedure Blog:

    Consents to Extend the Statute of Limitations Must Be Properly Executed During Open Period (9/12/12)

    But, the truth is that this is really a noncontroversial position of the law. I cannot imagine why an IRS tax lawyer would not know it. If he or she has not ever heard of it, ask him or her to ask the next two colleagues that he or she sees and I'll bet both of them will know it. He or she will learn something.



  22. One other thing, notice the language of the consent form. It is a consent to extend the statute of limitations -- not a consent to waive the statute of limitations already expired nor the extend an expired statute. The wording implies -- consistent with the law -- that it is just an extension which presumes a live statute when it is signed. And, if the statute is not open when finally signed, the consent is meaningless as the IRS acknowledges in the memo in the blog I mentioned in the earlier comment.

    Jack Townsend

  23. Thanks, Jack. With respect to the IRS attorney, I am not going to throw the baby out with the bathwater. Maybe he did not understand me as I am not a lawyer and do not speak IRM. On the positive side, he gave me another tip which I would like to share here with people who are considering opting out. It will be obvious to you, but how would a lay person considering opting out know what I am about to say?

    At some point, if the person considering opting out feels their arguments are strong, they will likely do a calculation of potential penalties AND known penalties. Many would assume the accuracy-related penalty would still apply and be prepared to pay it. In OVDI this was an add-on penalty. Outside of OVDI it appears to be another story.

    People in OVDI who had filed previously had to amend their returns. Once one is outside of OVDI, one can argue that the amended returns are QARs (Qualified Amended Returns) and under Treasury Regulation Section 1.6664.2 and IRM relating to the timely filing of QARs, i.e., the return is a QAR if it is filed before one is contacted by the IRS, an accuracy-related penalty can be avoided. According to the regulations, the tax liability on the original Form 1040 includes the amount of additional tax reflected on the QAR.

    This can be important to know for someone considering what penalties to propose to the IRS when opting out of OVDI. Outside OVDI, with respect to FBAR penalties, there is a lot of uncertainty about how the IRM will be applied and having to participate in a possible full audit, however, the nice thing about being outside of OVDI is that you can look at the IRM and other regulations for guidance for the other penalties.

  24. The above discussion of SoL consents is great for people who are trying to understand tax assessment consents related to OVDI, but FBAR appears to be another story.

    I understand that FBAR SoLs run 6 years from the date they are due. I have two questions. One is about FBAR filing and SoL. The other is about FBAR consents.

    1) If one files an FBAR late, e.g. a 2003 FBAR is filed in 2011, does the SoL start running again?

    2) Do the same rules of "extension by agreement" that apply to tax assessment consents apply to the FBAR consents to extend time for civil penalties that one had to sign within OVDI, i.e., are they only valid if both parties have signed before the SoL has expired?

  25. Jack has referred to the possibility of the out of OVDI returns being considered as QARs, with no accuracy penalty.

    The big uncertainty is how reasonable or not the IRS (or more importantly, the individual agent) will be on opt out. Will they try and use FBAR penalties to compensate the government for tax loss in closed years (and for any accuracy related penalty) ? In ij's case, it seems they did not, but everyone has a different case, and a different examiner, so the result might be different for different people.

  26. 1) No
    2) Likely, but this is not as clearly established as it is for tax extensions. I do not believe there is any specific statutory or case law on this. In any case, I think the IRS will follow this principle

  27. FBAR statute of limitations is 6 years, both for false FBARs and for failure to file the FBAR. What that means in other contexts can only be extrapolated from other rules; hence there is no certainty. With that caveat, I extrapolate:

    1. On the assumption that the delinquent FBAR is not a false FBAR, then the statute of limitations would not start running again but would run from the original delinqencies -- June 30 of the year following the reporting years.

    2. The rules of extensions by agreement in income tax cases apply because of the way the income tax statute is worded. The FBAR provisions do not even address consents to extend. In that case, no one knows what the definitive answer would be, but I suspect that a court would likely apply the common law statute waiver rules that permit a party in whose favor the statute operates to waive the statute even after it has expired. The consent form could be read as a waiver. (Indeed, many courts refer to the income tax consent (Form 872) as a waiver, but it really isn't -- it is a mutual consent to extend the statute). On the other hand, as I noted in a recent Federal Tax Procedure Blog entry, courts will sometimes "borrow" a statute of limitations (and by exrapolation the concepts around the statute) when, as here, the specific Code section being applied appears to have no statute of limitations. See Is there A Statute of Limitations for the Section 6702 Frivolous Return Penalty (9/21/12), here:


    Jack Townsend

  28. Thanks for your response. I was aware of the QAR and everyone undertaking the process should keep that possibility in mind. You have provided a very good introduction to it. At a minimum, taxpayers opting out should have the potential for a QAR as a possibility on the table during what really amounts to a settlement discussion about penalties for the open years.

    I provide below a cut and paste of my discussion of the QAR from my Tax Procedure text book (no footnotes are included in this cut and paste):

    I mentioned earlier in discussing amended returns that there is a special category of amended return called a qualified amended return (“QAR”). The QAR permits a taxpayer to treat the amount of tax reported on the QAR as the tax reported on an original return so that the accuracy related penalty will not apply. In the example above, if the taxpayer files a QAR reporting the correct $150 tax liability after reporting only $100 on the original return, the reporting of the correct $150 liability will avoid the accuracy related penalty. QAR relief does not apply, however, as to the amounts originally underreported attributable to fraud.

    What are the circumstances in which the taxpayer may achieve the benefit of the QAR? A QAR is an amended return filed after the original due date of the return (determined with extensions) but before any of the following events: (i) the date the taxpayer is first contacted for examination of the return; (ii) the date any person is contacted for a tax shelter promoter examination under § 6700; (iii) as to a pass-through entity item, the date the entity is first contacted for examination; (iv) the date a John Doe Summons is issued to identify the name of the taxpayer; and (v) as to certain tax shelter items, the dates of certain IRS initiatives published in the Internal Revenue Bulletin. Undisclosed listed transactions are excluded.

    The QAR is a formal procedure to achieve a result in the civil penalty arena that a “voluntary disclosure” – often effected by amended return(s) – does in the criminal tax enforcement arena in generally the same relevant equitable circumstance – i.e., the IRS has not yet started a criminal investigation against the taxpayer or a related proceeding (e.g., § 6700 investigation or John Doe Summons) likely to lead to the taxpayer. These programs that permit taxpayers to avoid penalties – civil in the case of a qualified amended return and criminal in the case of the voluntary disclosure practice – are designed to encourage taxpayers to get right voluntarily with the IRS. The programs produce significant additional revenue that might otherwise escape the IRS net; in the circumstances, foregoing the penalties is consistent with overall revenue enforcement policies. I discussed the criminal voluntary disclosure policy earlier in this book.


    Do note, however, that the taxpayers within the scope of John Doe Summonses issued to banks -- at least UBS and HSBC India -- probably will not qualify for QAR relief if they joined the program after the John Doe Summons was issued (in the UBS case, that would be virtually all of them).


    Jack Townsend

  29. @JackTownsend:disqus @anon5percent:disqus

    This is just to confirm QAR. I compared my two sets of Form 4549.

    One was sent while inside OVDI, there is accuracy-related penalties under IRC 6662

    One was sent after opt-out, there is no such a penalty.

    I did not pay much attention on 4549s --- while overly worrying on FBAR.

  30. Jack,
    when you say " will not qualify for QAR relief if they joined the program after the John Doe Summons was issued", by program do you mean joining OVDI or filing amended tax returns through quiet disclosure? I have an account with HSBC India with max. amount barely $13K and I'm trying to figure out if I still quality to join OVDI?

  31. ij - You had the right focus. You also had a good agent. You did great!

  32. The UBS John Doe Summons was withdrawn. What if an account holder joins a voluntary disclosure program after a summons is withdrawn? Is the clock set back to zero for the QAR?

  33. Either. The statute which I paraphrased in the excerpts says that QARs do not work after John Doe Summons directed to the unknown taxpayer.

    Keep this in perspective though. Except for the largest taxpayers, the real hit in OVDI/P is the "in lieu of" penalty -- not the income tax which the accuracy related penalty increases by 20% (along with interest on each). In my observation, while every penny / dollar counts, it is not the tax and accuracy related penalty that draws the most angst.

    Still, saving 20% on the tax and interest does not hurt.

    Jack Townsend

  34. Thanks for your post. I just posted another comment that the real concern is the "in lieu of" and, upon opt out, the FBAR penalty. Still, every little bit helps.

    Jack Townsend

  35. But Moby was assessed (or self assessed) the 20% accuracy related penalty, although in some respects his story was even better than ij's story (only 1-2 years in the US).

    I did think the IRS would use the FBAR penalty (or the possibility of applying it) as a potential negotiating point to ensure that taxes in all OVDI years (including closed ones) and possibly an accuracy related penalty is paid by the taxpayer. In ij's case that did not happen (the IRS did not even take an offered FBAR penalty), but it likely depends on the agent, the case and the IRS opt out committee.

  36. I am not sure if Moby did end up to pay 20% accuracy penalty as he recommended in his opt-out request letter.

    I also recommended that penalty for all the open years, and plus to have FBAR penalty to cover this penalty for the closed years.

    But IRS did not take it all.

  37. Jack - What effect does a withdrawal/non-withdrawal of a John Doe Summons have on UBS and HSBC Customers?
    1) The HSBC John Doe Summons appears to still be in effect. Does it mean that HSBC India account holders will never be able to make a QAR as long as it is in effect?
    2) The John Doe Summons for Switzerland was for all US Persons holding accounts between 12/31/02 and 12/31/07. It was withdrawn on 11/16/10. Assume U.S. returns filed timely. Assume a non-fraudulent 6 year statute of limitations. If someone with an account during the 2002-2007 period files an amended return during 2012, is it impossible for it to be a QAR? If the same person files an amended return for 2010 in 2012, is it a QAR because it was filed after the summons was withdrawn?

  38. 1) Certainly, if the HSBC summons were never withdrawn, the requirements of QAR are not met. See the regulations definition below.

    2) I am not sure that the result is changed by the withdrawal of the summons. The QAR definition of John Doe is keyed to the date it is served, not whether it is ever complied with or withdrawn. Now, whether the IRS in exercise of common sense and perhaps discretion might interpret a withdrawal as is the JDS were never served, I really can't speak.

    Here is all we really know about the JDS exception to QAR relief:

    26 CFR 1.6664 - Underpayment.

    (c) Amount shown as the tax by the taxpayer on his return --

    * * * *

    (2) Effect of qualified amended return.

    (3) Qualified amended return defined -- (i) General rule. A qualified amended return is an amended return, or a timely request for an administrative adjustment under section 6227, filed after the due date of the return for the taxable year (determined with regard to extensions of time to file) and before the earliest of—

    (D) (1) The date on which the IRS serves a summons described in section 7609(f)relating to the tax liability of a person, group, or class that includes the taxpayer (or pass-through entity of which the taxpayer is a partner, shareholder, beneficiary, or holder of a residual interest in a REMIC) with respect to an activity for which the taxpayer claimed any tax benefit on the return directly or indirectly.

    (2) The rule in paragraph (c)(3)(i)(D)(1) of this section applies to any return on which the taxpayer claimed a direct or indirect tax benefit from the type of activity that is the subject of the summons, regardless of whether the summons seeks the production of information for the taxable period covered by such return;

    The 7609(f) summons is the John Doe Summons.

    I am trying to get some clarity on this and may post a blog entry on the subject if I feel that I can add something beneficial to readers.

    Jack Townsend

  39. Also, I should have mentioned that we really do know more about the QAR. Chuck Rettig has a good article on the exception to QAR relief when fraud is involded: Charles P. Rettig, A Return to Troy: QARs and the Civil Fraud Exception (2012), here:

    It really does not address the JDS issue (except to state the rule from the regulations I quoted in my earlier comment).

    Jack Townsend

  40. I recollect from Moby's timeline that he did pay the 20% (or at least did not ask for a refund). All he got was a note saying his request to opt out had been guaranteed. If he reads this, maybe he can confirm.

  41. I can only speak for myself, but even if I pay an accuracy related penalty, it is based on unreported income. It is a penalty based on the highest balance (in my case only the income was not reported) that I find unfair.

  42. Jack - Those who will opt out of OVDI need to be clear about how many years of FBAR penalties are on the table. Based on what you wrote, i.e., that a court would apply common law statute waiver rules on the consent to extend FBAR penalties, more clarity is needed. OVDI participants signed an agreement for calendar years 2004 and 2005 that states that any penalty provided by U.S.C. 5321 may be assessed on or before December 31, 2012.
    1) It appears that this means that Section 6501(c)(4) rules do not apply, so if one signs the consent in August 2011 and the IRS signs in September 2012, this does not mean that 2004 and 2005 are closed and out of consideration. Is this correct?
    2) Given an existing signed consent until December 31, 2012, if the IRS wants to request an extension of consent beyond December 31, would both parties need to sign this new consent before December 31, 2012 for it to be valid?
    3) Can the IRS request an extension of the consent for 2004 and 2005 after January 1, 2013 (after the signed consent to Dec 31 has expired)?
    Part of the reason for the confusion is that the IRS did not request consents to extend FBAR penalties for 2003, which was clearly closed when the OVDI program began in February 2011. 2004 and 2005 were open at that time. Your post indicates that under the common law statute waiver rules statute expiration does not matter if it is favorable to the IRS in this case.

  43. I think the IRS will likely say that any year that was open when the FBAR form was signed is open on opt out. And that seems like a defensible position.
    1) IRC rules do not apply to the FBAR extension since it is not a tax extensions. About your question, I don't know if the extension would be considered valid when you signed or when the IRS signs. I think 2004 would be closed in any case, and 2005 may or may not be closed.
    2) At a minimum, you would need to sign. I am not sure if the IRS's signature is actually required in this case.
    3) They can request an extension, but that doesn't mean you have to agree or that it is valid.

    I would say its all uncertain and it may take a court to resolve (in the unlikely even it goes to a court).

    But realistically speaking, the IRS has considerable discretion in applying even the non-willful penalty, including amount of mitigation, whether to apply on a per account basis or not. Even if a year or 2 drops off, they can likely ratchet up the penalty in the open years to make up the difference. Or even if all years are open, they can still waive the penalty completely, as they have done in several cases. So I would not be too obsessed about the SOL

  44. Researcher --

    Good discussion. Thanks for your comments on this blog. I am sure that readers appreciate them.

    Jack Townsend

  45. Thanks, Researcher. Your comments are very much appreciated. They are helpful for anyone planning an opt out. I think your last point is particularly true. If one has reasonable cause arguments that are valid for all years, one should not lose too much sleep worrying if the years are open or not.

  46. A
    lady posed this situation to me. She gave a gift in excess of $13000
    and wants to file 709 for the year (no taxes would be due). The form
    asks on line 11a whether you have filed 709 form previously. About 9
    years ago, she made gifts in excess of annual exemption amounts but did
    NOT file the 709 at that time (again no taxes due).

    Some practitioners have noted that if a gift tax forms were not filed
    on previous gifts it makes the current gift tax form false. However, I
    do not see that interpretation because the form simply asks whether you
    filed a 709 before - It does not ask whether you made gifts in excess of
    exemption amount and did not file the 709 form.

    Any opinions would be appreciated

  47. Thanks for sharing your valuable knowledge OVDI.

  48. with regards to the statue of limitations to claim a refund, what are re recourses when the overpayment was made due a preparer error, but it was not discovered until the statue had passed, IRS already disallowed the claim

  49. no recourses Michael when refund SOL has passed -- unfortunately case closed

  50. Thanks for the reply, I think I figuered another way to get that money back, since the overpayment was caused by preparer claiming a whole distribution from a 401K, even though half of it was a rollover, what I'm gonna do is subsequent distributions from the rollover account, I'm try to claiming as income not subject to tax, since taxes were already paid, in the first reporting, hope it's allowed...


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