Tuesday, June 26, 2012

IRS Announcement and FAQs re OVDP 2012 (6/26/12)

Issue Number:    IR-2012-64
Inside This Issue
IRS Says Offshore Effort Tops $5 Billion, Announces New Details on the Voluntary Disclosure Program and Closing of Offshore Loophole

WASHINGTON — The Internal Revenue Service today announced that its offshore voluntary disclosure programs have exceeded the $5 billion mark and released new details regarding the voluntary disclosure program announced in January, including tightening the eligibility requirements.

"We continue to make strong progress in our international compliance efforts that help ensure honest taxpayers are not footing the bill for those hiding assets offshore," said IRS Commissioner Doug Shulman. "People are finding it tougher and tougher to keep their assets hidden in offshore accounts."

Shulman said the IRS offshore voluntary disclosure programs have so far resulted in the collection of more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures made under the first two programs. In addition, another 1,500 disclosures have been made under the new program announced in January.

The voluntary disclosure programs are part of a wider effort by the IRS to stop offshore tax evasion and ensure tax compliance. This includes beefed up enforcement, criminal prosecution and implementation of third-party reporting through the Foreign Account Tax Compliance Act (FATCA).

The IRS also closed a loophole that’s been used by some taxpayers with offshore accounts. Under existing law, if a taxpayer challenges in a foreign court the disclosure of tax information by that government, the taxpayer is required to notify the U.S. Justice Department of the appeal.

The IRS said that if the taxpayer fails to comply with this law and does not notify the U.S. Justice Department of the foreign appeal, the taxpayer will no longer be eligible for the Offshore Voluntary Disclosure Program (OVDP). The IRS also put taxpayers on notice that their eligibility for OVDP could be terminated once the U.S. government has taken action in connection with their specific financial institution.

Additional details of these eligibility issues are available in a new set of questions and answers released today on the current OVDP, which was announced in January (see IR-2012-5). The IRS reopened the OVDP following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs.

This program – which helps bring people back into the tax system -- will be open for an indefinite period until otherwise announced. The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the terms of the program could change at any time going forward.

Under the current OVDP, the offshore penalty has been raised to 27.5 percent from 25 percent in the 2011 program. The reduced penalty categories of 5 percent and 12.5 percent are still available.

The IRS also announced a plan to help U.S. citizens residing overseas to catch up with tax filing obligations and assistance for people with foreign retirement plan issues. See IR-2012-65 also issued today.


I have not yet seen the FAQs and will post information and links to them when I get them.


  1. Well, I knew it was time for the Trumpets to sound again, and the standard proclamations of success to be rolled out.  I assumed it would happen before June 30th, and I hate it when they are sooo predictable.   I am sure we will have the usual assortment of Headlines, Tax Cheats come clean, again with nary a question raised about what has been happening the last 3 years. 

    Still, not to be totally cynical, I am somewhat hopeful that this is the beginning of a real mitigation process for minnows as was implied in the IR-2012-65.  

  2. I also havent been able to find the FAQ - has anyone had luck with it?

  3. See today's first blog entry at http://www.federaltaxcrimes.blogspot.com/2012/06/irs-websites-on-ovdp-2012-62712.html

    Jack Townsend

  4. From IR 2012-64:  "The IRS also put taxpayers on notice that
    their eligibility for OVDP could be terminated once the U.S. government has
    taken action in connection with their specific financial institution."

    This is a significant statement that is buried in
    the release.  If this statement is taken at its full meaning, it
    represents a very significant departure from past OVDP and OVDI practice.
     Moreover, this statement seems to be at odds with new FAQ 21.

    In the past, if DOJ or IRS "ha[d] taken
    action in connection with [a] specific financial institution", then an
    account holder was still eligible to apply for the OVDP/OVDI so
    long as the IRS had not already received account information about the
    taxpayer.  Thus, in 2009, DOJ served a John Doe Summons against UBS, but
    taxpayers with UBS accounts were still eligible to apply for the OVDP until the
    IRS received their names from UBS.

    Now, it appears from the quoted sentence that an
    "action" against the foreign bank (and "action" presumably
    would include the issuance of a John Doe Summons, or request pursuant to treaty
    or information exchange agreement), would render an OVDP application untimely.

    As a current example, DOJ recently issued a treaty request for
    banking information related to US account holders at Liechtensteinische
    Landesbank (LLB)(see Jack's recent blog post on this).  Under the new
    language, the DOJ request itself would appear to preclude OVDP eligibility for
    any US client at LLB - - even if DOJ has not yet received any LLB banking

    OVDP FAQ 21, however, seems to clarify that the taxpayer is still
    eligible until the point that DOJ or the IRS receives the banking information.
     In other words, LLB account holders can still come forward unless and
    until DOJ receives their names from LLB.

    However, there is additional new language in FAQ 21: "the IRS may
    announce that certain taxpayer groups that have or had accounts at specific
    financial instructions will be ineligible due to U.S. government actions in
    connection with the specific financial institution. Such announcements will
    provide notice of the prospective date upon which eligibility for specific
    taxpayer groups will be posted to the 2012 Offshore
    Voluntary Disclosure Program page."


    While the first part of
    FAQ 21 seems to still allow a safe harbor until the banking information is
    provided to DOJ/IRS, this new language calls the first part of FAQ 21 into
    question in certain circumstances.  The new language is also ambiguous.
     What is the "U.S. government action"?  What government
    action would preclude OVDP eligibility, while other action (e.g., treaty
    request for LLB banking data) would still allow for OVDP eligibility?
     Until what point can a taxpayer with a foreign account at a bank that is
    the subject of "government action" come forward?


  5.  Account holders have no control as to their bank's conduct with third parties (past, present, or future.)  It seems unjust that someone might be excluded from OVDI because of some outrageous conduct that the bank has taken part of with other account holders.

  6. Recent (unannounced) changes to OVDP (2012) FAQ #25

    On January 9, 2012 the IRS announced OVDP (2012) and promised: "More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program." (IR-2012-5)

    On June 26, 2012, more than 5 months later, the IRS released FAQs for OVDP (2012), announced in IR-2012-64 on the same day. When I printed the FAQs on July 9, 2012, it said at the bottom: "Page Last Reviewed or Updated: July 09, 2012". When I looked again at the FAQs on the IRS website today (July 24, 2012), the line at the bottom was unchanged, and I concluded that the document had not been changed since July 9.

    How wrong I was when it comes to FAQ #25. Here are some changes (which are not in my document printed on July 9)::"The voluntary disclosure submission must be sent in two different parts." Part 1 consists of the check and now requires information about "years to which the payment relates to". I suppose this is the IRS reaction to the mess they created by applying all (even separate annual) tax payments to the tax year 2007. I suggest you don't follow the instructions under the 5th bullet, which instructs to send the check (again!) with part 2 of the submission - hopefully this is only a clerical error.

  7. Thanks for the detective work on these changes.

    Jack Townsend


  8. I just got around to reading the 2012 OVDP FAQs and
    important changes for US persons resident abroad who enter the 2012 OVDP program
    are contained in Examples 4 and 5 of FAQ51.1. US persons resident abroad eligible for
    the 5% penalty are mentioned in the examples.

    Specifically, Examples 4 and 5 in FAQ 51.1 state, “If the taxpayer elects to opt
    out, the taxpayer will still be subject to tax and interest on the unreported
    income, but upon examination, IRS is not likely to assert accuracy related,
    FBAR and/or information return penalties.”

    Brilliant. The IRS is
    finally making clear that mitigation contemplated in the IRM can be applied
    upon opt out. They are also mentioning it with respect to an example of a US person
    resident abroad.

    Why were the OVDI 2011 FAQs not updated with this

    Why is the IRS keelhauling OVDI 2011 participants who are resident abroad? . What is the reason for the harsher policy
    toward these 2011 OVDI participants?
    These people tried to comply early on. They are left hanging, with no information and no movement on their cases.

    Finally, FAQ 51.1 in OVDP 2012 does not mention whether failure to file
    penalties and failure to pay penalties would be assessed. Since all other penalties are being
    mentioned, why are the FAQs not clear about this?

  9. Thanks for sharing your valuable knowledge OVDP.


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