Thursday, July 3, 2014

Rumors on the Workings of Streamlined Programs (Including Transitioning in OVDP) (7/3/14; 7/17/14)

I thought I would pass on some rumors that are floating around about the newest OVDP / Streamlined initiative.  I will update this blog as I hear more rumors and, of course, commenters as they hear can advise by comment.  I should note in this regard that a number of commenters have already added some information / rumors about how this works in their various comments, so readers might check out comments for the relevant blog entries.

1.  One practitioner has been told that accounts that are excludable from the OVDP penalty base because there is no U.S. tax noncompliance will be included in the 5% penalty base if the account was not reported on an FBAR.  I think this is right, parsing the Domestic Streamlined announcement says:
A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered FBAR period if the asset should have been, but was not, reported on an FBAR (FinCEN Form 114) for that year. A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset should have been, but was not, reported on a Form 8938 for that year. A foreign financial asset is also subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year.
As stated, therefore, each of the following can cause the account to be included in the 5% penalty base:  (i) not reporting the account on the FBAR or the Form 8938 regardless of whether it is noncompliant (income reported and tax paid); OR (ii) gross income from the account was not reported, regardless of whether the account was reported on the FBAR or Form 8938.

And, the transition FAQ 5 says that those transitioning to the Streamlined result:
will not be required to pay the Title 26 miscellaneous offshore penalty at the OVDP rate to continue participation in OVDP, but will instead be subject the miscellaneous offshore penalty terms of the Streamlined Domestic Offshore Procedures.   
So, presumably, under straight Streamlining or transition Streamlining for the offshore penalty, the offshore penalty base will be as indicated above -- broader than in OVDP.

Those caught in this trap with a good nonwillful argument might want to consider options

2.  The transition certification will require all 8 years on the certification rather than just 3 years and that the taxpayer should indicate on the certification which accounts and years, if any, were compliant.  If true, this will require each taxpayer to modify the form for the additional years, until and unless the IRS puts out a template.  I think that those transitioning can only do so if they have submitted the full OVDP package anyway, so putting the same information into the certification form should not be that difficult.

As I hear other rumors which appear to have some credibility, I will post them.  I will make corrections, as appropriate, as new information comes forward.

Addendum 7/9/14 3:52 pm:

A frequent reader and commenter, Milan Madhani, CPA, just posted as a comment below the following from a conversation with the IRS Hotline representative, which I thought should be lifted to the blog:

1) When I asked him the question of the signatory accounts being subject to the 5% penalty in SDOP, he said, "Maybe." He said they are debating it and there would be information on that shortly. He recognized that the penalty base in SDOP could potentially be broader than that what was in OVDP, but mentioned he did not have any concrete information on this currently. He said to wait for IRS notices or just check the SDOP webpage regularly. I found this interesting.

JAT Comment on 1):  The base as stated on the web site "is equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets."  An account is not the taxpayer's account if all he does is serve as signatory with no beneficial interest.  I recognize that in the next paragraph the following is stated: "A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered FBAR period if the asset should have been, but was not, reported on an FBAR (FinCEN Form 114) for that year."  These seem to be inconsistent statements, since the signatory account needs to be reported on the FBAR.  One rule of construction of contracts and the law, is that the more specific takes precedence over the more general.  However, I think that rule applies to narrow the scope of the general rather than the expand the scope of the general.  Let's just wait and see on this one.  This could be a real disincentive to join Streamlined.  I guess the disheartening thing is that they did not have enough reviewers and decision-makers that they could not have smoothed out these inconsistencies on the front end.  I guess if there is one thing that has been true of the overall offshore account initiative to bring taxpayers into the fold is that more thought should have gone into the initial process.  But, hind sight is always better than foresight.

2) He said that no one has to necessarily "qualify" for SDOP or SFOP. Just follow the instructions and submit your returns & FBARS accordingly, along with the NW certification, penalty check, and income taxes with interest, and that would be it. There would be NO examiner assigned, NO 906 closing statement, "nada."

JAT Comment on 2):  That is my understanding / reading of the tea leaves that were on the table.  Nice to hear it confirmed.

3) Those who transition from OVDP would need approval to go into SDOP/SFOP, which most of us know, however, once granted approval, they also would NOT receive any 906 once their case is completed in SDOP/SFOP. He specifically mentioned that the taxpayer would be LEAVING OVDP were they to be granted approval to go into SDOP/SFOP. This makes sense as the taxpayer has to sign the NW certification, which would not be needed were the taxpayer to remain in OVDP and enjoy the willful protection that program provides to a OVDP participant.

JAT Comment on 3:  This is useful information.

4) It's okay to edit the NW form, for the necessary covered years. White out. write over, etc, until they get a proper editable template.

JAT Comment on 4:  Also useful.

Addendum 7/10/14 3:00pm:

A reader, pseudonym Anonymous, just posted the following that I thought would be helpful:

  • Under transition you are apparently not redoing your original submission or updating it with more recent (compliant) years.
  • The penalty base also includes tax-compliant unreported foreign accounts [this was noted above], as well as foreign stocks/bonds not held in a financial account.  [JAT Note:  I suppose this would be because they are reportable on Form 8938.  I have not researched the issue, but do have the following which is from my Federal Tax Crimes book:
[Form 8938] Reportable “specified foreign financial assets” are depository or custodial accounts at foreign financial institutions and, to the extent not held in an account at a financial institution, (1) stocks or securities issued by foreign persons, (2) any other financial instrument or contract held for investment that is issued by or has a counter-party that is not a U.S. person, and (3) any interest in a foreign entity.  The IRS interprets these terms broadly, so IRS pronouncements must be consulted each time the issue arises, particularly during the early years of implementation when the IRS’s interpretations may be in a period of flux.  The assets and foreign institutions and the maximum values during the year must be reported. ]

Addendum 7/17/14 8:45 am:

On certifying nonwillfulness in transition to streamlined, Severiano Ortiz, an attorney with Holland & Knight in Chicago, reports that:
I have spoken with several IRS agents now and reviewed several posts from other practitioners who have also spoken with various agents. A request for transitional treatment might not be as simple or as liberal as we initially thought, although no one seems to really know yet.  
The agents I spoke with informed me that the IRS is taking a more strict non-willfulness approach to requests for transitional treatment. On its face, in a type of closed world analysis, a taxpayer’s scenario is either clear as day non-willful or not so clear. If not so clear, then it’s an automatic rejection. This doesn’t necessarily mean, however, that it’s willful, so opting out is still a possibility. In an opt out, we are permitted to submit additional information, respond to agent questions and walk the client through an interview with the IRS.  In our request for transitional treatment, however, I have been informed that nothing additional will be permitted once our certified statement and request for transitional treatment is submitted. One agent even said that it is her understanding that “merely not knowing about the FBAR requirement,” alone, is not enough to qualify for transitional treatment. 
Even less sure how strict the IRS will be on those who are only now coming forward through the 2014 new streamlined procedures… Certainly the IRS can’t be as strict as it claim’s it will be with taxpayers requesting transitional treatment.


  1. Does this not then contradict what's stated in -

    Or does it mean someone filing delinquent FBARs following the information contained in the link will be assessed a 5% penalty though no taxes were left unpaid?

  2. My foreign pension in a non-treaty country was exempted from the penalty under OVDP 2012, because it looked and smelled like social security. i.e. I could not touch it or take any distributions until age 65. At age 65 the distributions will be taxable as ordinary income.
    Looks like the the people that came in earlier are being treated harsher. Makes no logical sense to treat those that came in early and are still in the OVDP worse. I have been in the OVDP for 2.5 years and I have personally paid over 150,000 in illegal and accounting fees to get to a 906. Those that come in now only have 3 years of returns and no accuracy penalties. Also I have several very large accounts that were tax compliant under the OVDP , that will be added back in for penalty under the streamlined. Again not logical. In the 8 year look back for OVDP transitionals are they using the highest balance during the year, or just the year end balances? I believe if people push back in protest of the the biased treatment of those that came forward early, the IRS may make changes.

  3. Michael J. MillerJuly 4, 2014 at 9:29 AM

    I find it strange that they've apparently decided the streamlined procedure should (in some circumstances) have a broader penalty base than the OVDP penalty base, but putting that aside I don't think it's inconsistent with the other guidance listed. I think the way to look at it is there's no cherry picking. Either you're in the OVDP, or you're in the streamlined procedure, or you're filing under the delinquent FBAR submission procedures. Whichever one you're in applies to all of your accounts.

  4. Does any one have any experience with their IRS agent in regards to including account balances in the penalty base of the OVDP 2012. I have a situation where an account was tax complaint 6 out of the first 8 years in the OVDP period. The agent is making me include the balance in the penalty calculation for every year because they say the account was tainted for 2 years. I argued that for the years the account was tax complaint I should not have to include it in the penalty calculation for that year. The agent ran it all the way up to their technical manager and he would not agree to remove the balance of the account in tax complaint years. Any one gotten different response from their agent?


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