Taxpayer Advocate Report on OVDI/P's Burden on Benign (Relatively) Taxpayers (1/18/14)

In the recently issued Taxpayer Advocate FY 2014 Objectives Report to Congress and Special Report to Congress, here, the Taxpayer Advocate included a report titled OFFSHORE VOLUNTARY DISCLOSURE: The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Made Honest Mistakes, here.

Key Excerpts (footnotes omitted):

Definition of the Problem: 

* * * Designed for “bad actors,” these programs burdened “benign actors” who inadvertently violated the rules by requiring them to “opt in and opt out” to get a fair result. The programs were punitive, charging average penalties of more than double the unpaid tax and interest associated with the unreported accounts. Because those opting out faced prolonged uncertainty and a risk of even more severe penalties, some agreed to pay more than they should, as described in prior reports. 

Unlike those who remain in the programs, those who opt out are audited, which essentially penalizes them for coming forward. On average, the IRS assessed penalties of nearly 70 percent of the unpaid tax and interest in the audits of those who opted out. Thus, while those who opt out generally face smaller penalties than those inside the OVD programs, they still face very significant ones. 

For those who remained in the 2009 program, the median offshore penalty applied to those with the smallest accounts (i.e., those in the 10th percentile with accounts of $87,145 or less) was disproportionate — nearly six times the median unpaid tax. Among unrepresented taxpayers with small accounts it was even more disproportionate — nearly eight times the unpaid tax. It was also disproportionately greater than the median penalty paid by those with the largest accounts (i.e., those in the 90th percentile with accounts of more than $4.2 million) who paid about three times the unpaid tax. Given the harsh treatment applied to those with small accounts, some have made “quiet” disclosures by correcting old returns and others have begun to comply prospectively — in each case without subjecting themselves to the lengthy and seemingly-unfair OVD process. 

While 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements,8 the IRS received only 807,040 FBAR submissions in 2012.9 Yet the FBAR audit rate is less than one quarter of one percent. Thus, the IRS has likely failed to address significant information reporting noncompliance.

Reader Question on Temporary Fund Deposit and IRS OVDI/P Penalty (9/25/13)

I recently posted on this blog a series of examples that I think highlight some perhaps unintended consequences in the inside (miscellaneous or in lieu of) penalty in OVDI/P, particularly as a result of interpretations that result in inequity.  See Elimination of Duplications and Short Term Deposits in Miscellaneous Penalty Base - FAQ 37 and Extrapolations (Federal Tax Crimes Blog 9/10/13), here.

A reader has asked that I posit a question to fellow readers who hopefully will offer some feedback either by way of comment or by emailing to me (jack@tjtaxlaw.com) and I will forward the email to the person making this request.  The question is:

Have you been able to exclude from the OVDI/P penalty base temporary funds parked in a foreign bank account?  By temporary, I mean that the funds are in the account only for a day or two and did not earn any interest.  The funds came from fully U.S. tax compliant sources and went to a fully U.S. tax compliant destination after the temporary stop in the noncompliant foreign account.

Readers who can and will answer that question, please do so in the ways indicated above.  If possible, the reader asking this question would prefer to be able to establish contact with the readers providing answers (via emailing me), but if the authors desire anonymity, they can still provide meaningful feedback by making comments to this blog.

Update on RRSPs in OVDI (9/26/11)

This blog entry reviews a Tax Notes Today article -- Marie Sapirie, Clarification of Retirement Plans Need in OVDI, 2011 TNT 186-4 (9/26/11):

1. RRSPs are similar to U.S. IRAs permitting Canadian tax deductions and reporting of income upon subsequent withdrawal. For persons also subject to U.S. taxation, deferral requires the filing of a Form 8891, "U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans."  U.S. persons residing in Canada were often unaware of the implications of the RRSP and thus did not file the Form 8891. Late filing of the Form 8891 requires filing a private letter ruling request for relief under under Reg. Section 301.9100-3.

2. The issues raised by RRSPs are (i) whether, absent the Form 8891, the RRSP will be included in the in lieu of penalty base in OVDI; (ii) whether the income earned inside the RRSP is subject to current U.S. taxation in the year earned or whether the taxpayer may get some retroactive Form 8891 relief; and (iii) whether the U.S. sourced income inside the RRSP will be considered in determining the $10,000 relief.

OVDI 2011 - Mitigating the Penalty by Lowering the Penalty Base (6/27/11)

In the OVDI 2011 program, the "in lieu of" penalty is determined by multiplying an amount which I shall call here the penalty base (generally speaking, the highest aggregate value the U.S. tax noncompliant foreign assets, both financial accounts and otherwise) times a percentage. The percentage is 25% but may in special cases be 12.5% (see FAQ 35 ) or 5% (see FAQ 52). Mitigating the penalty, therefore, can be accomplished by achieving one of the lower percentages. Mitigating the penalty also can be accomplished by lowering the penalty base to which the percentage applies.

Regarding the penalty base, it is important to keep in mind that, for purposes of the OVDI 2011 penalty, the penalty base includes not only the foreign financial accounts (the only type of assets reported on the FBAR) but also other foreign assets, not otherwise reportable, which are U.S. tax noncompliant (either with respect to the money used to acquire the other foreign assets or the income from the other foreign assets).

The question I raise here is the ways that the penalty base can be lowered.

OVDI 2011 FAQ 52 5% In Lieu of Penalty Experience (5/20/11)

FAQ 52 of the 2011 OVDI provides a 5% in lieu of penalty under the following conditions:

1. Taxpayers who meet all four of the following conditions: (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) have 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) have, 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.

2. Taxpayers who are foreign residents and who were unaware they were U.S. citizens.