Wednesday, August 17, 2011

IRS Responds to Indian-American Community's Concerns Over OVDI (8/17/11)

I previously posted a blog on Indian American community requests for relief with respect to the OVDI initiative. See Indian American Groups Push for Foreign Account Relief (7/29/11) here.  I provide below a response from Heather Maloy, IRS Commissioner, LB&I. I do not yet have a public link to the letter itself, but will provide the link when I get it.  (Readers with access to Tax Notes Today can find it at 2011 TNT 159-16.)


August 4, 2011

Mr. Inder Singh
GOPIO International
P.O. Box 560117
New York, NY 11356

Dear Mr. Singh:

I am responding to your letter to Secretary Geithner dated June 27, 2011. You asked about relief available to certain taxpayers under the 2011 Offshore Voluntary Disclosure Initiative (OVDI). Thank you for your interest in the OVDI.

The OVDI provides a way for taxpayers with undeclared assets offshore to resolve their tax problems. The terms of the OVDI require taxpayers to pay the following penalties:

• A 20 percent accuracy-related penalty under section 6662 of the Internal Revenue Code (Code);
• A failure-to-file penalty under section 6651(a)(1) of the Code;
• A failure-to-pay penalty under section 6651 (a)(2) of the Code; and
• An offshore penalty equal to 25 percent of the highest aggregate balance in foreign bank accounts and entities or the value of foreign assets during the period covered by the voluntary disclosure in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties.

The OVDI terms already lower the offshore penalty down to 12.5 percent or 5 percent in some circumstances. Further, under no circumstances will a taxpayer have to pay a penalty greater than what he or she would otherwise be liable for under the maximum penalties imposed under existing statutes. If the offshore penalty is unacceptable to a taxpayer, he or she may opt out of the OVDI and request that we refer the case for an examination of all relevant years and issues.

You also asked that we extend the August 31, 2011, OVDI deadline to December 31, 2011. At this time, we do not contemplate granting an across-the-board deadline extension for all taxpayers. However, a specific taxpayer can request an extension of the deadline (up to 90 days) to complete his or her submission if the taxpayer can demonstrate a good faith attempt to fully comply with the OVDI requirements on or before August 31,2011. The request must be in writing and must include a statement of the items that are missing, the reasons why, and the steps he or she is taking to secure them.

You also asked that the U.S. Government publicize the OVDI in ethnic newspapers and other community media in multiple languages and that IRS representatives promote awareness of the OVDI in the media. We have promoted OVDI awareness by posting information about the OVDI in eight foreign languages, including Hindi, on We have also released information through traditional media, both national and local, as well as social media websites such as Twitter. We will continue this extensive outreach effort as the August 31, 2011, deadline nears.

Again, thank you for your interest in the OVDI. If you have any questions, please contact Rosemary Sereti, Identification Number 10-00120467, at (212) 719-6258.


Heather C. Maloy


JAT Note:  As I mentioned in my prior blog, perhaps the safety net will be IRS reasonable application of the penalties on opt out.  In addition, there might be ways even within the program for the IRS to reasonably apply the rules inside the program to reach a fair result.  I will give an example in which, in my judgment, the IRS should allow some inside the program relief.  Assume that a U.S. person with parents still in India has an Indian financial account with a consistent balance of $15,000 since 2007, except that, on January 5, 2008, in order to effect a gift of $20,000 to his parents, he or she wire transfers $20,000 fully tax paid U.S. dollars into the Indian financial account where it is held for 2 days, just long enough for the parents to draw the money out.  That gave a temporary bump in the highest aggregate value to $35,000.  Since 2007, the U.S. person has been U.S. tax noncompliant as to the meager earnings on the base constant amount of $15,000.  The U.S. person is not U.S. tax noncompliant and intended no U.S. tax noncompliance on the the temporary deposit into the Indian account.  Nor did the U.S. person attempt in any way to disguise the account via an entity or the critical deposit (effected by wire transfer from a U.S. bank).  I think the IRS could exclude that amount from the penalty base consistent with a fair application of the spirit of the OVDI program.  I would hope that the IRS would apply these rules fairly.  My experience in other contexts over the years is that the IRS is generally fair and my extrapolation -- certainly my hope -- is that within what appears to be rigid rules, the IRS will find opportunities for fairness and even grace in the application of those rules.  (I know that grace is not a concept embedded in our tax laws but sometimes it peeks through in the administration in a way that is not really inconsistent with fair administration of the tax laws.)


  1. There are also Indians who transferred money to accounts to buy a house in India, which pushed up account size. Those people deserve relief as well. Another extremely good case for penalty relief is for people who came to the US only recently (last 4-5 years) and may not have been familiar with all US tax laws.

    Of course, I think many cases might not be so clear-cut -- people who owned unreported rental property or small businesses in India, have become US citizens after decades here etc. etc.

  2. To Anonymous August 17, 2011 5:40 AM

    Your variation on the temporary deposit of money to buy a house is excellent. There will be many equally compelling fact patterns that, hopefully, will be handled sensibly by the IRS.

    Your other points are also good.



    Jack Townsend


  3. In another vein, what about health related issues which prevent a taxpayer from properly filing the appropriate forms?

  4. I'm not surprised on the response from IRS. But I'm glad that the Indian community did express their concern and the IRS responded. This could be just the beginning of a long dialogue between communities who may get affected by the OVDI program, mostly by its harsh penalty structure. I hope that the discussion continues even after the Aug 31 deadline so that the IRS realises that they need to be fair when imposing penalties.

  5. If a US person has joint accounts with parents who are non-US citizens, I wonder how the base penalty(5% or 25%) is calculated.

    Would it be 1/3rd of principal in the account and 1/3rd tax on the interest?

  6. Jack, regarding your example, I am skeptical that a revenue agent will disregard the deposit of $20K into the account. Because the deposit occurred during a year covered by the OVDI, and because that year was a year of non-compliance (i.e., the foreign account was not reported and income in that foreign account was not reported), then the revenue agent can easily assert that the highest balance that year included the $20K deposit, with the result that the penalty will include the amount of that deposit.

    I have seen too many examples of IRS unfairness and over-reaching within the OVDP to optimistically hope for IRS "fairness" and "grace" in this example. To be fair, I have indeed seen some indications of IRS sympathy and understanding in certain cases (primarily involving elderly taxpayers who clearly had reasonable cause or displayed non-willfulness), but too many instances going the other way. If the individual in your example was my client, I would advise that if he got lucky, and was assigned a sympathetic agent, then MAYBE he could have some hope that the $20K deposit may be disregarded, but he should prepare for its inclusion in the penalty base.

  7. To Asher Rubinstein August 17, 2011 9:44 AM

    Just thought that somehow this fits.

    The difference between an optimist and a pessimist. A pessimist goes around saying "Things are horrible, things are terrible, things can't get any worse than this." And the optimist says "Oh, yes they can."

    I hope the IRS's actual application of the program in truly meritorious cases -- note the qualifier, because many, perhaps the bulk, of the cases where the taxpayer is represented by counsel are not truly meritorious -- will make optimists of us all.

    Jack Townsend

  8. To Anonymous August 17, 2011 9:35 AM

    I think the answer is whose money was it in the account. If the U.S. person is not the owner of the account and the joint titling was simply an estate planning or signatory type mechanism (should have used signatory rather than joint title), then it should not go into the penalty base because there is no U.S. tax noncompliance. However, the issue will be provinig that the taxpayer had no interest.

    Now, if the ownership of the underlying account funds is mixed or uncertain, as is sometimes the case, then the proof is going to be problematic. At least in theory, as to the part owned by the U.S. person there would be U.S. tax noncompliance (he or she should have reported his or her share of the income), and should be included in the penalty base.

    I have situations like the former and the latter in the pipeline but none yet resolved, so I hope my analysis is not just wishful thinking. Maybe others can provide actual experience.


    Jack Townsend

  9. "I would hope that the IRS would apply these rules fairly."

    Thank you for the comment, Jack. Unfortunately, hope is not a strategy. Leaving the US, or not arriving in the first place, is a strategy.

  10. 'In another vein, what about health related issues which prevent a taxpayer from properly filing the appropriate forms? '

    These are normally accepted for reasonable cause grounds if health issue is severe. But if there are many years of FBARs not filed, it would be hard to accept health related issues for all years ...

  11. Hope and optimism notwithstanding, our job as advocates for the taxpayer would be to argue for the non-inclusion of that $20k deposit in the penalty base. To that end, I would argue that the funds were after-tax, declared earnings . . . they were sent offshore as a gift to non-resident aliens who are not subject to U.S. taxation . . . that this gift was not reportable nor taxable (we would need additional info to make this argument, e.g., could this have been a gift from husband and wife, each entitled to make a tax-free gift of up to $13K) . . . that there was no obfuscation or use of foreign entities . . . etc. These would all be "good facts". However, they would be countered by the "bad facts" in the hypothetical above, and the fact that the FAQs do not provide for a carve-out for deposits such as those in the hypothetical. I would advance these arguments, but would also prepare the client accordingly.

  12. I had a chuckle at the IRS response to publication efforts that the Indian community asked for. It was a fair request, and the response was an insult, including the patronizing nature of the letter starting with…"Thank you for your interest in the OVDI".

    "We have promoted OVDI awareness by posting information about the OVDI in eight foreign languages, including Hindi, on"

    and use "social media websites such as Twitter"

    What a joke of an answer!! So what does Heather think? Every Indian has the on their browser home page, or goes there daily for guidance on whatever new rule is published? Or follows the government on Twitter?? Where was Twitter in 2003?

    Come on Heather...That is not how real people live their lives. Prior to the OVDP, I had never ever been on the web site and I am an American. I never never done Twitter or Facebook for that matter. She expects that Indians are going to go there and read everything prior to coming to America or once they are here working follow on Twitter? Nonsense! You know, none of these social media sites were around during the times that the IRS is asserting severe penalties backwards.

    Doesn't she understand that most people don't live their lives looking for rules or regs published by governments on their web pages or in Twitter. I know that is the IRS bizzaro "rules and regs" bubble world, but not ordinary folks don’t inhabit it.

    To equate publishing on the web site or twitter as a publication/education outreach on foreign accounts and FBAR requirements is just insulting to normal intelligence.

    I think she knows that, but doesn't have any other answer to a legitimate request, and can only resort to mealy mouth language as the outsourced spokesman for Shulman who can’t even bother to sign the letter.

    Unfortunately, I can see the day coming that if you don't have as your browser homepage, or don’t follow them on Twitter, you will be considered "willfully blind". Isn't that their term of choice to assure all are considered tax cheats and subject to "maximum" penalties?

    If the IRS was honest with itself, and if compliance was the objective way back when, and not just opportunistic confiscatory revenue collection now, then there are many other efforts they could have taken through the years if this FBAR was soooo important. They could have used many additional outreach to all taxpayers and assist them in becoming aware and compliant.

    I think the OVDP and the OVDI represent a “failure of communication” through the years, not a “revenue collection success” as Shulman has now trumpeted, and Congress and the Media have swallowed hook, line and sinker.

    I saw something once, that a Committee in Congress suggested that they put the notice on the front page of the 1040 about foreign accounts and FBARS. That would get attention of all Tax Payers. The IRS ignored that advice. They could have put something in every mailing that the IRS sends out since the law was enacted in the 1970’s, but did not. They could have made it a requirement to all Practitioners to inform all their past, current and future clients. Or how about a FBAR disclosure notice that every bank gives a customer when they transfer funds overseas? Or how about notices on every Immigrant Visa application? You or I could come up with a lot more things the IRS could have done, if we were given the problem to solve.

    Hell, give this education task to a Business that has a product to sell, and they will find thousands of ways to inform and publish without hiding behind this silly assertion that they published it on their web site or Twitter. Does anyone wonder why we get frustrated with such stupidity in government or why we become so cynical? The IRS seems to have only one tool in their publication tool box, and it is a hammer. Prosecute a few offenders, assert a few maximum penalties and then the message will get out. How Orwellian !!

  13. Actually, the indictment of the HSBC India guy in January got a fair amount of coverage in the Indian media, including ethnic papers, Indian papers and the like. Even Indian preparers and CPAs seem to have picked it up and are touting OVDI. 'Indictment' seems to bring a lot of outreach (sad, but true).

  14. Anon @8/17 2:20pm,
    Very well said. The response doesn't even warrant a read. Jack had forewarned that groups like this would not be heard, but no way I expected this type of response.

    Wonder what's next.. maybe DMV will learn from IRS on ways to collect revenues and take off all instructions on "STOP" signs on the manuals one must read to get a DL. Then, remove the STOP signs (or at least not put up any new ones and save cost) and post guidance on their website about what should be a "STOP" point. They could collect significant revenues from fines on everyone who did not stop because they had not been to the DMV webpage. Too bad if there are a few crashes because of this.

    The above is not plainly sarcasm out of frustration, but sincerely an attempt to apply IRS approach and logic to other vital areas of regulations and possible impact. I have always been amazed how the car examples apply to almost everything...

  15. For the lawyers out there...
    can there be an argument that in case of FBAR failure, there really is not only the individual to blame, but also the IRS and the tax preparer. SO all 3 should share the 25% penalty. To every point raised by anon at 2:20pm, this is as much IRS failure as any individual's. So why should IRS get revenues and individuals lose their hard earned money?

  16. This response by IRS doesn't make any sense....GOPIO was asking the IRS to advertise in local ethnic news papers...having an OVDI site in other languages at the IRS' website doesn't mean that people would suddenly become aware..And twitter - i hope she was kidding!

    Why aren't other organizations steeping up and joining hands with the indian organizations!

  17. anon @August 17, 2011 3:30 PM

    "For the lawyers out there...
    can there be an argument that in case of FBAR failure, there really is not only the individual to blame, but also the IRS and the tax preparer. SO all 3 should share the 25% penalty."

    I think the legal argument against the IRS is likely to go as far as the normal tax protester arguments against the IRS -- the people making those arguments end up with big penalties (if not in jail)

    About preparers, people have been known to blame preparers for bad advice. but if you didnt get in writing from them that you didn't have fbar filing requirement, then it would be hard to bring a case against them.

  18. anon 2;20 good.article......i never heard of fbar my whole life...i am 69 yrs old. irs should have done a better job of telling the public, say , on 1040.

  19. To Anon of "August 17, 2011 2:20 PM",

    I did not know OVDI/FBAR until by chance I read a Chinese news just few months ago. Then I became aware OVDP 2009, and UBS prosecution etc..

    I guess people do not pay attention to IRS news unless who are really trying to take advantage of this tax system.

    Also, I fully understand that "law does not have to make one to know/understand, one must know/understand the law". here we are in ovdi -- paying huge fine for this lesson.

    I think people on this board should take credit that they are themselves to make this hiden law more public/visiable.

    Of course, Jack's blog is the top bandname in the town.

  20. seems like the GOPIO received a cut and paste reply of the rules of OVDI. Probably the NYSBA recommendations were very specific of what to do but perhaps the IRS is not in a mood to make changes. How much collateral damage this stance will do ..only time will tell.
    Just hoping the GOPIO and others keep up the efforts and not lose hope soon.

  21. "To equate publishing on the web site or twitter as a publication/education outreach on foreign accounts and FBAR requirements is just insulting to normal intelligence. "

    Eh ? The GOPIO letter was asking specifically about publicizing the OVDI, and the response was bout general OVDI publicity, not general foreign accounts/FBAR requirements. I think anyone of normal intelligence would see that.

    "saw something once, that a Committee in Congress suggested that they put the notice on the front page of the 1040 about foreign accounts and FBARS."

    Its on Schedule B, and the question there is fairly clear. Besides, the requiremenet to report worldwide income is fairly clear in 1040 instructions. So even if someone did not report foreign accounts, they are fine according to the iRS as long as they reported income on account.

  22. It looks like there has been a major misunderstanding & the IRS has interpreted the Indian community's letter in the wrong way. The letter says "Many people holding foreign bank accounts were unaware of these rules simply because these rules were never publicized by the IRS to the general public." I believe the community is talking about FBAR & foreign account rules which many immigrants are not aware of. But IRS interpreted that statement as OVDI rules.

  23. Hello, I just learned about OVDI and now trying to collect all paper work. I can't find old tax returns or bank statements. I haven't even applied for pre clearance letter. Is it too late? Can some one guide me? Also, if have experience with extension then please share. Also, I've no money to send check with OVDI. Is it still OK to file? thank you!!!

  24. you ask for extension, but you should send for pre-acceptance ASAP.

    you can ask IRS for old returns -- you may have to pay.

    you should ask your bank for statements -- if they do not have any, then ask them to provide a letter stating that fact.

    Just hurry up...

  25. "For the lawyers out there...
    can there be an argument that in case of FBAR failure, there really is not only the individual to blame, but also the IRS and the tax preparer. SO all 3 should share the 25% penalty."

    I don't think these arguments would be successful in reducing penalties.

    As to the IRS "to blame": The argument is that because the IRS did not adequately publicize the requirement to file the FBAR, penalties should not be assessed against the taxpayer for FBAR non-filing. (As mentioned in other posts elsewhere on this blog, the Indian-American community is advancing this argument.) I believe this argument will fail because Form 1040 Schedule B on its face, as well as the instructions, direct the taxpayer to the FBAR.

    As to tax preparers "to blame": Here the argument is stronger, but ultimately, the IRS isn't going to drop 1/3 of the penalty, nor send the tax preparer a bill for that amount.

    I've had OVDP cases where tax preparers were well-aware of clients' foreign accounts, but did not prepare the FBAR (notwithstanding, as I wrote above, Form 1040 and the instructions), or gave faulty advise as to the need to file FBARs. In one OVDP case, the IRS agent advised that if the accountant would submit a signed affidavit setting forth an affirmative statement that the accountant advised the client that the client need not submit FBARs, then the IRS would reduce the penalty.

    The argument to reduce FBAR penalties because of bad advise or negligence on the part of tax preparers is rarely successful. Voluntary Disclosure taxpayers will likely face the full penalties. However, I think that we will soon see many lawsuits initiated by taxpayers against their tax preparers based on FBAR negligence, whereby the taxpayers will attempt to recoup, from their tax preparers, the penalties that they had to pay the IRS.

  26. Good Commentary here on the impact of these FBAR rules on so many more than you would ever think possible...

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  28. What if the clearance letter has been sent to CI and NO response is received before August 31st 2011? Anyone in the same situation?

    I did not do the pre-clearance fax as my attorney suggested that it is not a requirement.

  29. FAQ 25 says:

    After I am notified by CI that my disclosure is timely, what other information will I have to provide?

    The letter from CI will instruct the taxpayer or their representative to submit the full voluntary disclosure package of information to the Austin Campus ... on or before August 31, 2011.

    So, if I haven't been notified of acceptance into the OVDI yet, will I have time after notification of acceptance to submit the entire package, or do I need to send the complete package by August 31?

    I realize I'm ignoring FAQ 25.1 regarding requests for an extension, because I'm hoping that if the answer to my question above is favorable (i.e. more time), I won't have to request the extension.

  30. Have couple of questions

    1) Does stock portfolio to be included in determining the highest asset value for a given year for OVDI
    2) How can one determine the highest value for a portfolio of stocks(My agent don't provide a statement with values)
    3) When there are sell and buys in your account, what approach was taken to determine value

    Appreciate your clarification

  31. Jack, Really appreciate if you could throw some light to my query


    1) Does stock portfolio to be included in determining the highest asset value for a given year for OVDI
    2) How can one determine the highest value for a portfolio of stocks(My agent don't provide a statement with values)
    3) When there are sell and buys in your account, what approach was taken to determine value

    Appreciate your clarification

  32. Some more update on this

  33. Jack:

    I really appreciate if you can answer my question. I have my final package ready and I am still debating whether to submit or opt out.
    I fit in exactly with the your note: I am a non us citizen or permanent resident but a us tax person and the purpose of my funds was family maintenance and for taking care of my parents medical emergencies and my balance was on an average constant of 20k per year.

  34. To Anonymous August 31, 2011 12:07 AM

    You don't offer me enough detailed facts to have an opinion as to whether to opt out. If you are just at the stage of submitting the package, you don't have to make the decision right now. You submit the package and will have the opt out decision when the IRS reviews it and makes a decision inside the program. Perhaps there will be some anecdotal information about opt outs at that time that will help you make the decision.

    Jack Townsend

  35. Thanks a lot Jack for your response. I really appreciate it. I am glad to know that I don't need to make a decision right now for opting out. I hope by the time they make a decision on my case, there will be more information on opting out. I will be sending my package on Tuesday.

  36. I have stock in India was bought before 2003 . at present it is in in bank DEPOSITORY account and dividend go to bank saving account.
    Account fluctuate from 2003 to 2010 tremendously.
    my question is -
    do I have to pay 25 percent penalty on highest amount which was in 2007?even it is in stock,never sold
    Stock in Depository acct. consider as brokerage account. I appreciate your answer

  37. To Anonymous September 6, 2011 9:48 PM

    It all depends on your highest aggregate of accounts and assets. Suggest you read the FAQs carefully. It could be less than 25% depending on your facts. However, whether or not your stock is sold or not, is not material to the discussion of penalties. The FBAR penalty in the OVDI relates to values at a point in time, not on whether or not something was sold or held. Good luck. Only 2 days left to apply.

  38. If you look at the FBAR form, it expects you to report all the financial accounts crossing $10000 and does not expects to declare a property.

    But in OVDI program, while calculating FBAR penalty, they expect you to account and assets(property values) toward calculating principal amount.

    This seems totally unfair to me...

  39. To Anonymous September 9, 2011 6:34 PM

    But of course it is unfair, but fairness is not what the OVDI is about. It is about collecting revenues. The IRS, taking the position, that all funds overseas must be fraudulent funds, and that to further hide it, people might have moved their money from accounts to assets like art or property, so let's go after those assets too in the OVDI penalty structure. The penalty is all about what they can do, not what is fair or right.
    Go figure.

    To get out of the asset penalties, you will have to Opt Out of the program, and hope that the discretion of the IRM will be applied to lower your penalty to something less. That is a possibility that one must seriously consider and not be intimidated by the IRS use of fear that they might apply maximum penalties if you take that "irrevocable" decision. You will need good attorney advice should you arrive at that decision point.

  40. Anonymous Mom-
    If I have a joint account in India with my son, and my other children send me gifts of money to that account (for my use) and they are not US persons, why should that money be declared to the IRS and also the interest is miniscule I may say- it just does not seem fair that the gifts to me from other people have bumped up the balance briefly, and suddenly it is my son's responsibility ? What about my right as a foreigner to have my money in a joint account as is allowed in my country? Can I separate my money from my son's if I can show where it came from?


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