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.)

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August 4, 2011

Mr. Inder Singh
Chairman
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 irs.gov. 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.

Sincerely,

Heather C. Maloy

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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.)