Tuesday, June 19, 2012

Some Info on OVDP 2012 (6/19/12)

In a Tax Notes Today article, the author reviews recent discussion of the current iteration of the offshore voluntary disclosure program (referred to here as OVDP 2012).  Shamik Trivedi, IRS Official Previews Changes to FAQ for Offshore Voluntary Disclosure Program, 2012 TNT 118-1 (6/19/12).  The discussion occurred at the NYU annual Tax Controversy Forum in NYC.  I do not have the article to post but I do note key points that I have also confirmed from other sources:

1. The IRS will shortly release a new FAQ for guidance of the program after OVDI 2011.  Apparently it is now being called the offshore voluntary disclosure program ("OVDP").  For clarity, I refer to this as OVDP 2012.

2.  Apparently, there will be an 8-year rolling period for amended returns required by the FAQ.  I quote the article because, as I shall note, I am not sure I understand the point or, if I do understand the point, the logic of the point:
The upcoming FAQ will likely clarify the rolling eight-year period of returns due with the voluntary disclosure, said Jennifer Best, IRS senior attorney-adviser (services and enforcement), at New York University's annual Tax Controversy Forum in New York. "If the return is not yet due for a year, then that year is not included in the eight-year period," she said. The IRS also plans to clarify that compliant years' returns are not due as part of the disclosure, she said. 
Scott D. Michel of Caplin & Drysdale said one area of confusion for practitioners had been how far back returns were due for taxpayers who were new to the program. Best confirmed that under the proposed clarification, taxpayers who have not yet filed a 2011 return do not include their 2011 return as part of the eight-year period, but taxpayers who filed a "false" 2011 return in April and then came into the OVDP in June must include a 2011 return. 
I interpret the words to mean, for example, if a false 2011 return has been filed when the taxpayer joins OVDP 2012, say on June 25 (more or less contemporaneous with mailing of the FBAR for timely filing), then the 8 year period is from 2004 to 2011.  If the already filed 2011 return is not false (say the person was doing a "go-forward" but then changes his / her mind to join OVDP 2012, then the period is from 2003 to 2010.  However, if the return is on extension when the taxpayer files for OVDP 2012 and not yet filed (so that when filed it will not be false), then the period is from 2003 to 2011.  It seems to me that there can be some game playing there.  For example, if 2003 is the high year, the taxpayer would want to file a false 2011 return and then join the program.  There are some other strange results I can imagine, but maybe I just don't understand the comments are narrated in the article.  Perhaps readers can enlighten me.


  1. Well, Jack that is both bizarre, on the surface, and extremely disappointing in depth, if that is all there is to come out of this new/old OVDP.  I guess I will wait to read and digest the Tax Notes.  I would have hoped by now, that some other mitigation for minnows type of acknowledgment would have occurred along the lines of some of the good suggestions that have been offered up here.

    http://federaltaxcrimes.blogspot.co.nz/2012/04/open-forum-comments-to-congress-and-irs.html There are many Canadian that were expecting to hear something about the RSSPs, and of course new immigrants that would have liked some recognition / mitigation on family accounts back in their homelands what were certainly not part of the Bank Secrecy Act intentions that created the FBAR monster. 

  2. I suspect the FAQs will be more detailed. I think they are still in preparation so only one or two of the items were authorized for disclosure and discussion by the IRS representative.

    I have no idea whether the pending FAQs will offer great comfort for minnows. They could. But I do think that, at some point, the IRS will release some data from audits (whether opt out audits or regular audits) as to what is happening to people in the nonwillful category (meaning also its income tax equivalent of nonfraud category). We know what is happening in the FBAR willful category from the criminal cases (50% of highest year) and presumably there will be a civil fraud penalty as well. What we don't know is what is happening in the nonwillful / nonfraud category into which most minnows fall. That is the dataset that I am hoping at some point to get so that it can meaningfully assist taxpayers in making the decision whether to opt out or even to join OVDP 2012 in the first place.

    Jack Townsend

  3. Doesn't the fact that the bottom line for the tax payer be better if he/she files a false 2011 tax return put lawyers in situation where they might recommend their client to infringe the law? Can you comment about the ethical responsibility of the lawyer to advise their client to do the right thing, when they know, from the IRS's rule that in some cases, for some customers, it might be better to infringe the law one last time?

  4. Just me, thanks for mentioning RRSP --  I hope it will be part of new FAQ.  I have not yet heard from my agent yet as which way they want to go -- I think it is a such a tough question for these elites in the Federal Government to figure it out -- RRSP is NOT Swiss secret bank account, it is well controlled by Canadian Revenue Agency which has routing communication with IRS under the treaty !

    Unless it is an evil intent of the robbery -- which by law they can to impose this ridicules penalty.

  5. Lawyers can't ethically promote or participate in the filing of a false return. However, in Clintonian logic, it depends upon what false is.

    Take the analogous gambit that many tax lawyers learn in school or early in their career. Say the IRS audits and makes adjustments that the IRS cannot sustain if litigated. Let's say that the wrong adjustments result in additional tax of $1,000,000. But, say also, that the agent simply misses an adjustment that would have generated $10,000,000 in additional tax. What does the taxpayer do?

    Probably the best thing to do is nothing. Just let sleeping dogs lie. The taxpayer is still $9,000,000 in the positive. But many taxpayers don't ;like having to pay anything, so they want to fight about the $1,000,000 in tax which should not have been asserted.

    Those taxpayers will take risk in going to the Tax Court because a savvy IRS attorney can put everything in issue and, even with the loss of the $1,000,000, collect $10,000,000.(for a net from the fight of $9,000,000).

    The gambit to avoid the risk of losing any more money from fighting the erroneous adjustments is as follows: (i) the taxpayer pays the asserted tax; and (ii) then coordinates the filing of a claim for refund and, if necessary suit for refund after the assessment statute of limitations has closed.

    Now the question is -- how can a taxpayer sign a 1040X claiming refund of $1,000 when he knows that he is not entitled to that refund? That would be a problem for the taxpayer and for the professionals who assisted him.

    But, with some analysis, the taxpayer and his professionals may come to believe that there is sufficient doubt about the additional tax liability that they can take a return reporting position that it could be decided in the taxpayer's favor and thus, they calm themselves, the taxpayer can claim the $1,000,000 refund. (I don't play that game, but I imagine that some do.)

    So, to put that in the context of fliling a false 2011 return in order to game the situation discussed in the blog, perhaps they would assure themselves that, as to its falsity, they have some reporting position that could pass muster and therefore sign the return. Then, after more sober reflection (they would claim), they decide that they should file an amended return in the OVDI program which would then permit the period to be from 2004-2011. (Now, I wouldn't do that either, but some might do some variation of it).

    Jack Townsend

  6. Jack,
    Any indications on timings for the FAQ?

  7. No. I am told soon. That information / speculation is not terribly useful, though.

  8.  Perhaps the TAS will get this information internally and publish it.

    Right now, the service is asking for 27.5% (or 25%) from all but the very smallest minnows (< 75K) in the program, and including non reportable assets such as real estate and paper securities too. The criminal cases are 50%, only slightly more.

    It doesn't look like there is that much of a break for minnows. I suspect the only relief the IRS will offer is -- opt out if you don't like the result.

  9. Do you by chance have Jennifer's contact information?  I have many clients that have FBAR disclosure issues regarding their Israeli pension plans (as required by their "home" govt.)  I heard that Jennifer mentioned that the new OVDI program will bring in FAQ #17 - I would like to learn more about this as I am in current conversation with a couple of my clients about meeting with an attorney to enter the OVDI / OVDP program to disclose these assets.
    Thanx in advance for any help that you can offer.
    Kind Regards,
    Irene Wachsler, CPA

  10. I don not have her contact information.  I would imagine that you can call the IRS and get it.  Maybe another reader can supply the address.

    Jack Townsend

  11. Currently in analysis of joining OVIP or go-forward. 2011 Taxes are on extension. FBAR due end of next week.

    2010 penalty calculations are about half of 2011 penatly calculations.
    Should the taxes be filed before I mail the FBARs ?
    Should the taxes be filed before the intial OVDP contact ?

  12. The clarification of the rolling look-back period appears in FAQ #9 of OVDP (2012):
    "For calendar year taxpayers the voluntary disclosure period is the most recent eight tax years for which the due date has already passed."

    I understand this as follows: Say we are talking about joining OVDP in 2012. If joining before April 17 (or whatever extended due date someone has), the look-back period consists of years 2003-2010, because the due date for the 2011 return has not yet passed. If joining after the due date/extended due date, the look-back period is 2004-2011. For determining the look-back period, it does not matter whether the return is or was "false". (This matters for including the year 2011 in the OVDP submission and penalty base, but that's a different point.)

    What I find confusing in FAQ #9 is the mention of tax non-compliance/"false" return: "The eight year period does not include current years for which there has not yet been tax non-compliance." (See also Best's comments under 2. above.)

    I read this as saying that 2011 cannot be tax non-compliant before the due date of the 2011 return. A taxpayer who filed a "false" return in April and then comes into OVDP in June, as in Best's example, has look-back period 2004-2011 because the 2011 due date has passed, and must include a 2011 amended return in the disclosure because the original return was "false". If the return had not been "false", the look-back period would be 2004-2010.

    Do I understand this correctly?

    Thanks, Henry


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