Reversal by IRS on voluntary disclosure program causes concerns
Recent disqualification of taxpayers from participating in the Offshore Voluntary Disclosure Program comes as a shock to many, because some of the foreign account holders had received pre-clearance to participate.
April 06, 2013
In an apparent about face, the Internal Revenue Service recently notified some offshore account holders that they do not qualify for the Offshore Voluntary Disclosure Program. The move concerns many tax professionals, because the IRS had previously approved some of the offshore bank account holders for participation in the program.Many of the account holders informed of the disqualification had accounts with Bank Leumi. Ironically, the bank had sent letters to some account holders in late 2012 discussing the OVDP and advising account holders to contact a tax attorney if they had questions or wanted to participate in the program.
In the last few weeks Bank Leumi, which is Israel's second-largest lender, announced it would take a loss of $91 million related to investigations by U.S. authorities into U.S. customer accounts. Many assume this charge is to cover a upcoming fine along the lines of those levied against Swiss banks, UBS in 2009 and Wegelin just last month.
How OVDP typically works
The OVDP allows U.S. taxpayers with undisclosed foreign savings or investments accounts to come forward, tell the IRS about the accounts and pay back taxes. In exchange, the U.S. government foregoes criminal tax prosecution and civil penalties that can amount to 50 percent of the value of the account or $100,000, whichever is greater.
Through OVDP, a taxpayer files five years of amended returns. In addition to back taxes, interest and penalties, the taxpayer must also pay a penalty of up to 27.5 percent of the maximum amount held in the account for failing to file a Report of Bank and Financial Accounts (FBAR) form.
Those under investigation already cannot take advantage of the program
The program is only open to those not currently under investigation by the IRS. How does a taxpayer find out if he or she is under investigation? What often occurs in that a tax attorney will provide minimal information, such as a client's name and social security number to the IRS to get a green or red light for program participation. Once given a pre-clearance more questions and checks occur before the IRS issues a formal clearance letter. Then the taxpayer files amended returns and pays any penalties.
For some of the Bank Leumi account holders it appears they made it through the pre-clearance stages, so the reversal was a startling surprise. While the IRS has not commented on specifics, some believe that the government already had the taxpayer names, but they might not have carried through to the correct computer system used to conduct the pre-clearance. There are several other reasons for taxpayer disqualification such as if the taxpayer "fails to make a timely, truthful and complete disclosure."
While it is unclear exactly what lead to the disqualifications, these account holders could now be subject to criminal investigation and higher civil penalties.
Since the first OVDP started in 2009, tens of thousands have taken the chance to disclose foreign accounts. Estimates are that the IRS has collected $5 billion through the partial amnesty.
As investigations spread across the globe, time is slipping away to take advantage of the voluntary disclosure program. Whether you recently inherited a foreign account or did not disclose an offshore account for business or personal reasons now is the time to seek the assistance of an experienced tax attorney.
Article provided by Law Offices of Jeffrey S. Freeman
Visit us at www.freemantaxlaw.com