The Internal Revenue Service (IRS) introduced the Offshore Voluntary Disclosure Program (OVDP) to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws.
Entering into the program would potentially reduce the civil and criminal penalties that these taxpayers would face for not reporting the income and disclosing their foreign financial accounts. The OVDP has resulted in over $4 billion in collections since implemented and has made it safe for many taxpayers to get into compliance.
In 2012, the IRS made some significant changes to the program. Certain penalties under OVDP have increased, and more importantly the agency has announced that the program may come to an end at any time so time is of the essence to take advantage of this opportunity clean up offshore accounts free from criminal prosecution. Those that have not taken entered OVDP by the end of the program could face increased civil and criminal penalties if it is later discovered that income has been concealed.
In 2011, the penalty rate for OVDP was 25 percent of the highest aggregate balance during the eight full tax years prior to the disclosure. In 2012, this number rises to a maximum penalty of 27.5 percent. The IRS also reserved the right to change this program to include different penalties for different types of taxpayers.
Since the program presumes willfulness, many taxpayers who enter the program with a reasonable cause position that would otherwise mitigate or eliminate penalties, are prevented from obtaining reasonable cause relief within the program itself. They enter into OVDP and then opt out of the OVDP’s civil settlement structure. This approach which the IRS attempts to address in Frequently Asked Question 51.1, addresses taxpayers that voluntarily report the assets, report all of the required information to the IRS, but decide to opt out of the program at the penalty stage because they want to pursue their “reasonable cause” argument.
Critics of the OVDP have long been concerned about the time it takes for the IRS to resolve these matters. If an individual starts the OVDP process, and stay within the civil settlement arena, the case is usually handled within 300 plus days. If the taxpayer opts out of civil settlement, the case can last over 500 days. This unreasonable time delay greatly discourages those who have valid reasons for not reporting from participating in the OVDP. A more reasoned approach might be to allow the OVDP examiner to consider reasonable cause arguments within the boundaries of the program itself.
Recently, the National Taxpayer Advocate, Nina Olson, at an International Tax Enforcement Conference sponsored by the American Bar Association Tax Section in New York, publically criticized the current IRS practices in the Offshore Voluntary Disclosure Program (OVDP) that hinder voluntary compliance by penalizing taxpayers who are entitled to a reasonable cause exception from willfulness according to an article written by Zsuzsanna Kádár, M.A., J.D., L.L.M. that was published in International Taxes Weekly (11/13/2012).
Specifically, Kádár reports that Olson publically stated that “taxpayers who follow an "opt in - opt out" path in offshore voluntary disclosures (i.e. taxpayers who enter into the OVDP but subsequently opt out of the program's civil penalty structure) are generally subject to extended resolution times over smaller amounts when compared to traditional offshore voluntary disclosure participants”.
These comments are significant because the National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports directly to the Commissioner of Internal Revenue. The National Taxpayer Advocate is required to provide an independent perspective as the statutory “voice of the taxpayer” both within the IRS and by submitting two reports each year directly to the congressional tax-writing committees in accordance with Internal Revenue Code Section 7803(c). The function of the National Taxpayer Advocate Office is simply to identify and resolve taxpayer problems with the IRS and to the extent possible propose changes in administrative practices and identify legislative changes which may be appropriate.
Many attorneys applaud Ms. Olson for being the voice of reason and for her professionalism in making these comments. There is hope that the IRS will listen to her and develops a more reasoned approach to some of the specific situations when reasonable cause exceptions do apply and the taxpayer has entered the program. If the IRS wants complete participation in this initiative, this issue must be taken into account.
If you have questions about the OVDP, speak to an attorney experienced in international tax law matters. If you fail to report certain income or assets, you could find yourself facing significant penalties. Knowing the options that are available to you can help you make the best decisions for your future. Putting the right plan in place now can allow you to be confident that you are complying with all of the IRS’s requirements.