OVDP: The Survivor's Manual

OVDP

The Survivor’s Manual

Overview • The objective of the Offshore Voluntary Disclosure Program

(OVDP) is 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.

• It enables noncompliant taxpayers to resolve their tax liabilities and minimize their chance of criminal prosecution.

• To do so, a taxpayer must truthfully, timely, and completely comply with all provisions of the voluntary disclosure program.

Overview

• When it comes to OVDP, complying with the provisions means opening up your “financial Kimono” and disclosing all of the particulars of your foreign assets.

Pros• Although voluntary disclosure does not provide an ironclad

guarantee of immunity from prosecution, it generally results in prosecution not being recommended.

• While OVDP is not exactly a get-out-of-jail free card, it may nonetheless be the next best thing. Why?

• It allows the taxpayer to partner with experienced counsel upfront, so he can have an advocate every step of the way as opposed to waiting until things get hairy. As difficult a pill as OVDP might be to swallow, it’s much better to knock on the Service’s door than have them come to you.

Pros

• Another perk of OVDP is that it allows taxpayers to determine their miscellaneous offshore penalty to the very penny, thus creating peace of mind by eliminating any possibility of the IRS asserting draconian FBAR penalties that could catapult your liability into the penalty stratosphere.

Debunking A Myth

• Voluntary disclosure is not something that the IRS or DOJ offers out of the “goodness” of their hearts or because they want to cut noncompliant taxpayers a “break.”

• Instead, the IRS desperately wants your money and it is cheaper for them if you come forward on your own than it is for them to hunt you down like a “fugitive from justice” and devote what are otherwise “scarce resources” to investigating and prosecuting the case.

Hanging In The Balance

• As with all tax policies, voluntary disclosure involves a balancing of interests. – On the one hand, there is a significant revenue loss.

Those taxpayers contributing to the gap – whether non-filers or evaders – need to be nudged to come back into the system or at least become more forthcoming.

– This militates in favor of the policy. In one sense, the policy gives the government the best of both worlds – it can continue to litigate as many criminal cases to its heart’s content while encouraging taxpayers to “get right” with Uncle Sam.

Hanging In The Balance

• The alternative is unwieldy• For example, if the government had no policy or if

the policy had so many restrictions that it would be easier for the taxpayer to climb Mount Rushmore in sneakers than to qualify, the government would lose revenue because taxpayers would have no incentive to come out of the shadows and disclose.

• Thus, a carefully structured and implemented voluntary disclosure policy is a “win-win” for both wayward taxpayers and the government.

Not So Fast!

• As you might have guessed, there are a few important caveats. Although the law on this point is a bit unsettled, it looks much better if the taxpayer doesn’t wait until the final stanza of “Just As I Am” to walk the sawdust trail.

• The essence of voluntary disclosure is that a taxpayer will not be prosecuted if he voluntarily discloses his misconduct before the IRS or DOJ is in hot pursuit.

https://www.youtube.com/watch?v=TGXDfxWM2r0

Not So Fast!

• The metaphor that I like to use here is the hunting of a fox by a thirsty bloodhound. If the bloodhound has already detected the scent of the fox and is hot on his trail, then the fox is “squat.” No amount of pleading with the bloodhound is going to save the fox from the sharp and carnivorous teeth of the salivating bloodhound.

Not So Fast!

• Moreover, the OVDP is not a one-night stand. In addition to filing accurate paperwork, the taxpayer must agree to cooperate on an ongoing basis. If the IRS has more questions, the taxpayer must provide answers, or the deal is off. This element is often a serious concern, because many taxpayers may have more to hide than a few dollars in the Azores.

Miscellaneous Penalty

• Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program must pay a miscellaneous penalty equal to 27.5% of the highest maximum aggregate balance of unreported foreign bank accounts during an eight-year look-back period.

Miscellaneous Penalty

• This penalty is in lieu of all other penalties that may apply to a taxpayer’s undisclosed foreign assets and entities, including FBAR and offshore-related information return penalties.

Miscellaneous Penalty Swells to 50% For Certain Banks

• On August 4, 2014, the IRS increased this penalty from 27.5% to 50% if certain conditions exist.


Taxpayers are subject to the 50% penalty if, at the time the pre-clearance letter is submitted, any one of the following events has occurred:

(1) The taxpayer’s foreign financial institution has been publicly identified as a target of investigation by the IRS or the Department of Justice; or

(2) The taxpayer’s foreign financial institution has been publicly identified as the recipient of a John Doe Summons or is cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement; or


(3) A facilitator who helped the taxpayer establish or maintain an offshore

account has been publicly identified as being under government

investigation, has been issued a John Doe Summons, or is cooperating

with a government investigation.


• The IRS does not interpret public disclosure so liberally as to mean that every U.S. citizen must receive a postcard sealed with a kiss from the IRS and announcing one or more of these events.

• Nor must the IRS take out its bullhorn, climb to the top of Mount Everest, and in a blood-curdling scream proclaim to every man, woman, and child that a new bank has entered into a cooperation agreement with the government – in the same way that a PathMark employee gets on the loudspeaker to announce the supermarket’s daily specials – in order for their to be a public disclosure.


• Instead, the IRS talks about “public disclosure” in much the same way as a law school property professor describes “inquiry notice” when lecturing on the topic of recording deeds.


According to the IRS, examples of a public disclosure include the following: (1) A public filing in a judicial proceeding by any

party or judicial officer, or(2) Public disclosure by the Department of Justice

regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator. The latter is nothing more than a press release.

What is a NPA?

• For those unfamiliar with the Department of Justice’s Swiss Bank Program, it was unveiled on August 29, 2013. It provides a path for Swiss banks to resolve potential criminal liabilities in the United States.

DOJ’s Swiss Bank Program

• In order to participate, Swiss banks had to take the “bull by its horns” and notify the Department of Justice by December 31, 2013 that they had reason to believe that they had committed tax-related criminal offenses in connection with unreported U.S.-related accounts.

• In other words, they had to “eat crow.”


• Banks already under criminal investigation relating to their Swiss-banking activities (along with any individuals who work for such banks) were deemed ineligible from participating in the program.

DOJ’s Swiss Bank ProgramIn order to be eligible for a non-prosecution agreement, banks must satisfy the following requirements:

– Make a complete disclosure of their cross-border activities;

– Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;

– Cooperate in treaty requests for account information;


– Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;

– Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and

– Pay appropriate penalties.


• As of July 9, 2015, twenty-nine banks have signed non-prosecution agreements with the Department of Justice.

• What does it mean for a taxpayer who has an unreported account at one or more of the banks on this dreadful list?


• While the taxpayer may still apply to OVDP, the price of admission has increased dramatically – from 27.5% to 50%.

• Worse yet, if the 50% offshore penalty applies to even just one account, then it applies to all accounts, including those held at another institution or established through another facilitator even if these other financial institutions have not brokered NPA’s with the DOJ and do not appear on the dreadful “list”

• It’s the equivalent of getting sprayed by a skunk and having that putrid odor penetrate every orifice of your body.


• Unfortunately, this doomsday scenario only gets worse. Although the taxpayer is not disqualified from applying to OVDP merely because he has an unreported account at a bank that has entered into a NPA with the DOJ, such taxpayers should take heed of the following:


– Under the terms of a non-prosecution agreement, foreign banks must turn over the names and information of their U.S. accountholders to the U.S. government.

– To the extent that a cooperating bank has exchanged this information with the U.S. government and the U.S. government has already identified an OVDP applicant as the owner of an unreported foreign account at that bank, any hope of participating in the Offshore Voluntary Disclosure Program may be all but lost.

Takeaway

• Such taxpayers are facing pressure on two fronts: from their bank and from their government.

• With respect to the former, banks have begun sending their U.S. accountholders letters reminding them of their U.S. tax and disclosure obligations and urging them to come into compliance.

Commonly Asked Questions

(1) What years are included in the OVDP disclosure period?

– The voluntary disclosure period is the most recent eight tax years for which the due date (or properly extended due date) has already passed.

– Example: Assume that Kate submits a voluntary disclosure prior to April 15, 2014 (or other 2013 due date under extension). The disclosure period includes each of the years 2006 through 2013 in which she had undisclosed OVDP assets.

Commonly Asked Questions

(2) How does the miscellaneous offshore penalty work?

• General rule: – Unlike FBAR penalties that can be asserted for multiple

years (up to six under the six-year statute of limitations for FBARs), the offshore penalty is a one-time penalty.

– The values of foreign accounts and other foreign assets are aggregated for each year and the penalty is calculated at 27.5 percent of the highest year’s aggregate maximum value during the period covered by the voluntary disclosure.

How does the miscellaneous penalty work?

(3) What other penalties (and interest) apply within the offshore program?

– Of course, taxpayers must pay the tax deficiency for each year during the disclosure period and interest on the deficiency.

– Information-return penalties such as the Failure to File penalty for the respective tax years.

– A 20% accuracy-related penalty under IRC § 6662(a) on the full amount of offshore-related underpayments of tax for the respective tax years.

– Under OVDP, the civil fraud penalty generally does not apply.


Example

Jack holds the following amounts listed in the chart below in a foreign account over the period covered by his

voluntary disclosure. He files a return but does not include the foreign account or the interest income on his return.

Nor does he file a FBAR. Jack decides to apply to the voluntary disclosure program. Assume further (1) that Jack

deposited the $ 500,000 in his account before 2003, properly reporting it; (2) that Jack’s voluntary disclosure is

accepted by the IRS; and (3) that Jack is in a 35-percent income tax bracket.


YEAR AMOUNT ON DEPOSIT

INTEREST INCOME ACCOUNT BALANCE

2003 $ 500,000 $ 25,000 $ 525,000

2004 $ 25,000 $ 550,000

2005 $ 25,000 $ 575,000

2006 $ 25,000 $ 600,000

2007 $ 25,000 $ 625,000

2008 $ 25,000 $ 650,000

2009 $ 25,000 $ 675,000

2010 $ 25,000 $ 700,000


• Because the highest account balance was in 2010, the base for the offshore penalty will be $ 700,000.

• Therefore, the offshore penalty is $ 192,500 (i.e., $ 700,000 x 27.5%).


• What are Jack’s total penalties within OVDP?


• Within the OVDP framework, Jack would pay $ 276,500. This includes:

– Tax of $ 70,000 (8 years at $ 8,750/year) plus interest; – An accuracy-related penalty of $ 14,000 (i.e., $ 70,000

x 20%); and

– A miscellaneous offshore penalty, in lieu of the FBAR penalty, of $ 192,500.


• What if Jack didn’t apply to OVDP? What civil penalties would he be subject to?

• This is the doomsday scenario.• Outside of the offshore voluntary program, Jack’s civil

liability includes:

– Tax, accuracy-related penalties, and, if applicable, the failure to file and failure to pay penalties, plus interest;

– FBAR penalties totaling up to $ 2,450,000 for the willful failure to file complete and correct FBARs:


• 2003: $ 262,500 (.5 x $ 525,000); • 2004: $ 275,000 (.5 x $ 550,000); • 2005: $ 287,500 (.5 x $ 575,000),

• 2006: $ 300,000 (.5 x $ 600,000),

• 2007: $ 312,500 (.5 x $ 625,000),

• 2008: $ 325,000 (.5 x $ 650,000),

• 2009: $ 337,500 (.5 x $ 675,000),

• 2010: $ 350,000 (.5 x $ 700,000).


– A potential fraud penalty of 75%; and – Substantial additional information return penalties

if the foreign account is held through a foreign entity such as a trust or corporation and required information returns were not filed.

– Had the foreign noncompliance started before 2003 and Jack decided not to enter the program, the IRS may even examine tax years prior to 2003.

What type of assets does the offshore penalty apply to?

• All assets directly or indirectly owned by the taxpayer, including (i) financial accounts holding cash, securities or other custodial assets; (ii) tangible assets such as real estate or art; and (iii) intangible assets such as patents or stocks or other interests in a U.S. or foreign business.

• For assets that are indirectly held or controlled by the taxpayer through an entity, the penalty may be applied to the taxpayer’s interest in the entity. But if the entity is an alter ego of the taxpayer, then the penalty may be applied to the taxpayer’s interest in the underlying assets.

Don’t Forget The Salt!

State Offshore Voluntary Disclosure – Because One Tax-osaurus Rex Wasn’t Enough


• Picture this: You are sitting behind your desk when your phone rings. No, it’s not your spouse calling to find out why you are late for dinner. Although if this was the first thing that came to mind, their might be some deeper meaning in it.

• Instead, it is a new client. His name is John. John is a U.S. citizen who lives in New Jersey. John contacts you for advice regarding foreign, unreported bank accounts in Switzerland.

• You recommend that John apply to the Offshore Voluntary Disclosure Program.


• As part of this process, you file amended federal income tax returns on John’s behalf in addition to delinquent FBARs.

• John then pays the miscellaneous offshore penalty on the highest aggregate maximum balance in his foreign bank accounts during an eight-year look-back period.

• Finally, John pays additional taxes and penalties for each of the preceding eight years.


• At the end of the disclosure process, you sign IRS Form 906, otherwise known as a closing agreement, to settle the liability for the years covered by the disclosure once and for all.

• Right about now, you are ready to kick your feet up, pat yourself on the back for a “job well done,” open up the liquor cabinet, and take a “swig” from a bottle of Jack Daniels.

• After all, John’s Federal tax issues are resolved. But are all of John’s tax issues resolved? Not quite.


• The question now becomes, “What about state taxes?” Does John have an obligation to notify the New Jersey Division of Taxation about what happened at the Federal level?

• Indeed he does. In fact, failing to do so could have serious consequences.


• New Jersey, not unlike NY and other states, has its own offshore voluntary disclosure program.

• After all, taxpayers who didn’t report their interest income from an undisclosed Swiss account to the IRS probably didn’t report it for state tax purposes either.

• Those states with state income tax were tempted to get a piece of the IRS’s action

• While some are knock-offs of the IRS’s program, some are quite unique.


• Getting these out of the way is definitely the right way to go.

• Why? Two reasons:


1. Internal Revenue Code § 6103 authorizes the IRS to share information with state agencies for tax administration purposes. What type of information? Information pertaining to examinations and tax returns. This authorization applies whenever the IRS enters into an agreement with a taxpayer.

2. The state can seek criminal penalties even if the IRS has already decided against gobbling you whole.

Answers to Important OVDP questions

1. When determining the highest amount in each undisclosed foreign account for each year or the highest value of each OVDP asset for each year, what exchange rate applies?

The foreign currency exchange rate at the end of the year, regardless of when during the year the highest value was reached.


2. I have an interest in a PFIC (passive foreign investment company). What are my options?

Within OVDP, the IRS offers taxpayers an alternative to the statutory PFIC computation. The purpose of this alternative is to resolve PFIC issues on a basis that is consistent with the Mark to Market (MTM) methodology authorized in I.R.C. § 1296 without requiring a complete reconstruction of historical data.


3. I’m currently under examination. Can I still come in under voluntary disclosure?

No. If the IRS has already initiated a civil examination against you, then it’s too late. And that is true regardless of whether the examination relates specifically to undisclosed foreign accounts or undisclosed foreign assets. Similarly, taxpayers under criminal investigation by CI are also ineligible.


4. Assume that Jack decides to make a “quiet disclosure” and file amended returns and delinquent FBARs for 2006-2013. However, he suddenly has a change of heart and decides to apply to the OVDP. Is Jack still eligible?

• The IRS is aware that some taxpayers have made “quiet” disclosures by filing amended returns and delinquent FBARs and paying any related tax and interest for previously unreported offshore income, without otherwise notifying the IRS.

• Taxpayers who have already made “quiet” disclosures are still eligible to participate in the OVDP.

• To do so, they must submit an application, along with copies of their previously filed returns – original and amended – and all other required documents and information to the IRS’s voluntary disclosure coordinator.


• Those taxpayers making “quiet” disclosures should be aware that it provides no protection from criminal prosecution and may lead to civil examination and the imposition of penalties.


5. If I make a quiet disclosure, will the IRS audit me? If so, will I still be eligible for OVDP?

• The IRS is reviewing amended returns and could select any amended return for examination. It has identified, and will continue to identify, amended tax returns reporting increases in income.

• The IRS will closely review these returns to determine whether enforcement action is appropriate. If a return is selected for examination, the taxpayer will no longer be eligible for OVDP.


6. What if I cannot afford to pay the total amount of tax, interest, offshore penalty, and other penalties?

• You may be able to qualify for special payment arrangements. However, before that can happen, the IRS must determine that your inability to pay is genuine.

• As such, you must submit a proposed payment plan to the IRS, along with a completed Collection Information Statement (Form 433-A or Form 433-B).


7. I have two offshore accounts. No FBARs were filed. I reported all income from one account, but not the other. How do I report this?

• The issue can be framed as follows: Must you report both accounts as a voluntary disclosure or should you separate them so that there is a delinquent FBAR filing for the reported account and a voluntary disclosure for the unreported account?


• NOTE well: An FBAR is a single form that discloses all foreign accounts meeting the reporting requirement. As such, it is not possible to separate the corrected filing.

• Instead, you should make a voluntary disclosure for the omitted income and include the delinquent FBARs for both accounts.


• The account with no tax deficiency is unrelated to your tax noncompliance.

• Therefore, no penalty will be imposed with respect to that account.


8. If the amount of income that I underreported from my foreign bank account was de minimis, do I still need to consider the program?

• Yes. No amount of unreported income is considered de minimis for purposes of determining whether there has been tax non-compliance with respect to a foreign account or other OVDP asset.


9. If the IRS serves a John Doe summons or makes a treaty request seeking information from my bank that

identifies me as the holder of an undisclosed foreign account, does that disqualify me from making a voluntary disclosure under this program?

• No. The mere fact that the IRS has served a John Doe summons, made a treaty request or has taken similar action does not automatically disqualify every member of the John Doe class or group identified in the treaty request from participating.


• However, this comes with the following caveat. Once the IRS or DOJ obtains information under a John Doe Summons, treaty request or other similar action that provides evidence of a specific taxpayer’s noncompliance with the tax laws, that particular taxpayer will become ineligible for OVDP.


10.If I apply to OVDP and am accepted, will my voluntary disclosure be subject to an examination?

• Normally, no examination will be conducted once the taxpayer enters the offshore voluntary disclosure program.

• However, the IRS reserves the right to conduct an examination.


• The normal process is for the voluntary disclosure to be assigned to an examiner who will certify its’ accuracy and completeness.

• The certification process is less formal than an examination and does not carry with it all the rights and legal consequences of an examination.

• However, the examiner has the right to ask any relevant questions, request any relevant documents, and even make contact with third parties.


11. If I transferred funds from one unreported foreign account to another during the voluntary disclosure period, will I have to pay a 27.5 percent offshore penalty on both accounts?

• For example, must assets in an account that was closed and transferred to another account be double-counted – once in the old account and then again in the new account?

• No. If you can establish that funds were transferred from one account to another, you will only have to pay a 27.5 percent penalty on the highest balance in one account. However, the taxpayer carries the burden of establishing the duplication.


• NOTE well: To the extent that the highest balance in the receiving account was not reached until some point after the closing balance was transferred from the old account, then the money transferred from the old account must actually have contributed to the highest balance in the receiving account before any duplication can be removed!


• Keep in mind that it is not unusual for a run-of-the mill checking account to contain a lot of account activity (i.e., deposits, withdrawals)

• What evidence can the taxpayer rely upon to meet his burden? Account statements


12. Are entities, such as corporations, partnerships, and

trusts eligible to make a voluntary disclosure?

Yes.


13. If a taxpayer has failed to file an FBAR to report an account over which he has signature authority but no beneficial interest, will that foreign account be included in the base for calculating the taxpayer’s offshore penalty?

• No. The account that the taxpayer has mere signature authority over will be treated as unrelated to the tax noncompliance the taxpayer is voluntarily disclosing.

• He or she may cure this delinquency at any time by filing an FBAR with an explanation prior to being contacted by the IRS regarding an income tax examination or delinquent returns.


• The answer might be different if one or more of the following conditions exist. In these cases, the taxpayer may have an OVDP asset to which the offshore penalty applies:


1. The account over which the taxpayer has signature authority is held in the name of a related person, such as a family member or an entity controlled by the taxpayer;

2. The account is held in the name of a foreign entity for which the taxpayer had a reporting obligation; or

3. The account was related in some other way to the taxpayer’s noncompliance (e.g., it was used as a conduit).


14. Parents have a jointly owned foreign account on which they have made their children signatories. As

such, the children have an FBAR filing requirement but no income. How should the family correct this? How will the offshore penalty be applied?

• Signatories with no ownership in the account, such as children in this example, need only file delinquent FBARs with explanatory statements.


• As for the parents, only one offshore penalty will be applied for the voluntary disclosures relating to the same foreign financial account. Here, this means that the parents must jointly pay a single offshore penalty on the account.

• This can be satisfied by one parent paying the total offshore penalty or by each paying a portion, at the taxpayer’s option.


15. If multiple taxpayers are co-owners of an OVDP asset, who will be liable for the offshore penalty?

• In the case of co-owners, each taxpayer who makes a voluntary disclosure will be liable for the penalty on his percentage ownership of the highest value of the OVDP asset.


• The burden will be on the disclosing taxpayer claiming ownership of less than 100 percent of the OVDP asset to establish the extent of the ownership.

• His voluntary disclosure applies to his tax liability only. It does not cover the other co-owners.


16. If there are multiple individuals with signature authority over an OVDP asset held in the name of a trust, must everyone involved file delinquent FBARs? If so, must everyone pay the offshore penalty?

• Only one offshore penalty applies with respect to voluntary disclosures relating to the same OVDP asset.

• The penalty may be allocated among the taxpayers with beneficial ownership making the voluntary disclosures in any way they choose.

• The reporting requirements for filing an FBAR, however, do not change. Therefore, every person who is required to file an FBAR must file one.


17. How can the IRS propose adjustments to tax for more than three years without a statutory

exception to the normal three-year statute of limitations for making those adjustments?

• The taxpayer must agree to assessment of the liabilities for all years in order to get the benefit of the reduced penalty framework. It is an all or nothing proposition.


18. What should I do if I’m having trouble obtaining my bank records from my foreign financial institution?

• Carefully document your attempts. For phone conversations, note the date, time and duration of the call. Note the name of the employee of the foreign financial institution with whom you spoke.

• For correspondence, make a photocopy of all correspondence to and from the foreign bank.

• Provide your documentation relating to your attempts to obtain records to the examiner handling your case, or if your case is not yet assigned, contact the IRS OVDP hotline.


19. Must I complete and sign agreements to extend the period of time to assess tax – including tax penalties – and to assess FBAR penalties for any years that are set to expire while my application is being processed?

• Yes. Agreements to extend the period of time to

assess tax (including tax penalties) and to assess FBAR penalties must be submitted as part of the voluntary disclosure package.


20. Does the examiner have any discretion to settle offshore voluntary disclosure cases for amounts less than the 27.5% (or where appropriate, 50%) offshore penalty?

No.


21. After making a voluntary disclosure, what if I disagree with the offshore penalty? What can I do?

• Remember that the penalty framework for offshore voluntary disclosure and the agreement to limit tax exposure to eight years are package terms. In other words, mediation with appeals is not an option.

• The only option is for the taxpayer to withdraw from or “opt out” of the program. An “opt out” is an election made by a taxpayer to have his case handled under the standard audit process. Once made, this decision is irrevocable. Therefore, if the taxpayer wakes up the following morning with buyer’s remorse, it is too late.


22. If I opt out, will my case be referred for audit?

• The IRS will likely conduct a full examination. In that examination, the normal statute of limitations rules apply.

• If no exception to the normal three-year statute applies, the IRS will only be able to assess tax, penalties, and interest for three years.


• However, if the period of limitations was open, then six years of liability may be assessed.

• Under what circumstances might the period of limitations remain open?


– Scenario 1: If the IRS can prove a substantial omission of gross income.

– Scenario 2: The statute of limitations for asserting FBAR penalties is six years from the date of the violation, or the date that an unfiled FBAR was due to have been filed. Similarly, if there was a failure to file certain information returns, such as Form 3520, Form 5471, or Form 8938, the statute of limitations will not have begun to run.

– Scenario 3: If the IRS can prove fraud, there is no statute of limitations for assessing tax.


23. Does my case remain within the Voluntary Disclosure Practice even after opting out?

• Yes. Therefore, you must cooperate fully with the examiner by providing all requested information and records. In addition, you must pay, or make arrangements to pay, the tax, interest, and penalties that are ultimately assessed.


24. If I opt out and the IRS discovers during a full scope examination that their were issued that I did not previously disclose, can my case be referred back to Criminal Investigation for review?

Yes.


25. If I opt out and the IRS conducts a full examination, may I appeal any tax and penalties imposed by the IRS? How about the IRS’s decision on the terms of the OVDP closing agreement?

• After a full examination, any tax and penalties

imposed by the IRS may be appealed. However, the IRS’s decision with respect to the terms of the OVDP closing agreement may not.

How to Apply to OVDP

STEP 1: REQUEST PRECLEARANCE

STEP 1

Taxpayers or representatives must fax a letter to the IRS – Criminal Investigation Lead

Development Center (LDC).

STEP 1• The pre-clearance letter must include the following:– Applicant identifying information including complete

names, dates of birth (if applicable), tax identification numbers, addresses, and telephone numbers.

– Identifying information of all financial institutions where undisclosed OVDP assets are held. Identifying information for financial institutions includes complete names (including all DBAs and pseudonyms), addresses, and telephone numbers.

STEP 1

– Identifying information of all foreign and domestic entities (e.g., corporations, partnerships, limited liability companies, trusts) through which the undisclosed OVDP assets were held by the taxpayer seeking to participate in the OVDP. Information must be provided for both current and dissolved entities. Identifying information for entities includes complete names (including all DBAs and pseudonyms), addresses, and the jurisdiction in which the entities were organized.

– Executed power of attorney forms (if represented).

STEP 1

– Criminal Investigation will notify taxpayers or their representatives within thirty days as to whether they are eligible to make an offshore voluntary disclosure.

– Preclearance does not guarantee a taxpayer acceptance into the OVDP.


Step Two: Submit Offshore Voluntary Disclosure Letter And Attachment

STEP 2

• The taxpayer must prepare an Offshore Voluntary Disclosure Letter and Attachment and mail it to the IRS Voluntary Disclosure Coordinator at 1-D04-100 2970 Market Street Philadelphia, PA 19104.

• Criminal Investigation (CI) will review the OVDP letter and notify the taxpayer by mail or fax as to whether the disclosures have been preliminarily accepted as timely or declined.

• CI estimates that it will complete its review within 45 days of receipt of the OVDP letter.


Step Three: What To Do After You’ve Been Pre-accepted Into OVDP

Step 3• You’ve submitted your OVDP letter and attachments to the Voluntary

Disclosure Coordinator and are reclining in your armchair watching the “big game” while opening up the day’s mail. The upper left-hand corner of one of the envelopes in your pile is adorned with the IRS’s logo. You open it up.

• The letter is but a few paragraphs long and as you scan it you breathe a sigh of relief.

• It says that your disclosure has been preliminarily accepted by CI as timely. It provides instructions for the next phase: completing and submitting the full voluntary disclosure package to the Austin Campus within 90 days of the date of the timeliness determination.

• You’ve made it this far, but you are uncertain about what is meant by a “full voluntary disclosure submission.”

Step 3

• The voluntary disclosure submission consists of two parts, each of which must be submitted separately.

Step 3

• Part I

– The total amount of tax, interest, offshore penalty, accuracy-related penalty, and, if applicable, the failure-to-file and failure-to-pay penalties, for the voluntary disclosure period must be sent with information identifying the taxpayer’s name, taxpayer’s identification number, and years to which the payments relate.

Step 3

– To ensure payments are properly posted to the taxpayer’s account, separate checks should be made for each tax year which would include all applicable tax, interest, accuracy-related penalties, and failure-to-file and failure-to-pay penalties.

– The offshore penalty should be paid by a separate check.

– These payments are advance payments. Consequently, any credit or refund of the payments is subject to the limitations of IRC Section 6511.

Step 3

• Part 2

– The full submission

Step 3– Copies of previously filed original (and, if appropriate,

previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure.

– Complete and accurate amended federal income tax returns or original Form 1040 (if delinquent) for all tax years covered by the voluntary disclosure, with accompanying schedules detailing the amount and type of previously unreported income from foreign financial accounts or domestic sources.

Step 3

–Copy of your completed and signed OVDP letter (including enclosures and attachments) submitted to criminal investigation.–A completed “Foreign Account or Asset

Statement” for each previously undisclosed OVDP asset during the voluntary disclosure period.–A completed and signed “Taxpayer Account

Summary With Penalty Calculation.”

Step 3

– Properly completed and signed agreements to extend the period of time to assess tax (including penalties) and to assess FBAR penalties.

– Copies of statements for all financial accounts reflecting all account activity for each of the tax years covered by your voluntary disclosure.

Step 3

• All applicants disclosing foreign financial accounts: Copies of filed FBARs for foreign financial accounts maintained during the period of your voluntary disclosure. FBARs must be filed electronically.

Step 3• All applicants disclosing foreign entities:

– A statement identifying all foreign entities, whether held directly or indirectly, for the tax years included in the voluntary disclosure, and a statement concerning ownership or control of such entities.

– If foreign entities held OVDP assets, provide complete and accurate information returns (or amended returns, if applicable) required to be filed, including Forms 3520, 3520-A, 5471, 5472, 926, 8865, and 8938 for all tax years included in the voluntary disclosure.

Step 3

– Applicants with estate and gift tax issues: If the taxpayer is a decedent’s estate, or is an individual who failed to report an OVDP asset in a required gift or estate tax return, either as executor or advisor, provide complete and accurate amended estate or gift tax returns (original estate or gift tax returns if not previously filed) for tax years included in the disclosure period correcting the underreporting or omission of OVDP assets.

Step 3

• Applicants with Passive Foreign Investment Company (PFIC) issues: A statement whether the amended or delinquent returns involve PFIC issues during the tax years covered by the OVDP period, and if so, whether the taxpayer chooses to elect the alternative to the statutory PFIC computation that resolves PFIC issues on a basis that is consistent with the mark to market (MTM) method authorized by IRC Section 1296.

Electronic Submission

• May the taxpayer submit documents on a CD or flash drive?

– Yes, subject to the following conditions.


1. The representative must submit an original, signed paper Agreement for Digital Submission of OVDP Documentation. A copy of the Form 2848 must be attached.

2. All other required OVDP documents other than the Agreement for Digital Submission of OVDP documentation may be submitted digitally.

3. All required OVDP documents, or as many as possible, should be transferred to a CD or flash drive.


4. The digital documents should be arranged in separate folders in the same sequence as a paper submission would be

assembled.5. The CD or flash drive must be labeled with the last four digits only of the taxpayer’s Taxpayer Identification Number.

Following the Final Submission

• An extension to submit the final submission can be requested for up to 90 days, but only if there is a good reason.

• The examiner may contact you for specific additional information.

• The examiner will certify that your voluntary disclosure is correct, accurate, and complete. He will also verify the tax, interest, and civil penalties you owe.

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