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A History of the IRS’s Targeted Offshore Voluntary Disclosure Programs

OVDP Penalty Refund – Setting Aside the Closing Agreement on the Theory of Duress

In this 4 part series, we will examine whether there are any circumstances in which an OVDP participant who paid an offshore penalty may file an administrative claim for a refund and ultimately, whether they can utilize the theory of duress to civilly litigate for that refund.  The focus of this first segment is on the history of the IRS’s targeted offshore voluntary disclosure programs.

Four part series on OVDP Penalty Refund: Setting Aside the Closing Agreement on the Theory of Duress

Just over five years ago, the Internal Revenue Service (IRS) offered the first of three offshore voluntary disclosure programs for individuals with undisclosed foreign financial accounts.  Since this announcement, the IRS has threatened severe civil and criminal penalties against U.S. taxpayers with undisclosed foreign financial accounts.1  These threats have not been limited to individuals who utilized offshore accounts to evade the payment of U.S. taxes and have been targeted at just about anyone with a foreign financial account that has not been properly disclosed.  Additionally, the threats caused an almost hysterical reaction in U.S. taxpayers with foreign financial accounts that were not timely disclosed on a Foreign Bank Account Report, Form TD F 90-22.1 (FBAR) (now FinCEN Form 114), resulting in a rush to enter into one of the IRS’s targeted offshore disclosure programs.

Under the 2009 Offshore Voluntary Disclosure Program (OVDP), participating taxpayers were required to pay taxes on interest earned from undisclosed foreign financial accounts for the previous six years, as well as pay an accuracy-related penalty on any tax liabilities resulting from those six years.  Further, participants of the 2009 OVDP were assessed a 20 percent penalty on the aggregate highest balance in their offshore accounts during the 2003 through 2008 time period.  This 20-percent penalty was referred to as a miscellaneous penalty under Title 26 of the United States Code.2  The 2009 OVDP program was timed to profit from the publicity about IRS’ crackdown on Swiss bank accounts, particularly those held at Union Bank of Switzerland (UBS).

The next Offshore Voluntary Disclosure Initiative (OVDI) was announced by the IRS on February 8, 2011.  Under the 2011 OVDI, individuals were assessed a 25 percent penalty on the highest aggregate account balance or asset value for the tax years 2003 through 2010.3  For those participants that had offshore accounts totaling less than $75,000, the penalty was reduced to 12.5 percent.  Participants could also qualify for a 5 percent penalty if: a) the taxpayer did not open or cause the account to be opened, unless the bank required that a new account be opened rather than making an ownership change to the existing account upon the death of the account’s owner; b) the taxpayer exercises “minimal, infrequent contact with the account,” e.g., to request an account balance or update account holder information such as a change in address; c) the taxpayer has not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure, with the exception of a withdrawal closing the account and transferring the funds to an account in the U.S.; and d) the taxpayer can establish that all applicable U.S. taxes have been paid on funds deposited in the account.

The latest OVDP was announced by the IRS in 2012.  The 2012 OVDP program is identical to the 2011 OVDI, except that the highest penalty rate was increased from 25 percent to 27.5 percent and the years covered under the program were updated.

Since the 2009 OVDP was announced, over 39,000 taxpayers have participated in one the of three voluntary disclosure programs.  At last count, the IRS has collected over $5.5 billion dollars in tax, interest, and penalties.4  From the IRS’ point of view, the targeted offshore voluntary disclosure programs have been a huge success.  With that said, many have been critical of the offshore disclosure programs as being overly harsh and inflexible towards participants who did not understand that they had a legal duty to disclose foreign financial accounts on an FBAR and other little known reporting requirements.

Over the last several years, taxpayers have become far more knowledgeable in the area of international tax disclosures.  Now, the term FBAR has become a household name.  Not only have taxpayers become more mature in their understanding of foreign financial account disclosures, taxpayers with previously undisclosed foreign financial assets realize that participation in a targeted offshore voluntary disclosure program is not for everyone.  Furthermore, anecdotal evidence suggests that at least some taxpayers are considering other ways, short of participating in the 2012 OVDP, as a solution to their prior foreign income reporting problem.5  In most cases, this means making a so-called “quiet disclosure” to the IRS.  In some cases, this strategy may permit a taxpayer to avoid any penalties associated with not timely disclosing a foreign financial account on an FBAR.  In the next segment of this series, we will go on to explore the IRS’s position on disclosures made outside of the OVDP structure.


  1. The 2009 targeted offshore program was specifically targeted to individuals who utilized foreign financial accounts to avoid paying U.S. taxes. The first true offshore voluntary disclosure initiative was in 2003. That initiative was related to an offshore credit card project the IRS pursued starting in 2000. The program was designed to allow taxpayers to step forward and ‘clear up their tax liabilities.’ The program provided that the IRS would “in appropriate circumstances, impose the delinquency penalty under Section 6651, the accuracy-related penalty under Section 6662, or both penalties against taxpayers that participate in the Offshore Voluntary Compliance Initiative. The program waived the fraud penalty, the fraudulent failure-to-file penalty, and certain information return penalties otherwise applicable to participating taxpayers. In addition, participating taxpayers would not be criminally prosecuted.

  2. The participants of the 2009 OVDI were required to execute a Form 906 entitled “Closing Agreement on Final Determination Covering Specific Matters.” Under the terms of the closing agreement, the participant must agree to pay a miscellaneous penalty under Title 26 of the United States Code.

  3. See IRS 2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers, Note 35 (Feb 4, 2013), available at http://www.irs.gov/Businesses/International-Businesses/2011-Offshore-Voluntary-Disclosure-Initiative-Frequently-Asked-Questions-and-Answers, which states in relevant part: The offshore penalty is intended to apply to all of the taxpayer’s offshore holdings that are related in any way to tax non-compliance. The penalty applies to all assets directly owned by the taxpayer, including financial accounts holding cash, securities or other custodial assets; tangible assets such as real estate or art; and intangible assets as patents or stock or other interests in a U.S. or foreign business. If such assets are indirectly held or controlled by the taxpayer through an entity, the penalty may be applied to the taxpayer’s interest in the entity or, if the Service determines that the entity is an alter ego or nominee of the taxpayer, to the taxpayer’s interest in the underlying assets. Tax noncompliance includes failure to report income from the assets, as well as failure to pay U.S. tax that was due with respect to the funds used to acquire the asset.

  4. See GAO Report GAO-13-318 (Apr. 26, 2013), available at http://www.gao.gov/products/GAO-13-318

  5. The IRS 2012 Offshore Voluntary Disclosure Initiative (OVDI): Is It Really Such A Good Deal For You? Is It Really For Everyone? By Richard J. Sapinsky, Esq. & Lawrence S. Horn, Esq.

OVDP PARTICIPANTS: CONTACT YOUR TAX ATTORNEY IMMEDIATELY - JUNE 30TH DEADLINE

Related Content: Offshore Voluntary Disclosure

Translations: Korean
이 게시물뿐만 아니라 한국어로 사용할 수 있습니다.

The New Streamlined Filing Compliance for U.S. Persons Living Inside the U.S. and How for a Very Brief Period of Time the Participants of the OVDP may Significantly Benefit the Program

Up until last week, the 2012 Streamlined Filing Compliance Procedures offered by the Internal Revenue Service ("IRS") were limited to non-resident U.S. taxpayers who have resided outside the United States since January 1, 2009 and who have not filed a U.S. tax return during this same period.  The Streamlined Filing Compliance Procedures required participants to file income tax returns for the previous three years and file FinCEN 114, Report of Foreign Bank and Financial Accounts, (previously Form TD F 90-22.1 FBAR) for the previous six years, if applicable.  In exchange for participating in the Streamlined Filing Compliance Procedures, participants can avoid certain civil penalties.  Although the Streamlined Filing Compliance Procedures’ terms are far more generous than the 2012 Offshore Voluntary Disclosure Program (OVDP)1 , participants of the Streamlined Filing Compliance program do not receive the benefits of an IRS closing agreement or protection from a subsequent investigation by the IRS Criminal Investigation Division (IRS-CI).  This is because Streamlined Filing Compliance Procedures are not classified by the IRS as a voluntary disclosure; instead, they characterize Streamlined Filing Compliance as a filing position.



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On June 18, 2014, the IRS expanded Streamlined Filing Compliance Procedures to include "U.S. Persons Living Inside the United States."  Now, ALL individual taxpayers residing in the United States can participate in Streamlined Filing Compliance Procedures.  However, the terms of Streamlined Filing Compliance for U.S. participants are different.  In order for a U.S. taxpayer to make a disclosure through Streamlined Filing Compliance Procedures, the participant must have filed tax returns for the previous three years, the failure to disclose foreign income and assets on U.S. federal tax returns must be the result of a non-willful act, and participants must amend their tax returns for the previous three years and file FBARs for the previous six years.  (Note:  a willfulness/non-willfulness analysis is complex and should only be performed by a tax attorney qualified to perform such an analysis). 

In exchange for making a disclosure through Streamlined Filing Compliance Procedures, participants with undisclosed offshore accounts can avoid significant non-willful civil penalties.  Generally, the non-willful civil penalty for each undisclosed account on an FBAR or a Form 8938 can be as high as $10,000 per violation.  Under the terms of the new Streamlined Filing Compliance Procedures, participants will be subject to a five percent (5%) penalty on the highest aggregate account balance on their undisclosed account(s) for the past three years, and unlike the OVDP, the penalty is only assessed on foreign financial accounts that must be disclosed on a Form 8938 rather than all offshore assets.

Like the Streamlined Filing Compliance Procedures designed for "U.S. persons living outside the United States," a disclosure made through Streamlined Domestic Offshore Procedures does not offer the protection of a closing agreement or from an IRS criminal investigation.  Despite the fact that Streamlined Filing Compliance Procedures do not offer the protection of a closing agreement or from an IRS criminal investigation, the penalty reductions still potentially make disclosure through Streamlined Filing Compliance Procedures beneficial for those whose failure to disclose foreign income or accounts was non-willful.

Not only do Streamlined Filing Compliance Procedures offer significant relief from offshore penalties for those seeking to make a disclosure to the IRS, Streamlined Filing Compliance Procedures may also be utilized by current participants of an OVDP or those who have "opted-out" of an OVDP.  On June 20, 2014, at the NYU 6th Annual Tax Controversy Forum, Jennifer L. Best, Senior Advisor and John C. McDougal, Special Trial Attorney, Office of Chief Counsel announced that participants in an IRS OVDP or OVDP "opt-out" can elect to be removed from the OVDP program and placed into the 2012 Streamlined Filing Compliance Procedures.2   For some, the IRS’s change in position offers unbelievable potential savings from income tax, interest, and penalties.  However, participants seeking to benefit from the reduced penalty structure of Streamlined Filing Compliance Procedures must do so no later than June 30, 2014.

Anyone considering removal from the OVDP should carefully weigh the risks and benefits of entering into Streamlined Filing Compliance Procedures.  With that said, a very short window of opportunity has just opened for some U.S. taxpayers currently participating in an IRS OVDP or who have elected to "opt-out" of an OVDP. 

An experienced tax attorney with Moskowitz LLP can help you to quickly determine your best course of action.  To learn more, please contact our office by phone or email.  We provide translation services in Korean, Cantonese, Mandarin, and Arabic.  

1 Under the terms of the 2012 OVDP, participants must file or amend their tax returns and file FBARs for these years, and pay all delinquent taxes, interest, and penalties for the same years.  In addition, participants are subject to a 27.5 percent penalty on the highest aggregate account balance on their undisclosed account(s) for the last eight years.

2 The removal from the OVDP or OVDP “opt-out” and placement into Streamlined Filing Compliance Procedures is only available to those who have not yet been audited by the IRS in the course of an “opt-out.” 

 

Moskowitz LLP, A Tax Law Firm, Disclaimer: Because of the generality of this post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice from a tax attorney based on particular situations. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.