Guidance Anyone Or The Labyrinth of Overlapping Rules Within OVDP

The primary source of confusion (or should I say frustration) lies in juxtaposing the conditions that are needed to satisfy eligibility for one aspect of the program with the conditions that are needed to satisfy eligibility for a different aspect of the program. This confusion is only exacerbated when both aspects tend to overlap. Admittedly, I would be less than sincere if I didn’t acknowledge the existence of another factor that contributes to this shortcoming – that when this level of confusion exists, and the taxpayer is in greatest need of guidance, the IRS is nowhere to be found.
I do acknowledge the fact that the IRS could be more assertive in issuing notices, updating “questions and answers,” issuing technical advice memoranda, and/or issuing revenue rulings in order to inject uniformity into areas of the program that are susceptible to more than one interpretation. 
While rules do help create uniformity, the following disclaimer applies: “Be careful what you wish for, you just might get it …” In other words, if the IRS were to weigh in, the guidance it provides may have unforeseen and unpleasant consequences. There is no better example of confusion these days than in the case of taxpayers who are juxtaposing the requirements that trigger an increase in the offshore penalty from 27.5% to 50% with the requirements that disqualify a taxpayer from participating in OVDP. Contrary to popular belief, they are not one and the same.
Beginning on August 4, 2014, the offshore penalty within the OVDP program will increase from 27.5% to 50% for taxpayers whose foreign accounts are held with financial institutions that the IRS has relegated to a list. If you’re wondering what this list is, all you need to know is that it’s not a list of financial institutions that the IRS plans to take out to dinner. If that wasn’t enough of a clue, it’s not the type of list that any financial institution would aspire to be on. Taxpayers who have already filed a pre-clearance letter or who expect to do so before August 3, 2014 remain unaffected.  


Taxpayers who fail to submit their pre-clearance letter before August 3, 2014 will be subject to a 50-percent offshore penalty if any one of the following events has occurred that constitutes a public disclosure:

1. Your foreign financial institution has become a target of investigation by the IRS or the Department of Justice; or
2. Your foreign financial institution is cooperating with the IRS or the Department of Justice to help them locate tax evaders; or
3. Your foreign financial institution has been identified in a court-approved summons seeking information about U.S. taxpayers who may hold financial accounts at that institution.

These requirements stand in stark contrast to the requirements that must exist in order for a taxpayer to become ineligible to participate in the OVDP. Taxpayers will be deemed ineligible to participate in OVDP if at least one of the following events occurs before a request for pre-clearance is made:

1. The IRS commences a civil or criminal examination or investigation of the taxpayer;
2. The IRS receives information from a third-party – as the result of a John Doe summons or treaty request – that provides evidence of the taxpayer’s non-compliance;
3. The IRS commences a civil or criminal investigation that is directly related to the taxpayer’s liability; or
4. The IRS acquires information related to the taxpayer’s liability from a criminal enforcement action such as a search warrant or grand jury subpoena.

 A simple comparison of the requirements for triggering the 50% offshore penalty with the requirements that preclude a taxpayer from participating in the OVDP program reveals that they are different. For example, the mere fact that the IRS receives information relating to the taxpayer from a financial institution complying with its FATCA requirements – prior to the taxpayer making a pre-clearance request – does not render the taxpayer ineligible from participating in the OVDP, so long as no investigation has been commenced of the taxpayer based on that information. What this does mean is that the taxpayer now faces a 50% offshore penalty instead of 27.5%.

Similarly, the mere fact that the IRS served a John Doe Summons or made a treaty request does not make every member of the John Doe class or group identified in the treaty request ineligible to participate in the OVDP.

While the risk of criminal prosecution may be ever so slight please remember outside of OVDP  NW or Willful FBAR penalties are just the tip of the iceberg.
The potential for other penalties also exists, including failure to file and failure to pay penalties, accuracy-related penalties, and information-related penalties.
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