By Brian M
We have written at least 100 posts about the Offshore
Voluntary Disclosure Program (called OVDI or OVDP) and the need to file FBARs
(Reports of Foreign Bank and Financial Accounts). In almost every such post we
remind readers that time is running out. Many folks learned this week just how
true that advice was.
The IRS has kicked out an undisclosed number of taxpayers
from the OVDI program this week, even though they had previously received
acceptance letters. Why? Because their names had already been disclosed to the
IRS from a cooperating bank. The decision to begin enforcing the “first contact
policy” has tremendous impacts on the millions of Americans with unreported
foreign accounts.
Officially, anyone can participate in the Offshore Voluntary
Disclosure Program unless they are under audit or criminal
investigation, have received notice from the IRS regarding unreported foreign
accounts or the IRS has already received their name from a cooperating bank.
The first two exceptions are easy to understand = if you get a notice in the
mail or a knock on the door from the IRS it’s too late to seek amnesty
protection.
No one knows how or when the IRS will receive information
from a cooperating bank. In some instances, the information could literally sit
for months somewhere within the giant IRS bureaucracy until contact is made.
That is exactly what has happened with last week’s recision letters sent by the
IRS.
An undisclosed number of taxpayers who were already accepted
into the program received letters from the IRS advising them that they were no
longer eligible. Their participation was terminated meaning that they are now
subject to audit, possible criminal prosecution and draconian penalties. Some
had been in the program for 6 months before receiving the fateful letters.
Obviously, tax records are confidential and the IRS won’t
share the names of those folks who have been rejected from the program. From
what we can gather from the small community of lawyers that specialize in
offshore tax reporting, most of those rejected had accounts at Bank Leumi.
Coincidentally, Bank Leumi has been under investigation by the IRS and Justice
Department for quite some time. This means that as part of the investigation,
at some point Bank Leumi turned over the names of U.S. account holders
rendering those people instantly ineligible for the amnesty program.
Is the IRS playing fair? Absolutely not but they are playing
within the rules. Rules that they made.
We believe that once accepted into the program, participants
should be allowed to complete the program and reap the benefits of compliance.
The stated mission of the IRS is to promote voluntary compliance with the tax
code. Pulling the rug out from under folks who made a good faith decision to
come into compliance isn’t exactly fair. The IRS did reserve the right to
reject anyone, however, if their name and identity had already been disclosed.
Because of the bureaucratic inefficiencies inherent within
the IRS, that means others may find themselves accepted into the program and
later rejected.
The message being sent by the IRS is crystal clear. The
longer you wait, the higher the risks. Beginning next year, foreign banks will
be required to identify and report account holders with ties to the United
States. With hundreds of thousands of reports expected, it could be months – or
more – before the IRS gets around to sending notices to anyone with a
previously undisclosed account.
Receiving a rejection letter from the IRS isn’t the end of
the world for some taxpayers. But it does mean an audit, more legal and
accounting expenses and the potential of much higher penalties. (The penalties
for unreported foreign accounts are as much as $100,000 per account or 50% of
the highest account balance for each year the account was unreported.) If
taxpayers can prove the failure to disclose the offshore accounts was due to
mere negligence or ignorance, the penalties might actually be lower than
those in amnesty.
The decision to reject Bank of Leumi account holders is
something we will watch closely. Unfortunately, this probably is the beginning
of a trend.
Our message needs to be repeated again. TIME IS RUNNING OUT. For a few it may already be too late. If you have unreported accounts, get off the fence and do something now. Before it’s definitely too late.
Above is an excellent article. I think that someone with
this problem would do much better if they filed and the elected to opt out.
That way you deal with the appeals division of the IRS and usually get a much
better result.
The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.
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