On Nov. 21, three new documents related to Offshore Voluntary Disclosure Programs (OVDP) were released by the IRS. The three documents, all chief council memorandums, were released in response to a Freedom of Information Act (FOIA) request made by Tax Analyst.
Traditionally, the OVDP is a program with streamlined procedures, as well as other options for taxpayers failing to report gross income from foreign financial assets or failing to file the necessary Foreign Bank Account Reporting (FBAR) documentation. The program was developed as a way to bring taxpayers into compliance while limiting exposure to some potential penalties. These memorandums provide a glimpse into some of the Service’s legal analysis for addressing taxpayer issues under the OVDP.
Two of the three memorandums address issues arising under the Miscellaneous Offshore Penalty (MOP). The MOP is a penalty on taxpayers residing in the U.S. who hold foreign financial assets that have given rise to tax compliance issues, and who are participating in the Streamlined Domestic Offshore (SDO) procedure. The penalty equals 5 percent of the highest aggregate value or balance of the taxpayer’s foreign financial asset during the FBAR or covered tax return period. The MOP is applied to taxpayers in lieu of FBAR, failure to file information returns, and accuracy related penalties.
In the memorandum dated April 29, 2015, chief counsel discusses whether a refund may be granted to a taxpayer having overpaid the MOP. Taxpayers entering into the SDO must sign the SDO certification form, which has a provision waiving the taxpayer’s right to seek a refund or an abatement of the MOP. In this particular case, the Taxpayer miscalculated the MOP and subsequently filed an “informal claim for refund.” In the memorandum, the office of chief counsel determined that the IRS may consider granting a refund when the return is the result of an error by the taxpayer.
In the second MOP memorandum, dated July 12, 2016, chief council determined that Swiss libre passage accounts are not exempt from the MOP. The Taxpayer in this memorandum rolled over a pension into a Swiss libre passage account. Although a libre passage is similar to an IRA, it is not a qualified pension plan for US tax purposes. Libre passage accounts are also not covered by any tax treaties between the U.S. and Switzerland. The office of chief council determined that the Taxpayer was not only required to report the initial distribution from the pension, but was also required to report the interest income and growth of the new Swiss account.
The third memorandum, dated July 6, 2016, deals with a taxpayer entering into a closing agreement after having shown a desire to withdraw from the OVDP. In this case, the Taxpayer expressed an interest in withdrawing from the program in a letter to their examiner. However, the Taxpayer remained in the ODVP, eventually signing a closing agreement. There was a concern that the closing agreement may not be legally sufficient. However, the agreement was ultimately determined by chief counsel to meet the requirements of IRC § 7121.
Voluntary disclosure programs can provide significant benefits to taxpayers as opposed to the IRS finding this information through audit or exam. Additionally, the IRS has entered into agreements, through the Foreign Account Tax Compliance Act (FATCA), with over 100 countries to exchange information of citizens with accounts in those countries. However, navigating these options is unique to each taxpayer, and decisions should be carefully considered with counsel. If you have questions regarding the OVDP or other complex tax issues, please contact Steven Miller, alliantgroup, LP’s National Director of Tax, at Steven.Miller@alliantgroup.com.