IRS Guidance on the Offshore Voluntary Disclosure Program Likely to Increase Participation

Jun 29, 2011   
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Tax practitioners recently commented on the IRS’s guidance regarding the benefits of its second Offshore Voluntary Disclosure Initiative (OVDI). Several tax practitioners said that the 2011 initiative will likely encourage more taxpayers to enter into the program.

According to tax practitioners, the provision permitting taxpayers to request a 90-day extension of the August 31 application deadline is a “helpful and positive step in the right direction.” As discussed by Mark Matthews, former Chief of IRS Criminal Investigations

The possibility of an extension comes as a great relief to practitioners who want to help the clients come into compliance, but were fearful that delays in obtaining bank records, for example, might cause them to miss the deadline and then get into an unnecessary dispute about penalties. It is rarely the taxpayer’s fault that the bank records take a while to obtain.

The IRS clarified that it is possible that taxpayers who opt out of the program could receive a better deal on civil penalties if they have acted in good faith. The IRSs previous approach provided for blanket sanctions, regardless of whether a taxpayer was willfully evading taxes or simply made a mistake.

According to Matthews, “probably more than anything, the tone of the guidance was helpful, because it did not carry the threat that an opt-out was a sure way to a retaliatory audit.” He emphasized that advising clients is still difficult because there is no track record and the potential penalties are high.

Additionally, tax practitioners commented on the provision that allows taxpayers living abroad who earned less than $10,000 annually in US source income and complied with the tax reporting and payment rules in their country of residence to qualify for a five percent penalty instead of the 25 percent penalty mandated by the program. As discussed by Matthews, the IRS is

sending a message that there are situations when mitigation is appropriate, that there are circumstances that don’t warrant a 25 percent penalty. Nether long-term non-US residents nor their global tax advisers could conceive of a penalty of 25 percent of their net worth when many clients had no US tax liability.

If you have any questions regarding the IRSs Offshore Voluntary Disclosure Initiative or any other tax provision, please contact Fuerst Ittleman, PL at