The IRS has kicked out an undisclosed number of taxpayers from the OVDI program this week

Lance Wallach

We have written at least 75 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 its 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 its definitely too late.

With the number of options decreasing and looming compliance deadlines, anyone with an unreported account should consult with an experienced CPA who used to be with the IRS either in the international division or an appeals officer. You want to file and then opt out and go to appeals to reduce the tax.

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.