1 | P a g e
July 2014OVDP – What Happens Upon Rejection?
On January 9, 2012, the Internal Revenue Service (“IRS”) announce...
2 | P a g e
The purpose of the OVDP is to provide taxpayers with a compromise. A taxpayer must become compliant with
all a...
3 | P a g e
Used with the publisher's permission from GLOBAL TAX WEEKLY—A CLOSER LOOK, a weekly journal
published by CCH, ...
Upcoming SlideShare
Loading in...5
×

OVDP – What Happens Upon Rejection?

288

Published on

On January 9, 2012, the Internal Revenue Service (“IRS”) announced its third Offshore Voluntary Disclosure Program (“OVDP”). This program was modified for submissions after July 1, 2014, but remains part of the 2012 program. The previous OVDPs (the 2011 version was classified as an Offshore Voluntary Disclosure Initiative or OVDI) generated more than $5 billion of collected back taxes, interest and penalties, from more than 33,000 program participants. Individuals and corporations alike were among that group of program participants.

Published in: Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
288
On Slideshare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
1
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

OVDP – What Happens Upon Rejection?

  1. 1. 1 | P a g e July 2014OVDP – What Happens Upon Rejection? On January 9, 2012, the Internal Revenue Service (“IRS”) announced its third Offshore Voluntary Disclosure Program (“OVDP”). This program was modified for submissions after July 1, 2014, but remains part of the 2012 program. The previous OVDPs (the 2011 version was classified as an Offshore Voluntary Disclosure Initiative or OVDI) generated more than $5 billion of collected back taxes, interest and penalties, from more than 33,000 program participants. Individuals and corporations alike were among that group of program participants. The voluntary disclosure programs are aimed at helping the IRS combat offshore tax evasion by ensuring tax compliance. In order to facilitate U.S. taxpayer compliance, the IRS has provided taxpayers with a means to come forward voluntarily and report their previously undisclosed foreign accounts and assets. However, not all taxpayers are granted access into an OVDP upon request. When a taxpayer is denied access into an OVDP, he receives a rejection letter which states the general reason for the denial. The letter also instructs the taxpayer of his outstanding penalty for that tax year. Within the rejection letter, the IRS provides an appeals procedure for taxpayers seeking further consideration of the denial; herein lies the problem. When Is a Taxpayer Exposed to Reporting Penalties for Offshore Assets? Taxpayers may be subject to significant penalties if they fail to adequately and timely disclose assets maintained outside of the United States. The IRS’s Frequently Asked Questions (“FAQs”) list specific returns which indicate situations requiring timely disclosure. Included within the list are: • FinCEN Form 114 (formerly TD F 90-22.1) – Report of Foreign Bank and Financial Accounts (“FBAR”) – An information return of U.S. taxpayers (including U.S. citizens, residents and certain other persons) maintaining foreign bank accounts with an aggregate value of at least $10,000 (USD) at any point during the year; • Form 8938 – A report disclosing the taxpayer’s interest in certain foreign financial assets, including financial accounts and securities or other interests in foreign entities; • Forms 3520/3520-A – Reporting transactions of foreign trusts (including foreign trusts with U.S. owners); • Forms 5471 – Information returns of U.S. persons owning stock in foreign corporations; and • Forms 5472 – Information returns of a 25 percent foreign-owned U.S. corporation How Does the OVDP Help Resolve a Taxpayer’s Exposure? In certain circumstances, a U.S. taxpayer has potential U.S. federal tax liability for failing to file one of the aforementioned returns. In those instances, the penalties for the failure to file an information return typically start at $10,000 per form, per year. However, the IRS presumes that the failure to adequately disclosure foreign assets in information returns indicates that a U.S. taxpayer has failed to disclose additional information. Customarily, the hidden information includes unreported income. As the United States taxes U.S. taxpayers on their worldwide income, the unreported income may be subject to additional U.S. federal income tax, penalties and interest.
  2. 2. 2 | P a g e The purpose of the OVDP is to provide taxpayers with a compromise. A taxpayer must become compliant with all aspects of the U.S. reporting regime and must pay any outstanding tax owed (along with various other requirements). In exchange, the IRS provides the taxpayers with a reduced penalty rate. Under the 2012 OVDP, taxpayers may reduce their penalties to 5, 12.5 or 27.5 percent of the highest aggregate balance of their foreign assets. These reduced rates replace a host of penalties associated with a taxpayer’s failure to file information returns (such as FBAR or other offshore-related information returns), failure to pay penalty (on the outstanding tax owed) and an accuracy related penalty. Rejection and the Right to Appeal When a taxpayer applies for the OVDP (seeking either a reduced penalty rate or waiver of the statutory penalties), the IRS may reject the application for a myriad of reasons. In such instances, while the rejection letter informs the taxpayer of the right to seek reconsideration (of the rejection) with IRS appeals, that right is not actually available. Pursuant to the Internal Revenue Manual, international penalties, “[are] not entitled to appeals consideration until after the penalty was fully paid.” Despite the appeals instructions provided in the IRS letter, the IRS Office of Appeals has determined that it has no jurisdiction to cause OVDP to re-admit taxpayers into the program. As a result, taxpayers may go through the effort and expense of preparing a request for an appeal without any possibility of success. The options for seeking a reduced rate of tax and penalty after denial of entry into the OVDP are therefore, less than attractive. When taxpayers are denied participation in the OVDP, they must: • Show reasonable cause why they failed to timely file the information return; or • Pay the outstanding penalties and interest and then initiate a refund suite in the federal courts. The first option is unattractive. It applies a subjective, facts and circumstances standard showing that the taxpayers exercised ordinary business care and prudence in determining their tax obligations but nevertheless failed to comply with those obligations. Meeting the burden is easier if there is written documentation of a qualified tax professional’s instruction indicating the position the taxpayer took was appropriate. The second option is less attractive. In such an instance, the taxpayer must pay in full the outstanding liability. Then, at an additional cost, the taxpayer must engage counsel to file a refund suit in the federal courts. Such a refund suit costs additional money and time with no assurance of success; and the courts will not put a taxpayer back into the OVDP, either. The Need for a Trusted Advisor Taxpayers who receive a notice from the IRS for a failure to file information returns are faced with a host of difficult choices. Whether the question is to pay the penalty or seek entry into the OVDP, working with a trusted advisor is key. To help avoid additional, unnecessary expenses, a taxpayer should be mindful that there is no effective right to appeal when he is denied access into the OVDP. To evaluate whether you could benefit from participation in the OVDP, consult your local CBIZ MHM tax advisor.
  3. 3. 3 | P a g e Used with the publisher's permission from GLOBAL TAX WEEKLY—A CLOSER LOOK, a weekly journal published by CCH, a Wolters Kluwer business. Copying or distribution without the publisher’s permission is prohibited. To subscribe to the GLOBAL TAX WEEKLY—A CLOSER LOOK or other CCH Journals please call 800-449-8114 or visit www.CCHGroup.com. All views expressed in the articles and columns are those of the author and not necessarily those of CCH. Copyright © 2014, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. CBIZ MHM is the brand name for CBIZ MHM, LLC and other Financial Services subsidiaries of CBIZ, Inc. (NYSE: CBZ) that provide tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies.

×