Criminal Investigation Division Of The Internal Revenue Service Issues Disqualification Notices Under The Offshore Voluntary Disclosure Program

In a recent report (to be) published in Tax Notes Today, March 11, 2013, the Criminal Investigation Division of the Internal Revenue Service has been issuing letters to certain taxpayers who had previously been accepted into, and accordingly had made disclosures of financial and tax return information that would in many instances be of an incriminating nature, that they are no longer eligible for relief under the OVDP.

As a quick summary of the background of the OVDP, in August 2009, the IRS announced that it had completed successful negotiation with the Swiss government that would allow it to receive requested information on U.S. account holders at Swiss bank UBS. Such requests would be made to the Swiss government under the treaty with the U.S. As a result, many taxpayers that had kept unreported income in unreported offshore accounts were no longer going to hold secure the belief that their identity and information would be protected by the Swiss bank secrecy rules.

It was at that time that the IRS announced the 2009 Offshore Voluntary Disclosure Program ("2009 OVDP"), under which taxpayers that voluntarily and timely disclosed unreported offshore income for 2003-2008 could qualify for reduced penalties and escape criminal prosecution. In February 2011, a second Offshore Voluntary Disclosure Initiative ("2011 OVDI") allowed taxpayers with undisclosed income from undisclosed offshore financial and bank accounts for the 2003-2010 period the opportunity to restore their tax compliance profile. The initial deadline for the 2011 OVDI was August 31, 2011 and was extended until September 9 due to Hurricane Irene. The 2011 OVDI carries higher penalties than the original disclosure initiative, but also offered the promise of non-prosecution and reduced penalties. The 2011 OVDI allows a taxpayer to disclose his or her unreported offshore financial and bank accounts omitted from required F-BAR and other filings, including disclosure and reporting of income on federal income tax returns in exchange for a reduced 25% penalty (or in some cases, a 5% or 12.5% penalty) on the highest aggregate value of the accounts and any related assets for a particular tax year between 2003 and 2010, and payment of up to eight years of taxes and interest.

The IRS began an open-ended offshore voluntary disclosure program (OVDP) in January 2012 on the heels of strong interest in the 2011 and 2009 programs. The IRS has announced that it may end the 2012 program at any...

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