Offshore Voluntary Disclosure Eligibility Criteria

Generally, unless ineligible under specific rules, U.S. taxpayers who have undisclosed offshore accounts or assets and meet certain requirements are eligible to apply for IRS Criminal Investigation’s Voluntary Disclosure Practice and the OVDP penalty regime. In this article, I will only strive to broadly outline the 2012 OVDP (Offshore Voluntary Disclosure Program) general eligibility criteria, but the issue of the eligibility should be carefully analyzed in light of your individual circumstances by an international tax attorney experienced in the IRS voluntary disclosure programs.

The Types of Juridical Persons Eligible to Participate in the OVDP

Individual U.S. taxpayers as well as entities (such as corporations, partnerships and trusts) are eligible to make voluntary disclosure, assuming all other eligibility requirements are met.

Requirements of IRM (Internal Revenue Manual) 9.5.11.9 Must Be Met

In order to participate in the 2012 OVDP, a U.S. taxpayer must meet all requirements of IRM 9.5.11.9. In general, IRM 9.5.11.9 spells out five voluntary disclosure eligibility requirements.

1. Voluntary Disclosure Must Be Truthful

It is the most basic requirement of the voluntary disclosure – an OVDP participant cannot lie to the IRS during the voluntary disclosure. Generally, I try to go over the entire case of my clients in order to make sure that there is not even an appearance of the disclosure being anything less than truthful.

2. Voluntary Disclosure Must Be Complete

You cannot do a partial voluntary disclosure; an OVDP participant must disclosure all of his failings to comply with U.S. tax laws to the IRS. Therefore, the taxpayer who participates in the voluntary disclosure must strive to uncover any past non-compliance committed during the OVDP disclosure period. Unfortunately, such process requires reliance to a certain degree on the memory of the clients about events that may have happened some time ago and such memory may have lost its accuracy. Another major obstacle is the assumption often made by clients that certain facts are not important and they never disclose them, but which later turn out to be critical to the case.

As an attorney, I strive to test every part of my client’s case in order to make sure that there are no hidden issues and the IRS cannot disallow OVDP participation due to incomplete disclosure. Fortunately, the long experience of with numerous clients in this area greatly helps in uncovering the potential problems and allows for a more effective voluntary disclosure process.

3. Voluntary Disclosure Must Be Timely

A voluntary disclosure is timely if it is received by the IRS before either of the following events occurs:

(a) the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation. Notice, it is not relevant whether the IRS has initiated a civil examination which is not related to undisclosed foreign accounts or undisclosed foreign entities – either of the two, civil examination and criminal investigation, will prevent OVDP participation;

(b) the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;

(c) the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or

(d) the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

This is why time is so crucial in voluntary disclosures – it may make all the difference in what type of penalties you will be facing. This is also why it is so important for the taxpayers who found out about their non-compliance with U.S. tax laws to contact Sherayzen Law Office as soon as possible to discuss the voluntary disclosure options.

4. Cooperation During Voluntary Disclosure

The taxpayer must show a willingness to cooperate (and does in fact cooperate) with the IRS in determining his correct tax liability. Failure to do so will render the taxpayer ineligible to conduct voluntary disclosure.

5. Good-Faith Payment Arrangement

The taxpayer must make good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. The OVDP terms require the taxpayer to pay the tax, interest, and accuracy-related penalty, and, if applicable the failure to file and failure to pay penalties with their submission. However, it is possible for a taxpayer who is unable to make full payment of these amounts to request the IRS to consider other payment arrangements.

The burden is on the taxpayer to establish inability to pay, to the satisfaction of the IRS, based on full disclosure of all assets and income sources, domestic and offshore, under the taxpayer’s control. Assuming that the IRS determines that the inability to fully pay is genuine, the taxpayer must work out other financial arrangements, acceptable to the IRS, to resolve all outstanding liabilities, in order to be entitled to the penalty relief under the OVDP.

Per Se Ineligibility

Even if the requirements of of IRM 9.5.11.9 are met, there are certain “per se” ineligibility categories of taxpayers which will prevent such taxpayers from participating in the 2012 OVDP:

First, if a taxpayer appeals a foreign tax administrator’s decision authorizing the providing of account information to the IRS and fails to serve the notice as required under existing law (see 18 U.S.C. 3506) of any such appeal and/or other documents relating to the appeal on the Attorney General of the United States at the time such notice of appeal or other document is submitted, the taxpayer will be ineligible to participate. This OVDP provision closes one of the 2011 OVDI loopholes that allowed some U.S. taxpayers to appeal certain foreign decisions and not to inform the U.S. Department of Justice about it (as required by law), while maintaining their voluntary disclosure eligibility.

Second, the IRS may announce that certain taxpayer groups that have or had accounts at specific financial institutions will be ineligible due to U.S. government actions in connection with the specific financial institution. Such announcements will provide notice of the prospective date upon which eligibility for specific taxpayer groups will be posted to the IRS website. This possibility builds a tremendous pressure on non-compliant U.S. taxpayers, because there is constant fear that their voluntary disclosure eligibility will be taken away by an IRS action irrespective of the IRM 9.5.11.9 compliance.

Third, the IRS voluntary disclosure practice does not apply to taxpayers with illegal-source income.

Contact Sherayzen Law Office for Help With Your Offshore Voluntary Disclosure

The voluntary disclosure eligibility criteria is complex and it is best to consult an attorney experienced in voluntary disclosures with respect to whether you are eligible to conduct voluntary disclosure under your particular circumstances.

This is why your first step should be to schedule a consultation with a Sherayzen Law Office attorney. Our international tax firm is highly experienced in voluntary disclosures and they can help you with an entire voluntary disclosure process, including initial assessment of your FBAR liability, determination of available voluntary disclosure options, preparation of all of the required legal and tax documents, and rigorous representation of your interests during your negotiations with the IRS.