IRS Will Penalize You – OVDI

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
DEPUTY COMMISSIONER
March 1, 2011
MEMORANDUM FOR COMMISSIONER, LARGE BUSINESS AND INTERNATIONAL DIVISION
COMMISS NER, SMALL BUSINESS/SELF-EMPLOYED DIV ON
FROM: v T. Miller eputy Commissioner for Services and Enforcement
SUBJECT: A.uthorization to Apply Penalty Framework to Voluntary Disclosure Requests with Offshore Issues
The purpo~e of this memorandum is to set forth a penalty framework to be applied to v~luntary dls~l?s~re requests containing offshore issues, the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI). All voluntary disclosure requests under this initiative
are mandatory work.
As Criminal Investigation (CI) makes preliminary determinations that taxpayers are eligible to make voluntary disclosures, it will forward voluntary disclosure requests with offshore implications to Examination for processing. Those requests will be distributed to and worked by examiners who specialize in offshore examinations. All resulting closing agreements will be reviewed and executed as prescribed by existing delegation orders.
Effective as of the date of this memorandum for all offshore voluntary disclosures received after the close of the 2009 Offshore Voluntary Disclosure Program (2009 OVDP), you are authorized until further notice to execute agreements to resolve the tax liabilities related to offshore issues of taxpayers who make voluntary disclosure requests in the following manner:
(1) Assess all taxes and interest due for the years 2003 through 201 0 (e~ception: for accounts opened or received within this period, assess all taxes and Interest due starting with the year the account opened or was received). Require the taxpayer to file or amend all returns, including information returns and Form TO F 90-22.1, Report of Foreign Bank and Financial Account.s, ?ommonly known as an “FBAR”, and all other documents set forth in the SubmiSSion
Requirements.
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(2)
Assess an accuracy-related penalty on all years (no reasonable cause exception may be applied), and assess failure to file and failure to pay penalties when applicable.
(3)
In lieu of all other penalties that may apply, including FBAR and information return penalties, assess an offshore penalty equal to 25% (or 12.5% or 5% if the required conditions are met) of the amount in foreign financial accounts/entities and the value of foreign assets acquired with untaxed funds or producing untaxed income in the year with the highest aggregate account/asset value.
(4)
If a taxpayer meets all four of the following conditions, then the offshore penalty is reduced to 5%: (a) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account);
(b) has exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address; (c) has, except for a withdrawal closing the account and transferring the funds to an account in the United States, not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). For funds deposited before January 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it will be presumed that they were.
(5)
If a taxpayer is a foreign resident who was unaware that he or she was a U.S. citizen, then the offshore penalty is reduced to 5%.
(6)
If a taxpayer’s highest aggregate account balance (including the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) in each of the years covered by the 2011 aVDI is less than $75,000, then the offshore penalty is reduced to
12.5 percent.
Examiners and their managers have no authority to negotiate different offshore penalty percentages for 2011 avol cases.
The terms outlined herein are only applicable to taxpayers that make voluntary disclosure requests, and who fully cooperate with the IRS, both civilly and criminally.
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Cases involving offshore issues, whether under standard examination or subject to certification under the 2011 aVOI, must be assigned and worked on a priority basis. In addition, to foster taxpayer confidence and to encourage taxpayers to come forward voluntarily to self-correct prior tax non-compliance, it is incumbent on the Service to insure that similarly-situated taxpayers are treated in a fair and consistent manner within the 2011 avo/. Key to the success of the 2011 avol is the involvement of frontline managers in all aspects of the process as well as the application of the guidance in this memo.
Taxpayers who participated in the 2009 avop (whose cases have been resolved and closed with a Form 906 closing agreement) who believe the facts of their case qualify them for the 5% or 12.5% reduced penalty criteria of the 2011 aVOl, but who paid a higher penalty amount under the 2009 avop, should provide a statement to this affect inclUding all pertinent contact information (name, address, SSN, home/cell phone numbers), the name of the Revenue Agent assigned to their case, and a copy of their closing agreement. This information should be sent to:
Internal Revenue Service 3651 S.IH35 Stop 4301 AUSC ATTN:2009 avop Determination Austin, TX 78741
Upon receipt of this information, the case must be assigned to an examiner to review and make a determination. If a 2009 avop case is still open and the facts meet the criteria for the reduced 5% or 12.5% penalty of the 2011 aVOI, the examiner will assert the reduced penalty as appropriate. More guidance will be forthcoming regarding applications of the 2011 avoI rules to 2009 avop cases.
cc: Chief Counsel Commissioner, Tax Exempt and Government Entities Chief, Criminal Investigation Chief, Appeals

Letter to Congresswoman Carolyn Maloney sent August 1, 2011

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Letter to Congresswoman Carolyn Maloney sent August 1, 2011

I live in Israel. Marylouise Serrato of the ACA suggested I contact you as I believe I am being unjustly treated by the IRS.

My wife and I, in our latter years, I being 70 and Nancy 67, have been selected “at random” by the IRS for a compliance research examination for the tax year 2008. I was sent a seven page Form 4564 listing all the documents required for the audit. I must also fill out Forms 9209, 9211 and 9213 providing appropriate certified translations of each document.

We maintain dual citizenship and have been full Israeli citizens since 1992. We file and pay income taxes to the US every year. We also pay Israeli income taxes every year and have owned our house on Moshav Evan Menachem for the last 13 years. It is quite clear that we are eligible for the Earned Income Exclusion and that, even if we claim our gross earned incomes from my medical work ($28,743) and my wife’s farming work ($50,691), without reduction for expenses, we do not exceed the maximum allowable Earned Income Exclusion for the tax year 2008.

They want proof of our Israeli residency, which is in Hebrew. The want all the documentation regarding all expenses claimed on the Schedule C of our self employment endeavors, which, obviously also is in Hebrew and, according to the tax compliance officer, requires “Certified Translation.” All these translations entail a huge amount of work, time and expense to complete. Needless to say, our earned income, even if you don’t reduce it by business expenses, does not exceed the maximum earned income exclusion for 2008. We have always paid the self employment tax (social security) based on this earned income.

I feel that this total audit is unfair because the IRS has no representative in Israel. We deal with the office in Puerto Rico. They have no one who can read and understand Hebrew. If they want to review all this documentation they should provide a means of their understanding it such as an IRS officer in the Embassy here. I really have been depressed and distraught over this whole affair. I believe that it caused my acute appendicitis, which occurred three days after receiving the notification of this audit. I have even thought of taking my own life.

I turned to the Tax Advocate Service for assistance and they requested that the IRS carry out a limited/focused audit instead of the all-inclusive compliance research exam. The request was denied by the IRS. After that, the Advocate said they could not help me any more and closed my file.

Can you help me in any way or refer me to anyone who might be able to influence the IRS to at least carry out a focused audit? Can you draw this to the attention of someone in the IRS who might be able to help?

Thank you for anything that you try to do.

Author’s addendum: This inquiry was not answered as of this date