As we close more and more cases under the 2009 Offshore Voluntary Disclosure Program (OVDP) and head into the 2011 Offshore Voluntary Disclosure Initiative (OVDI), we look back at a few cases where our advocacy, coupled with the good sense and understanding of some IRS agents, allowed us to close some OVDP cases with excellent results for our clients. As our Wall Street colleagues always tell us, past performance is not a guarantee of future results. In addition, all clients are different and have different facts. Those qualifications aside, here are a few cases where our clients came out of the OVDP with good results.
The Unknowing Academic
One client, a ninety year old retired professor, established a bank account in Europe many decades ago when he temporarily lived there while teaching on sabbatical. He established the bank account for his day-to-day living expenses. After his return to the US, the account remained in Europe, slowly earning passive interest for many years. The client did not know that he was obligated to disclose the account on an annual FBAR, and pay tax on the interest that had accrued each year. The client came to realize that he had not been in tax compliance, and therefore entered the Offshore Voluntary Disclosure Program (OVDP).
This particular client already signed a will that dictates that at his death, his assets, including the foreign assets, will go to a scholarship fund at a US university. The full OVDP penalty would have significantly reduced the amount left for the scholarship fund. We argued that our client did not willfully fail to report the foreign account; that the account was set up not to evade US taxes; that the client is elderly and did not know his FBAR obligation, and that the foreign account was passive. Under these facts, we were able to persuade the IRS to limit the penalties to only $5,000 per year for the last five years. This was a great deal less than the standard penalty of 20% of the highest value of the foreign account, and much more was left for the scholarship fund.
Funds Hidden From the Nazis Under a Floor
Another client and his brother were Hungarian Jews who survived the Holocaust, including time at Auschwitz. After the war, they went back to their family home in Hungary, and discovered that their father, who did not survive the Holocaust, had hidden his nest egg from the Nazis by excavating a niche under the basement floor. The brothers deposited the family money in a Swiss bank. Ingrained with the psychology of both refugees and survivors, they viewed the Swiss account as providing stability in case of the next calamity. The client emigrated to the US, but the account stayed in Switzerland. Unbeknownst to the client, when he became a US resident, the account in Switzerland became tax non-compliant.
Again, we argued that these are not the facts of a tax evader; they are the facts of a tragic family history. We persuaded the IRS that any tax non compliance was not willful. We were successful in getting the IRS to apply penalties of only $5,000 per year for the last four years, rather than 20% of the account that by now had grown to close to $2 million.
In another case, all of our client’s foreign accounts were subject to the 20% penalty for various factual reasons. However, the IRS also included the value of our client’s foreign life insurance within the value of the foreign assets subject to the 20% penalty. We argued that, until guidance issued by the IRS only in 2011, the law was far from clear that foreign insurance is reportable on the FBAR. Further, if the law until 2011 was far from clear, then our client could not have been in non-compliance before 2011. In addition, the foreign insurance policy did not produce any taxable income. The IRS accepted our arguments and withdrew the value of the foreign life insurance from the client’s penalty base.
Next, we had a case where a US taxpayer worked overseas for a foreign company and received shares of stock of the employer as compensation. The stock was contributed by the employer into a foreign account. The client entered the voluntary disclosure program because that account had not been reported via FBARs. However, when we analyzed the relevant documents, we learned that all foreign income had been reported. We removed the client from the voluntary disclosure program in order to avoid the 20% penalty. One year later, the IRS came back and said the equivalent of “not so fast”, requesting the underlying documents. But, in the end, we were able to get the IRS to close the matter without assessing any penalty.
All of the above are actual cases where we achieved success for our clients. However, it must be noted that there is no guarantee that future cases will have similar outcomes. In particular, the penalty regime of the 2011 OVDI is very different from the penalty regime under the 2009 OVDP. Foreign life insurance is now explicitly covered by the 2011 OVDI. Significantly, arguments of non-willful tax non compliance and of reasonable cause for non-compliance, are of no consequence under the OVDI. Nevertheless, these case evidence that our good advocacy obtained favorable results for our OVDP clients.