Under the 2009 Offshore Voluntary Disclosure Program (OVDP), the IRS requested that taxpayers sign IRS Form 872, Consent to Extend the Time to Assess Tax. By signing this form, taxpayers agreed to extend the applicable statute of limitations period (usually six years) for the assessment of tax. The IRS cryptically states that “You do not have to sign the consent to be considered to have cooperated with the Internal Revenue Service for purposes of determining who has the burden of proof in any court proceeding.” The consent is silent on the issue of whether a taxpayer who does not sign it will be considered non-cooperative for purposes other than burden of proof in any court proceeding. We believe that this means that a taxpayer in the 2009 OVDP who does not sign the consent may be considered non-cooperative. To the extent that the taxpayer may, at some point, have to negotiate with the IRS, or may argue for decreased penalties, or may even exit the OVDP and face an audit or court challenge, not signing the consent might have a negative result in those situations, i.e., the IRS will “hold it against the taxpayer” that he or she did not sign the consent.
Moreover, having entered the OVDP, the taxpayer by the very terms of the OVDP has already agreed to pay back taxes (plus penalties and interest) going back six years. Thus, the Form 872 is essentially another writing to the same effect.
In most offshore voluntary disclosure cases, the taxpayer files amended tax returns showing the foreign income, pays back taxes, penalties and interest, signs a Closing Agreement and the matter is then concluded. However, if the foreign assets are criminally derived (e.g., drug profits, laundered funds, etc.), or if the taxpayer has not made a truthful and complete disclosure, then the taxpayer having signed Form 872 would result in the IRS re-opening the case which would presumably have significant results, including a criminal investigation. Assuming that the disclosure did not involve criminal funds, and was truthful and complete, the matter would head to closure and the Form 872 would have no consequence.
Under the 2011 Offshore Voluntary Disclosure Initiative (OVDI), signing the Form 872 is no longer optional, but is now mandatory. In addition, the IRS now also requires a new form, the Consent to Extend the Time to Assess Civil Penalties Provided by 31 U.S.C. §5321 for FBAR Violations. Curiously, while the OVDI terms mandate the taxpayer to sign this consent, the consent itself states that “the parties to this agreement are aware that they have the right to refuse to sign this consent”. Above, we noted the possible negative consequences for not consenting. Moreover, under the 2011 OVDI, it is likely that not consenting would result in the IRS considering the taxpayer to be non-cooperative in his or her voluntary disclosure.
Finally, we note that while the IRS has collected back taxes under the OVDP, if the voluntary disclosure results in a refund to the taxpayer, our experience has been that the IRS takes the position that the refund is barred by the statute of limitations.