IRS Releases Training Documents on Offshore Voluntary Disclosure Program

last month the IRS released more than 6,500 pages from the Internal Revenue Service on the agency’s Offshore Voluntary Disclosure Program and how it trains its agents. The documents included material used in training IRS personnel in the Offshore Voluntary Disclosure Program, determining program penalties and instructing IRS employees about the program.

The purpose of the OVDP is for individuals who have failed to file an FBAR (Foreign Bank and Financial Accounts Report) form with the IRS, or didn’t report income from offshore activities to disclose their errors and to avoid criminal tax prosecution. The OVDP’s current penalty is 27.5 percent. However there are other alternatives available to certain taxpayers that may provide additional relief, including the SDOP and SFOP programs.

Some of the materials advise agents on interpretation of willfulness and other key legal terms in the SDOP and SFOP programs, which both require non-willfulness as an eligibility requirement.

Below is an illustrative summary of one document.  We are carefully reviewing the documents to further understand the IRS’ analysis in reviewing our OVDP, SDOP and SFOP cases.

Document 11: page 52: “Willfulness is not present where a taxpayer has acted by mistake, accidentally, or in good faith. Making an honest mistake is not fraud while deliberately choosing to not comply with the law can be. Mistakes, inadvertence, reliance on others, honest differences of opinion, and mere negligence or carelessness do NOT constitute willful intent. Willfulness is determined by showing the following:

Document 11: Page 53-54: Taxpayer Involvement: Knowledge-  Intent-  Purpose.

• Did the client have control over the offshore accounts/transactions?
• How did the client access the funds?
• How complex was the client’s financial transactions? (Multiple Trusts, Multiple Countries, Convoluted Arrangements)- § What role(s), or title(s), did the taxpayer hold under the scheme arrangement? e.g. Manager, Director, Trustee, Beneficiary-  § Did the taxpayer play an active role in the scheme?
• Who set up the scheme?
• What communications did the taxpayer initiate or become involved in- (emails, letters etc.) concerning the scheme?
• What types of reports, if any, did the taxpayer receive from the promoter regarding the funds and/or the program?- § Look for badges of fraud (unreported income, concealment, destruction of records, use of code words, etc.)-  Taxpayer Knowledge of Scheme
• Did the taxpayer change accountants during the period of involvement in the scheme?- § Has the taxpayer participated in previous abusive schemes?
• Did the taxpayer disregard competent advice from the Service or other sources?- § How many years was the taxpayer involved in the scheme?-  § Prior convictions for similar offenses?
• Prior civil examinations, adjustments, fines, penalties, criminal investigations and correspondence relative to illegal- schemes?
• Information/documentation in the possession of the taxpayer that address illegality of the scheme? The Examiner also needs to determine if the taxpayer was aware that the Offshore Arrangement was abusive and designed to circumvent the tax laws. Questions such as the ones listed should be considered during the interview. Did you notice the taxpayer get a new preparer? Why? Maybe the old preparer was uncomfortable with the situation? Maybe in the year the scheme started, the promoter referred the taxpayer to a new preparer familiar with the scheme? Talk to the old preparer, find out why the relationship ended? What details did the taxpayer have about the scheme? Does he have promoter material? What was he told about how the scheme works? Does he have an opinion letter? Did he ever question its reliability? Maybe get a second opinion from the IRS or another unrelated professional? Is the taxpayer a known abuser? Was he identified as participating in an earlier arrangement in e-trak of some other database? Can you tell from IDRS if the taxpayer has been examined in the past? If so what were the results? Were penalties assessed?
• Has he been convicted of things other than tax crimes?

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