National Taxpayer Advocate Identifies OVDP Program as a Serious Problem

On January 17 that National Taxpayer Advocate Nina Olson recently issued her 2012 Annual Report to Congress calling on Congress to simplify the Tax Code. In her report, Olson questioned the “one-size-fits-all” approach of the IRS Offshore Voluntary Disclosure Program (OVDP), and identified the OVDP program as a most serious problem requiring resolution.

The Report states that the IRS discouraged taxpayers from voluntarily correcting FBAR violations outside of the OVD programs.  Those who opted out could be subject to an examination and FBAR penalties of up to 300 percent of the unreported account balance. In addition, the IRS will soon require duplicative reporting on both an FBAR and Form 8938, Statement of Specified Foreign Financial Assets.

The IRS recently identified a few situations in which a taxpayer could opt out without penalty.  In addition, on September 1, 2012, it established a Streamlined Nonresident Filing Initiative that allows certain nonresidents to correct errors outside of the OVD programs.  However, as the IRS identifies more FBAR noncompliance, it will face the choice of whether to devote more enforcement resources to address it, expand its outreach and self correction options, or ignore the noncompliance altogether .

The Report makes several recommendations:

The IRS should expand the self-correction options available to all benign actors (including U .S . residents); send “soft” notices to educate persons with foreign accounts about the reporting requirements; consolidate and simplify conflicting guidance; and revise Forms 8938 and TD F 90–22 .1 to reduce duplicative reporting.

In the past the National Taxpayer Advocate has made similar complaints and recommendations about the OVDI program. Few, if any, recommendations were adopted.  Therefore, taxpayers should hold out little hope for meaningful change in this area.

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