Willful Taxpayers with Corrected FBARs Will Not Negate Penalties
A recent decision by the Third Circuit Court of Appeals shows the inherent danger for taxpayers who submit to the IRS Offshore Voluntary Disclosure Program (OVDP) and then leave the program, before completing the program. Unfortunately, in the case of Collins, there has been inaccurate fear-mongering information published on the World Wide Web by less experienced counsel about resolving willful FBAR issues – without putting the case into proper context. Specifically, the issue in Collins was that the Taxpayer submitted to — and then withdrew from — OVDP. Moreover, when the Taxpayer’s returns were audited, it was revealed that the amended tax returns were incorrect (in this case, it turned a refund into a nearly $80K tax liability) due to PFIC issues. In Collins, the key takeaway is that once you submit to OVDP, you have to finish the submission or formally opt-out of the penalty — and understand the risks associated with an opt-out–– noting, that opting out does not mean you will avoid all penalties. Even in an opt-out situation, taxpayers typically still be assessed penalties, albeit in some circumstances the penalties may be lower (although they could also receive higher penalties as well).
What was OVDP?
OVDP was the Offshore Voluntary Disclosure Program. It was an offshoot of the traditional Voluntary Disclosure Program, that was specifically developed for taxpayers to get into compliance with previously undisclosed foreign money. In September of 2018 the OVDP offshoot was merged back into the traditional VDP program — so that these days, taxpayers who submit undisclosed foreign assets still used the expanded traditional VDP program.
Taxpayer Entered OVDP and then Withdrew
In this case, the main issue was that Taxpayer entered OVDP and then dropped out.
[Taxpayer] did not report any of his foreign bank accounts until he voluntarily amended his tax returns At that time, the IRS accepted Taxpayer] into its Offshore Voluntary Disclosure Program, and his accountant prepared amended returns for 2002to 2009, which yielded modest refunds stemming from large capital losses in 2002.
Upon filing the amended returns, [Taxpayer] withdrew from the Voluntary Disclosure Program, prompting an audit that uncovered an unforeseen issue.
Because [Taxpayer] invested in foreign mutual funds, his Swiss holdings were subject to an additional tax on passive foreign investment companies, 26 S.C. §1291 et seq., which he failed to compute in his amended returns.
The IRS audit determined that [Taxpayer] owed an additional $71,324 for 2005, 2006, and 2007, plus [Taxpayer] made payment towards these overdue taxes and associated penalties.
Reasonable Cause does Not Negate Wilfulness
One very important fact about Reasonable Cause and avoiding and/or abating IRS penalties is that reasonable cause does not negate willfulness. That is because if a person was willful, then they cannot technically have had reasonable cause. Thus, any argument that Taxpayer acted with reasonable cause in remedying the filings would not be persuasive if it was determined the Taxpayer was willful.
Important Takeaway from Case
If a Taxpayer enters the IRS Offshore Voluntary Disclosure Program, then the IRS is not going to let them withdraw from the program and submit payment/amended returns in order to avoid all penalties. Entering into the Offshore Voluntary Disclosure Program is a big step and you should be sure to speak with a Board-Certified Tax Law Specialist who specializes exclusively in this area of tax to get a good understanding of the protocols and procedures before submission.
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