Consider the following fact pattern:
Father and daughter are participants in the OVDP who submitted their OVDP Letters after August 4, 2014. Each owned separate unreported offshore bank accounts during the OVDP period 2006 through 2013.
The father’s account was with a bank on the IRS list of banks for which, after August 4, 2014 OVDP submissions, accounts are subject to a 50% Miscellaneous Offshore Penalty.
The daughter’s account is not on the list and would normally be subject to the 27.5% Miiscellaneous Offshore Penalty.
But, In October, 2013 the father added the daughter’s name to his listed bank account making her a joint owner. The daughter was added to the account after the father suffered a mild stroke and feared he might suffer another more serious stroke and become incompetent.
Clearly the father’s listed account is subject to the 50% penalty; but, does the daughter’s joint ownership[ of father’s listed account for three-months render her non-listed account also subject to the 50% Miscellaneous Offshore Penalty?
Let’s look at the FAQs.
OVDP FAQ ANSWERS APPLYING TO 50% PENALTY
A 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation. See FAQ 7.2.
Beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50-percent miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation: an event has already occurred that constitutes a public disclosure that either (a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person; (b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person or (c) the foreign financial institution or other facilitator has been identified in a court- approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a “John Doe summons”) at the foreign financial institution or have accounts established or maintained by the facilitator. Examples of a public disclosure include, without limitation: a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator. A list of foreign financial institutions or facilitators meeting this criteria is available.
Once the 50-percent miscellaneous offshore penalty applies to any of the taxpayer’s accounts or assets in accordance with the terms set forth in the paragraph above, the 50-percent miscellaneous offshore penalty will apply to all of the taxpayer’s assets subject to the penalty (see FAQ 35), including accounts held at another institution or established through another facilitator for which there have been no events constituting public disclosures of (a) or (b) above (emphasis added).
I called the OVDP Hotline, leaving the usual voicemail message with my question. Usually, one receives a call-back no earlier than the following day. This time I received a call back in about an hour. The OVDP agent told me he’d called back quickly because my question was novel. He said that the IRS position is that the OVDP FAQs are applied literally and to the letter. The above quoted FAQs 1.1 and 7.2 (“Frequently Asked Questions” that govern OVDP submissions) state in essence that if you own any interest in a listed bank at any time during the OVDP period all of your accounts are subject to the 50% penalty. The OVDP agent initially thought, from a literal reading of the FAQs, that the 50% penalty would apply to the daughter’s separate account. But, he felt that result to be harsh given my client’s unusual facts.. He discussed my question with others in his office and they concluded that the OVDP would follow the stringent rule even in these unfortunate circumstances. He suggested, however, that when my client’s submission is reviewed by the field agent, I could raise the issue even though the OVDP FAQs are publicly stated to be rigidly applied. The agent, he said, could elect send the matter to a higher level and a technical specialist would than review that interpretation of the FAQs to the above facts.
Of course, he also said my client could opt-out, but that is not a helpful option for my clients for reasons not germane to the question discussed in this post.
© 2014 by Robert S. Steinberg, Esquire
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