FAQ 25 lists the OVDP submission requirements and insofar as payment goes, provides:
Payment to the Department of Treasury in the total amount of tax, interest, offshore penalty, accuracy-related penalty, and, if applicable, the failure-to-file and failure-to-pay penalties, for the voluntary disclosure period must be sent with information identifying the taxpayer name, taxpayer identification number, and years to which the payments relate…. If you cannot pay the total amount of tax, interest, offshore penalty, and other penalties as described above, submit your proposed payment arrangement and a completed Collection Information Statement (Form 433-A, Collection Information Statement for Wage Earners and Self-employed Individuals, or Form 433-B, Collection Information Statement for Businesses, as appropriate) (see FAQ 20)
Taxpayer’s may be unable to pay the full amounts due under the OVDP regime for any number of reasons, including:
- The value of the offshore accounts has decreased below the highest balance during the OVDP period on which the penalty is computed. This may be due to a general market decline like the Great Recession or may simply be the result of poor or risky investment decisions.
- The account has been spent down on living expenses or to repay loans.
- The offshore funds have been invested in non-liquid assets such as a personal residence against which there is already substantial mortgage debt or no debt but the taxpayer is unable to secure a mortgage on the property.
What if the taxpayer cannot pay? Can the taxpayer still participate in the OVDP?
FAQ 20 answers: Yes, stating:
The terms of this program require the taxpayer to pay with his submission the tax, interest, offshore penalty, and accuracy-related penalty, and, if applicable, the failure-to-file and failure-to-pay penalties. However, it is possible for a taxpayer who is unable to make full payment of these amounts to request the IRS to consider other payment arrangements. If you cannot pay the total amount of tax, interest, offshore penalty, and other penalties required, submit your proposed payment arrangement and a completed Collection Information Statement (Form 433-A, Collection Information Statement for Wage Earners and Self-employed Individuals, or Form 433-B, Collection Information Statement for Businesses, Collection Information Statement for Businesses, as appropriate). The burden will be on the taxpayer to establish inability to pay, to the satisfaction of the IRS, based on full disclosure of all assets and income sources, domestic and foreign, under the taxpayer’s control. Assuming that the IRS determines that the inability to fully pay is genuine, the taxpayer must work out other financial arrangements, acceptable to the IRS, to resolve all outstanding liabilities to be entitled to the penalty structure of this program. (Emphasis added).
I have spoken with an agent at the OVDP Hotline regarding the meaning of FAQ 20 and was told:
- If a taxpayer can pay off the OVDP debt in installments, an installment payment plan will be incorporated into the closing agreement.
- The agent said he knew of one Offer in Compromise (OIC) that had been submitted to the OVDP but was denied. The agent thought there would have to be extraordinary circumstances like health issues making payment unlikely for a OIC to be approved as part of the closing agreement.
- If the OVDP debt is so large and beyond the taxpayer’s ability to pay-off in installments, the closing agreement will state total amount of tax, interest, accuracy related penalty and miscellaneous offshore penalty and the amounts that have been paid. The taxpayer will then have to deal with the IRS Collections Division. Thus a, very large unpayable debt of a taxpayer could then theoretically be resolved through an Offer in Compromise if the taxpayer can borrow from relatives and has no significant income potential or the debt could be put into “currently not collectible” status.
- The taxpayer will not be ejected from the OVDP simply because he or she legitimately cannot pay although there is no guarantee under FAQ 20 that the OVDP penalty structure will apply. The criminal protection will not be lost, however. Still, if a taxpayer cannot pay the 27.5% or 50% penalty, how will raising the penalty bring in more cash to the government? So, where the taxpayer genuinely cannot pay the entire OVDP debt, I don’t see the logic of the government increasing the penalty because the literal terms of the OVDP have not been met.
Remember, however, that:
- The taxpayer has the burden of establishing to the satisfaction of the OVDP that he or she genuinely cannot pay.
- The decision of the OVDP on payment issues, like other OVDP matters, is not appealable outside of the OVDP. You can request that the issue presented be reviewed at a higher level within the IRS to obtain an official agency response to your request for reconsideration. But, the decision of the IRS in OVDP matters cannot be brought to IRS Appeals or the Tax Court.
With the advent of the 50% penalty on listed banks, we probably will see more cases in which the taxpayer cannot pay the full amounts due under the OVDP regime. As these cases flow through the system we will learn more about how the OVDP is treating taxpayers who cannot pay the full required amount.
© 2015 by Robert S. Steinberg, Esquire
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