IRS Reneges On Offshore Voluntary Disclosure Deals.

“I’m from the IRS and I’m here to help.” Yes, that’s one of life’s big lies, but several years ago it looked as if that the IRS actually intended to help you out if you had an offshore tax problem.

In 2009, the IRS introduced something it called the “Offshore Voluntary Disclosure Program” (OVDP). The IRS designed it to encourage U.S. taxpayers to come forward with information about previously undisclosed offshore bank accounts, in exchange for reduced penalties.

Of course, the IRS didn’t design the OVDP to help you as much as the government. The proof is that the IRS has collected more than $5 billion since it introduced the OVDP and a couple of successor voluntary disclosure initiatives.

It also saved the IRS the time and manpower that would have been required to collect this money, because you and tens of thousands of others handed it to them on a silver platter.

If you took advantage of one of the three amnesty programs and were accepted, the IRS promised only to hit you with the back taxes, various penalties and interest. The good news was that you would escape criminal charges and time in prison.

You now have an empty bank account, but at least you also have the peace of mind that the IRS won’t be knocking at your door, right?


Earlier this month, the IRS sent faxes to tax attorneys across the country telling them that clients who it had previously been accepted in the current voluntary disclosure program, the “Offshore Voluntary Disclosure Initiative” (OVDI) are now mysteriously “disqualified.”

All of the disqualified taxpayers had undisclosed accounts at Bank Leumi le-Israel Ltd., Israel’s largest bank.

You may be asking how the IRS can reverse their previous decision to play nice. The answer is, “they are the IRS.” The IRS follows the rules in their own playbook and those rules often are unfair.

What does this recent reversal mean for you? It depends on who you talk to. To enter the OVDI, you must clear a number of hurdles. In the cases we know about, the taxpayers and their attorneys did exactly what the IRS instructed them to do and eventually got the “green light” from the agency.

To get the green light, you can’t currently be under audit or criminal investigation. As a result, the IRS sent the taxpayers a formal clearance letter instructing them to file the amended returns and pay up.

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Some attorneys believe the IRS simply screwed up and used the wrong taxpayer database. They didn’t realize that the OVDI request came from someone who didn’t meet the criteria. Other attorneys think there is something more sinister going on.

They believe the IRS wants to target particular individuals who were holding money in Leumi accounts–who knows for what reason. The IRS claims “there are a number of reasons why a taxpayer may be disqualified…a taxpayer may be disqualified if he/she fails to make a timely, truthful, and complete disclosure.”

It’s hard to know what to believe. Whatever reasons the IRS comes up with for reversing the previously approved cases, they may have shot themselves in the foot. The success of the program may be jeopardized when people stop coming clean about hidden accounts because they realize they can’t trust the IRS.

Under these circumstances, should you participate in the OVDI? If you’re a U.S. citizen with undisclosed offshore accounts, there’s a near 100% probability that the IRS will eventually find you. Before that happens, you need to come clean–if not through the OVDI, through what the IRS calls a “quiet disclosure.”

Unfortunately, the IRS discourages quiet disclosures, and reserves the right to impose criminal penalties on taxpayers who make them.

If you’re in this situation, consult with a qualified tax attorney (not an accountant). This arrangement provides attorney-client privilege for your discussions. The tax attorney can then retain an accountant to prepare the necessary returns, and decide whether you should participate in the OVDI.

Written by Mark Nestmann. Mark Nestmann’s career as an investigative journalist, international tax consultant, public speaker, and author of like resources spans nearly three decades. He holds a Master of Law (LL.M) in international tax law awarded to him by the Vienna (Austria) University School of Economics & Business Administration.

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