Are You Eligible For An OVDP Refund?

The IRS initially rolled out the Offshore Voluntary Disclosure Program (OVDP) in 2009. Its purpose was intended to aid individuals who were hiding offshore accounts to become compliant with their taxes. The toughest consequence for undisclosed offshore account holders if found by an IRS audit used to be 50% of the highest aggregate balance in foreign accounts along with imprisonment. The Offshore Voluntary Disclosure Program reduced that penalty to 20% and waived imprisonment. In 2009 alone, the IRS announced collections of USD 3.4 billion on account of the OVDP.

In 2011, the IRS rolled out a second Offshore Voluntary Disclosure Program. This time, the highest penalty was 25%, but included two other tiers – a 5% penalty and a 12.5% penalty if the taxpayer met certain criteria. Because these tiers weren’t offered in 2009, the IRS decided to refund penalties to those individuals who, in 2009, would have been eligible for the lower penalty structures.

“We have had clients who’ve finished the process and received their rebates. These clients were US persons but they’d not lived in the US for an exceedingly long time,” asserts Chaya Kundra, a Maryland based tax lawyer and Principal at Kundra & Associates.

While the 2009 OVDP didn’t see as much participation by Indian U.S. Citizens as the 2011 OVDP, what’s crucial here is the message the IRS is trying to send out.

“The IRS is essentially saying that its policy on tracking offshore revenue is ready. By abating the penalty, the IRS is spotting that it had been a little more rigorous than required and that it is willing to accept real circumstances. At the exact same time, the IRS is saying that it is willing to work with you if you’re willing to step forward and make disclosures on your offshore income and assets,” Kundra adds.

The penalty refunds are based primarily on precise circumstances which set the tone for IRS ‘ policy on this matter. Let us look at what these conditions are:

Conditions for five percent penalty tiers

A taxpayer may satisfy any one of these three conditions to have eligibility for the five percent penalty (that is, if you paid a 20% penalty, you may be eligible to get a 15% refund)

Condition One: The taxpayer had barely any use of the offshore account.

So as to determine this, the taxpayer must meet all four of the following conditions:

(a) didn’t open or cause the account to be opened; for instance the taxpayer inherited offshore accounts (b) have exercised minimum, rare contact with the account, for instance, to request the account balance, or update accountholder information such as a change in address, contact person, or email; (c) have, except for a withdrawal closing the account and transferring the funds to an account in the United States, not withdrawn more than $1,000 from the account in any year that the taxpayer was non-compliant; and (d) can establish that all appropriate US taxes have been paid on funds deposited to the account

Condition Two: Taxpayers who are foreign residents and who were unaware they were United States citizens

Condition Three: Taxpayer paid all taxes in foreign country

To be eligible under this condition, taxpayers must be foreign residents and must meet all three of the following conditions for all the years of their voluntary disclosure:
(a) taxpayer resides in another country; (b) taxpayer has made a good faith showing that she or he has timely went along with all tax reporting and payment requirements in the country of residency; and (c) taxpayer has $10,000 or less of US source income each year.

For these taxpayers only, the offshore penalty won’t apply to non-financial assets, such as real property, business interests, or art, acquired with funds that the taxpayer can establish that all relevant taxes have been paid, either in the U.S. or in the country of residence. This exception only applies if the tax returns filed with the foreign tax authority included the offshore-related taxable income that wasn’t reported on the US taxation assessment.

Conditions for 12.5% penalty tier

Taxpayers whose highest total account balance (including the fair valuation of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either purchased with wrongly untaxed funds or produced improperly untaxed income) in every one of the years covered by the 2011 OVDI is less than $75,000 will qualify for a 12.5% offshore penalty. So if you paid a twenty percent penalty, you may be fit for a 7.5% refund.

How to claim a reimbursement:

If you took part in the 2009 OVDP and your case was closed with a Form 906 closing agreement, but you suspect that you’d be eligible for a lower penalty as per conditions above, you can make an application including all pertinent contact information (name, address, SSN, home / cellphone numbers), the name of the Revenue Agent assigned to your case, and a copy of your agreement. You can send this information to the IRS.