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Seeking guidance: confusion arises out of OVDI programs

In our last post we discussed new concerns being raised by Nina Olson, the National Taxpayer Advocate, regarding the IRS' administration of the offshore disclosure initiatives. Olson says that she is concerned that taxpayers who unintentionally failed to disclose assets are being disproportionately punished while criminal tax evaders are receiving slaps on the wrist.

The most current voluntary disclosure program comes at a time when the IRS is aggressively pursuing investigations into Swiss banks that it suspects are harboring bank accounts which facilitate U.S. tax evasion. New rules are also being drafted for overseas banks which will make it easier to determine whether U.S. persons have a financial interest in foreign accounts.

Attorneys say that they are worried about clients who signed up for the voluntary disclosure initiative only to find that it was unfavorable. Cases in which it may make sense for a taxpayer to opt out include situations where the taxpayer didn't report income but also does not have a deficiency.

"The IRS is trying to coerce people," one attorney said. "The problem with the opt-out is the taxpayer almost certainly faces an examination and certainly faces a skeptical IRS agent reviewing their file."

The IRS insists that its disclosure program is voluntary and that taxpayers won't be treated in a negative fashion just because they opt out of the program. It is unclear whether IRS agents will be given more guidance in whether they can lower penalties for those who remain in the disclosure program. Some attorneys even reported stalling until more guidance is issued by the IRS commissioner.

Source: Bloomberg, "IRS Called Easy on Criminal Tax Evaders in Watchdog's Critique," Jan. 17, 2012

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