On December 19, 2014, the IRS added Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates along with Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA on December 22, 2014 to the list of FFIs subject to the 50% offshore penalty of OVDP FAQ 7.2
Why is the addition of Bank Leumi and Sovereign Management to this list important?
When the IRS updated the Offshore Voluntary Disclosure Program in June of 2014, it relaxed some penalties for many, yet increased penalties for others. For those with undisclosed accounts that the IRS has found out about without a "voluntary" disclosure, things have become less friendly.
Who benefited the most from the 2014 OVDP changes?
- "Non-willful" expats who were not under investigation, hands down, have won out the most. They are only subject a "0%" offshore penalty (if they qualify, of course). No opt-out required.
- "Non-willful" domestic account holders weren't quite as lucky. They are subject to a 5% offshore penalty — still a lot better than the 27.5% — with no opt-out required. See this link on the Streamlined Domestic Offshore Disclosure Program.
Who was hurt most by the 2014 OVDP changes?
Penalties increased for those the IRS have already received a public disclosure on. That is, the IRS seeks to further punish those who they already know about. The voluntary disclosure program is intended to reduce penalties for those who have voluntarily disclosed prior to the IRS finding out — on their own — of the non-compliance. So if the IRS already knows about your "illegal" activity, the IRS sees little incentive to give you much of a break.
Essentially, if the IRS already knows about your undisclosed offshore accounts and you did not make a correct voluntary disclosure (or attempted a so-called soft disclosure) the rule changes will likely impact you negatively. This is the IRS' own wording from OVDP FAQ 7.2, see if you can make sense of it:
"Starting 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."
Does this mean that I will be automatically subjected to a 50% Offshore Penalty if I enter into the OVDP and do not qualified for Streamlined treatment?
FIRST THING: This is very important. You may still qualify for streamlined treatment even if your bank is on the 7.2 list! Yes, you will probably experience a longer time and there may be some legal maneuvering, but it is possible to disclose under the streamlined offshore or domestic rules if your bank is on the 50% penalty list.
Assuming you don't want to go through the streamlined program, you may still opt-out of the standard offshore penalty even if you are a OVDP FAQ 7.2 taxpayer. During the opt-out, you may argue for a reduced penalty (or perhaps none) if you meet the reasonable cause test. The IRS believes there will be a "discrete minority" of taxpayers opting out. We know that many people, especially those who inherited accounts and others who were simply unaware of their FBAR reporting requirements are finding out about their OVDP issue every day. These cases will be time-consuming and difficult with no guarantee of result, so the opt-outs that we anticipate will be for high-value cases where a 50% penalty is way out of line with the taxpayer's conduct, and the taxpayer has at least some appetite for a lengthy process and potential civil litigation.
Have people successfully opted-out of the Standard Offshore Penalty?
Yes. However, understand that an opt-out for a case that was submitted in 2011 is a lot easier to prevail upon than a disclosure made in 2017. Also, the IRS is training its Revenue Agents to, in our opinion, misconstrue the law on "reasonable cause." However, if a 50% penalty is, again, unjustified, the IRS must sue in federal district court in order to convert an FBAR penalty into a judgment that you would be forced to pay. Prior to the judgment, the IRS is pretty much stuck to intercepting your refunds, if any.
But note, it is far easier to contest an FBAR penalty in an OVDP opt-out than in a case where the IRS has begun an audit or investigation. In an OVDP opt-out, the leverage for criminal charges is nearly extinguished, putting the taxpayer in a much better negotiating position and the IRS wondering if they should devote their scarce resources elsewhere.
Will other banks be added to the OVDP FAQ 7.2 list?
Yes. And they have been. A lot has been added. Including individuals.
What should I do if I own an undisclosed foreign account?
We have shied away from trying to scare people into coming clean with the IRS. But as try as we might, the consequences can be severe if you don't take the appropriate action. If you need assistance understanding what program, if any, you should get into, contact us for a free consultation.
