IRS Reverses Decision; Readmits Bank Leumi Customers Into OVDP

When making a voluntary disclosure pursuant to the IRS Offshore Voluntary Disclosure Program (OVDP), the first step involves sending a letter requesting pre-clearance to make a voluntary disclosure.  The letter includes a taxpayer’s identifying information, including the taxpayer’s name and social security number.  The IRS then runs the taxpayer’s information through an IRS database to ensure that the IRS has not already received offshore account information with respect to the taxpayer or that the taxpayer is not already under audit or investigation.  If the taxpayer’s information is not in the IRS database, the taxpayer is ordinarily preliminarily accepted into the OVDP.  The taxpayer then must complete a questionnaire, and absent extenuating circumstances (e.g., non-compliance with the terms of the program, such as the funds in the offshore accounts being derived from criminal activity), the taxpayer’s matter is transferred from the IRS Criminal Investigation Division to the IRS Civil Division for processing.

Several dozen taxpayers who were prior customers of Bank Leumi in Israel completed this process and, in many cases, were both pre-cleared to make a voluntary disclosure and transferred from the IRS Criminal Investigation Division to the IRS Civil Division.  These taxpayers were apparently fully compliant with the terms of the OVDP.

Last March, however, the IRS abruptly kicked out these taxpayers from the OVDP.  Practitioners believe that the IRS had received information from Bank Leumi with respect to the taxpayers but had yet to update its database.  As a result, the IRS preliminarily accepted the taxpayers into the OVDP, despite the fact that the IRS was already in receipt of their offshore account information.

The IRS actions caused an uproar among (1) practitioners, who were advising their clients that they had cleared a huge hurdle in being preliminarily accepted into the OVDP, and (2) taxpayers, who were faced with the possibility of the severe civil (and perhaps criminal) penalties that the taxpayers originally sought to avoid by entering into the OVDP. 

Perhaps as a response to this uproar, the IRS last week reversed its decision, and readmitted the taxpayers into the OVDP.  The OVDP has been a huge success for the IRS, with the IRS collecting approximately $5.5 billion through the program.  However, abruptly kicking taxpayers out of the program likely jeopardized the continued success of the OVDP because taxpayers were more hesitant to enter the program knowing that the IRS may remove taxpayers from the program at any time.  The IRS actions last week should provide taxpayers with some measure of comfort that they will be treated fairly within the OVDP.

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