IRS Amnesty (OVCI) Program and Offshore Investors with Losses

Meanwhile, the IRS has announced that they will not pursue civil fraud penalties or information return (non-filing) penalties for those taxpayers who voluntarily come forward before April 15th, 2003. (Rev. Proc. 2003-11) The purpose of the IRS amnesty program is to encourage those with unreported income from offshore financial accounts to come forward to provide the IRS with the names of the promoters who aided them to establish an offshore bank account, foreign trust and/or foreign corporation (IBC). The IRS will then contact the promoter to secure the names of his clients and to pursue those U.S. taxpayers who have unreported income from foreign sources.

The question is whether everyone who has any kind of offshore investment is also required to participate. The answer is that this amnesty program is for those who have income from foreign accounts that has not been reported -- AND those who failed to file various information returns relating to foreign entities such as a foreign trust, foreign corporation or IBC, foreign bank account, etc.

Those U.S. investors who have declared their foreign source income and who have filed the required reports have no reason to participate in the IRS offshore amnesty program. -- even if they have an offshore credit card.

Investors who have lost money in various offshore investment schemes may not have any need to participate in the program so long as they did not receive any income from their offshore investment at any time. In fact, such taxpayers may be entitled to file an amended return to claim a tax refund for their losses. In some cases, it may be possible to claim a loss even for an investment that simply became worthless.

Those who purchased an offshore investment through a foreign IBC or other foreign entity should have filed various information returns with the IRS -- even though no taxes were due -- and there are substantial penalties for a mere failure to file.

However, this author and a colleague have both received copies of an IRS letter to clients which states,

"... you must agree not to file a refund claim for the underlying tax, penalty and interest for any of the subject years on any ground ..."

It appears that they mean that taxpayers may not participate in the OVCI program, pay the taxes and interest and then file a claim for a refund of those taxes and penalties. However -- that is not what the letter says and it's not clear how the IRS will deal with those who have lost money in various offshore investment schemes.

It may be better for such investors to simply file amended returns for the past years -- with any information returns (such as the Form 3520-A, 5471, TD F 90-22.1 and others) and and to request a waiver of penalties for a failure to file the forms based on having relied on the advice of persons believed to be knowledgeable about the subject.

Which direction an individual taxpayer should take will depend on the specific facts and circumstances relating to that taxpayer's offshore investment and whether there were any foreign entities involved.

If there is any unreported income from any foreign sources or a failure to file any required information returns, (even if the losses exceeded the income), then the OVCI may be appropriate.

Consultation with an attorney who is familiar with these issues should be the first step for those who have any foreign financial accounts or foreign entities that have not been disclosed to the IRS.

Vernon Jacobs

U.S. Investors who lost money in various offshore Investment programs may not be required to participate in the IRS Offhore Amnesty Program, which the IRS refers to as the Offshore Voluntary Compliance Initiative or the OVCI.