Now that the September 9, 2011 deadline has passed people actually have the chance to think. It is understood that OVDI was primarily aimed at U.S. taxpayers who were using offshore bank accounts to hide money – and evade U.S. income tax. Even the name “Offshore Voluntary Disclosure Initiative” is telling. Two points:
1. OVDI is a subset of the decades old system of Voluntary disclosure – that is to avoid criminal prosecution.
2. The word “offshore” certainly suggests something further away than Canada. Canada is NOT a tax haven. Taxes are higher in Canada. Canadian banks are very effective at reporting income from bank accounts to Revenue Canada.
Time will tell – but, it is hard to believe that OVDI was ever intended for U.S. expats who are in compliance with law of their country. Of course, the disclosure is “Voluntary”. Anyone is free to use it. Many people voluntarily entered OVDI under extreme duress. There are people who entered OVDI who wished they hadn’t. There are undoubtedly people who did NOT enter OVDI and wished that they had. OVDI 2011 isdoes not allow for arguments related to “reasonable cause” and the like.
As one tax lawyer noted:
“Indeed, it is the risk of criminal prosecution that drives the voluntary disclosure program. For those with no real criminal tax exposure, the OVDI initiatives are not always a good fit. They offer transparency on monetary penalties but no flexibility where there is a reasonable cause defense to the penalties or where a non-willful penalty should apply. In situations where the fact pattern varies from year to year, where offshore assets outside of bank or brokerage accounts are involved, where long-standing foreign residents or recent immigrants are involved, or where bank accounts are nominally larger than $75,000 but are still relatively small, among others, the OVDI program may not be the best option. A close and analytical study of the situation by an experienced tax controversy or criminal tax attorney is essential, particularly since protecting client confidence is important during the early planning phase.”
Of course, one can use the “opt out” provision, go through standard audit and make whatever arguments you want.
We will never know how many true tax evaders entered OVDI. (Apparently ACA has put in a request for this information pursuant to freedom of information laws.) We do know that the collateral damage of OVDI has been severe. We know that collateral damage has been born largely by U.S. expats and immigrants to the U.S. The effect of OVDI on U.S. immigrants has been severe.
As an example of how damaging this IRS tyranny is consider the following comment of a U.S. expat living in Canada, that was on the Hodgen blog. It is clear that IRS tyranny has changed her life forever.
Note that LCU = Life Credit Unit
September 10, 2011 | 7:18 am
I love that phrase. I have only been dealing with this issue for two weeks since I first learned about the OVDI, but as of yesterday’s deadline I would say I used up ten years’ worth of LCUs. The small cold that I had when I first learned about this draconian cash grab has turned into a major chest infection, and I am tortured by the thought of losing a portion of our hard-earned retirement income just because my Canadian husband had the misfortune of turning them into spousals in 2006. Ironically that was the first time we have put both our names on a single family asset in 18 years of marriage. Sadly, he transferred almost everything over to my name on the advice of a Canadian investment expert, and the hit will be substantial. I can just about handle paying penalties on my own money, but for this wonderful man to lose a chunk of his Canadian savings to a foreign government is an abomination. After two weeks of torture trying to decide whether to enter the OVDI or attempt quiet disclosure (three Canadian tax and accounting professionals looking at my case, declared me an obvious ‘minnow’, and recommended the latter route), I finally caved in yesterday and filed the OVDI papers. I realized that I simply wouldn’t be able to sleep at night for however many years it took the IRS to decide my fate and that of my family. It is heartening to hear that Damsel in Distress had a good outcome, but I share the concerns of others in this thread who wonder if the mercy that was shown to her was more of an outlier than a positive new direction for the IRS. Nothing I read or heard from the IRS about OVDI 2011 has made me think that case-by-case discretion will be an option, or that IRS agents are even allowed to seek reasonable accommodations for regular middle class folks who are facing the loss of their life savings for failure to file an administrative form.”