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IRS U-turn allows disqualified US taxpayers back into offshore amnesty

Thursday, 26 September, 2013

In a change of mind by the US Internal Revenue Service (IRS), dozens of US expatriates with undeclared bank accounts in Israel have been told they can re-join the Offshore Voluntary Disclosure Program (OVDP).

The individuals concerned are clients of Bank Leumi. Like thousands of other US persons who wished to regularise their undeclared foreign bank accounts, they applied to use the OVDP initiative, launched in February 2009. This offers limited penalties and immunity from prosecution, provided the applicant is not already being investigated by the IRS.

The Leumi clients' applications to OVDP were originally accepted by IRS. But last March they were told they were not eligible for the amnesty, and warned they would be hit with a standard, undiscounted penalty proportional to the highest amount in their Israeli bank accounts.

This and similar events led to a complaint to the US Congress about the IRS by the lobbying group American Citizens Abroad. It presented Congress with evidence that the IRS had unfairly 'entrapped' taxpayers into trying to use the OVDP amnesty. The National Taxpayer Advocate's office had already in its 2011 report suggested that the IRS was using the OVDP as a 'bait and switch' technique to catch non-compliant taxpayers. The New York City Bar's Personal Income Taxation Committee also complained to the IRS about its 'arbitrary' actions.

The disqualifications also prompted tax lawyers to warn that other taxpayers would now be reluctant to use OVDP to disclose, since they could not be sure their applications would be treated in good faith. This may have influenced the IRS' thinking, since the programme has been profitable. About 39,000 Americans have disclosed hidden accounts and paid USD5.5 billion in back taxes, interest and penalties.

The IRS is not explaining as to why the Bank Leumi clients were excluded from the OVDP or why they are being re-admitted to it. A likely reason is that the IRS officer who examined their OVDP applications did not realise they were already known to the IRS as non-compliant.

Clients of other Israeli banks who have been excluded from OVDP are now hoping to be re-admitted.