The first step a taxpayer with undisclosed or unreported offshore accounts or assets undertakes in seeking to enter the Offshore Voluntary Disclosure Initiative (OVDI) is to apply for pre-clearance from the IRS Criminal Investigation Lead Development Center. If a pre-clearance letter is issued, the taxpayer then submits a Voluntary Disclosure Letter that discloses substantial information regarding the offshore items and underreporting.
In a recent article in the Journal of Taxation, author Brian P. Ketcham notes that earlier this year, the IRS took the unusual step of withdrawing pre-clearance letters previously issued to certain Bank Leumi customers. The author was troubled by this because the initial pre-clearance letter encourages applicants to make self-incriminating statements when they proceed with the next step in the OVDI process of submitting a Voluntary Disclosure Letter – statements that the government could use in a future criminal prosecution of the applicant if one is undertaken.
Mr. Ketcham’s article discusses case law that perhaps could be used to dismiss any future criminal indictment of such applicants. However, Mr. Ketcham goes on to point out that by withdrawing the pre-clearance letters, presumably based on criteria for rejection that was not previously disclosed to applicants, the IRS raises issues whether it will fully deal in good faith both under the OVDI or other future amnesty programs. By not acting in good faith, the IRS may be causing long-term damage to such programs based on taxpayer distrust which will lead to fewer taxpayers entering such programs.
Ketcham, Brian P., Can IRS Be Trusted? A Troubling New Development in the Offshore Voluntary Disclosure Program, Journal of Taxation, Apr 2013
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