Offshore Voluntary Disclosure Program: Limitation period on credits or refunds

In 2009, the IRS introduced the Offshore Voluntary Disclosure Program (OVDP). Since then, the IRS has continually updated the program, with the latest version being the 2014 OVDP.

The IRS created the OVDP for taxpayers to voluntarily report their previously undisclosed foreign bank accounts and/or assets. As part of the OVDP process, in addition to disclosing all previously undisclosed foreign bank accounts and/or assets for the last eight years and filing original or amended offshore-related information returns for those years, the taxpayer must provide complete and accurate amended federal income tax returns for all tax years covered by the voluntary disclosure.

Being admitted to and complying with the OVDP can relieve taxpayers from being subject to a range of civil penalties, including the penalty for failing to file an FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts), which can be as high as $100,000 or 50% of the total foreign account balance per unreported account for taxpayers who willfully fail to report foreign accounts. However, taxpayers who enter the OVDP are still subject to the statute of limitation imposed by Secs. 6511 and 6514 when claiming a refund or credit on an overpayment as a result of amending tax returns for the eight-year period. The purpose of this discussion is to briefly explain how these Code sections may affect a taxpayer when claiming a refund or credit on an overpayment through amended tax returns while under the OVDP.

Sec. 6511 requires the taxpayer to submit the claim for a refund or credit within the later of (1) three years from the return's filing date or (2) two years from the date the tax liability was paid. Furthermore, where the claim is allowed, Sec. 6511(b)(2) limits the amount of the refund or credit:

1. Limit where claim filed within 3-year period. If the claim was filed by the taxpayer during the 3-year period prescribed in subsection [6511](a), the amount of the credit or refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return. If the tax was required to be paid by means of a stamp, the amount of the credit or refund shall not exceed the portion of the tax paid within the 3 years immediately preceding the filing of the claim.
2. Limit where claim not filed within 3-year period. If the claim was not filed within such 3-year period, the amount of the credit or refund shall not exceed the portion of the tax paid during the 2 years immediately preceding the filing of the claim.
3. Limit if no claim filed. If no claim was filed, the credit or refund shall not exceed the amount which would be allowable under subparagraph (A) or (B), as the case may be, if claim was filed on the date the credit or refund is allowed.

When it is advantageous for the taxpayer to extend the time the IRS can make an assessment of tax, under Sec. 6501(c)(4), the taxpayer and the IRS can consent to an extension. The consent must be in writing, and an extension must be made within either the three-year period or two-year period as specified in Sec. 6511(a).

Under Sec. 6511(c)(1), the period for filing a claim for refund or credit is extended to six months after the expiration of the period for assessment agreed to under Sec. 6501(c)(4). If a claim is filed during the period described by Sec. 6511(c)(1), the amounts that the IRS may be allowed to refund or credit are limited by Sec. 6511(c)(2), which limits the amount of refund or credit to the tax paid after the execution of the extension and before the claim for refund or credit is filed plus the lookback period under Sec. 6511(b)(2).

A taxpayer that files amended returns as part of the OVDP process is entitled to a refund or credit based on an overpayment of any year's tax liability only if the claim for refund or credit is filed timely, based on the rules described above. If a claim is not timely filed, the IRS will disallow any refund or consider any portion of the refund granted to be erroneous under Sec. 6514.