OFFSHORE VOLUNTARY DISCLOSURE OPTIONS AFTER THE END OF THE OFFSHORE VOLUNTARY DISCLOSURE PROGRAM

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The IRS is ending the 2014 offshore voluntary disclosure program (“OVDP”) on September 28, 2018.  The Internal Revenue Service (“IRS”) has not provided clear guidance on what will happen to taxpayers who make voluntary disclosures after the end of this month.  If there are no new voluntary disclosure procedures for willful noncompliance, taxpayers will not have certainty as to the penalties they will incur under a “quiet disclosure” or the traditional voluntary practice outlined in the Internal Revenue Manual (“IRM disclosures”).  This uncertainty will lead to taxpayers making less voluntary disclosures.  

Quiet Disclosures Prior to the OVDP

Quiet disclosures are made by filing amended tax returns for applicable years and paying the related additional tax and interest and not otherwise notifying the IRS of the noncompliance.  A quiet disclosure provides the taxpayer no protection against criminal penalties; however, most quiet disclosures were undetected by the IRS prior to 2008.

IRM Disclosures

IRM disclosures entail sending the amended tax returns and an explanatory letter to the IRS Criminal Investigation division and making “good faith arrangements … to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.”  IRM section 9.5.11.9(2) states that this type of voluntary disclosure may result in prosecution not being recommended if it is made prior to the IRS receiving information about the taxpayer or initiates a civil or criminal investigation of the taxpayer.

2009 – 2014 OVDP

The IRS started the 2009 OVDP in March of 2009 and it closed in October of 2009.  The 2011 OVDP was in existence from February to September of 2011. The IRS announced the 2012 OVDP in January of 2012 and had no set deadline for its end.  The 2012 OVDP was amended in June of 2014 and the most recent set of rules are referred to as the 2014 OVDP. According to the IRS, more than 56,000 taxpayers have participated in the OVDPs, resulting in overall payment of $11.1 billion.  

All versions of the OVDP provided eligible taxpayers with unreported offshore income and assets the opportunity to become current with their filing obligations without criminal penalties and with predictable civil penalties.  

Under the 2014 OVDP, taxpayers must:

  • Provide information about the unreported offshore financial accounts and the relevant financial institutions and facilitators;
  • File accurate tax returns and foreign bank account reports for the eight most recent tax years for which the due date has already passed;
  • Pay the tax, interest, and applicable penalties due for those returns; and
  • Pay a miscellaneous offshore penalty equal to either 27.5 percent or 50 percent of the highest aggregate value of the taxpayer’s previously undeclared foreign financial assets during the relevant period.

Taxpayers in the 2014 OVDP must also correct noncompliance dealing with domestic issues.  However, the offshore penalty structure resolves only liabilities and penalties related to offshore noncompliance and the domestic noncompliance is subject to examination and additional penalties.  

Streamlined Filing Compliance Procedures

Taxpayers whose failure to report offshore financial assets and income was nonwillful should file through the streamlined filing compliance procedures.  The IRS defines nonwillful conduct as “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”  Taxpayers in the streamlined procedures must submit a statement certifying that their failure to report foreign financial assets and pay tax on those assets “did not result from willful conduct on their part.”

Under the streamlined filing compliance procedures, taxpayers must file tax returns for the most recent three years that the due date for filing has passed, pay the tax and interest for those years, and file FBARs for the most recent six years for which the FBAR due date has passed.  Taxpayers who reside outside the US for any year during the covered period of the streamlined filing are not subject to penalties. Taxpayers who reside in the US are subject to a 5 percent miscellaneous offshore penalty on the highest aggregate balance of their foreign financial assets during the covered FBAR period.

The streamlined procedures provide no protection from criminal penalties.  However, for taxpayers who meet the nonwillful requirement to file under the streamlined procedures there should be no risk of criminal penalties.  

Since the streamlined procedures provide for no or much lower penalties than the OVDP, taxpayers with willful noncompliance may be tempted to file through the streamlined procedures.  The Justice Department announced in 2016 that it intended to examine and prosecute taxpayers who falsely certified their conduct was nonwillful.

FBARs and Informational Reporting

If there was no unreported income associated with the unreported foreign financial accounts or from foreign assets reported on international informational filings, then the IRS has special procedures for these taxpayers.  Under the delinquent FBAR submission procedures, the taxpayer can submit delinquent FBARs without incurring penalties. Similarly, under the delinquent international informational return submission procedure, a taxpayer can submit delinquent international informational returns without penalty by amending the tax returns for the relevant years and attaching the omitted filings.  If the omitted international informational return is Form 3520 or Form 3520A, then those forms are to be filed in accordance with the instructions to those forms. For there to be no penalties, the IRS must accept the taxpayer’s reasonable cause statement.

IRS Reasoning for Ending the 2014 OVDP

The IRS provided the following reasoning for closing the 2014 OVDP:

While the program has been successful in the past, there has been a significant decline in the number of taxpayers participating as well as an increase of offshore tax and reporting obligations.  The IRS has previously stated publicly that the 2014 OVDP would close at some time. Taxpayers have had the opportunity to participate in OVDP since 2009.

Offshore tax noncompliance and evasion continues to be a top priority of the IRS.  Through the information received through the Foreign Account Tax Compliance Act and other sources, such as the Swiss Bank Program, the IRS no longer has to be so reliant on voluntary disclosures for such information.  

The IRS discourages quiet disclosures.  The IRS has stated that “all quiet disclosures will be reviewed and will be subject to civil or criminal penalties as determined under existing law.  

Criminal Liability

The IRS is expected to continue the long-standing practice under which taxpayers who file complete, timely (taxpayer is not under civil examination or criminal investigation), and truthful voluntary disclosures in good faith will be unlikely to face criminal penalties.  The termination of the OVDP does not affect IRM disclosures. Taxpayers who make an IRM disclosure should avoid criminal liability after the termination of the OVDP.

Conclusion

The closing of the 2014 OVDP will end predictability of civil and criminal penalties for taxpayers who were willfully noncompliant with their tax reporting obligations of foreign accounts and foreign income.  The lack of predictability will lead many taxpayers deciding not to come forward. After the 2014 OVDP, taxpayers who willfully failed to report foreign accounts and income will either make quiet disclosures, attempt to file under the streamlined filing compliance procedures (which they should not do), or make an IRM disclosure.  

 

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