The Offshore Voluntary Disclosure Program: A Brief History And Overview Of The Complexities Involved In Disclosing Foreign Assets

The IRS and the Justice Department have increased their efforts regarding criminal investigation of international tax evasion. Global tax enforcement has become a top priority at the IRS and, as a result, the agency initiated a series of Offshore Voluntary Disclosure Programs (OVD). The goal of these OVDs is to settle with taxpayers who had previously failed to report offshore income and file any related information return.1
The law assumes that nearly every U.S. citizen knows about the obligation to file an income tax return.2 Unfortunately, the Foreign Bank Account Report (FBAR) filing requirement was relatively unknown until recently and there are a significant number of taxpayers who violated the law inadvertently.3 Nonetheless, such taxpayers are subject to the FBAR penalties. Although there are some options available for benign actors, the complexities of the programs may make it difficult for taxpayers to come forward and distinguish themselves from intentional tax evaders.

Foreign Bank Account Report Filing Requirements and Penalties

The Bank Secrecy Act (BSA) requires U.S. citizens and residents to report foreign accounts on Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) in order for the government to prevent money laundering and tax evasion.4 According to the instructions promulgated by the IRS, a person must file an FBAR return if all of the following conditions are met: 1) a “U.S. person,” 2) had a “financial interest” in or “signature authority” over, or “other authority” over 3) one or more “financial accounts” 4) located in a “foreign country,” 5) and the aggregate value of such account(s) exceeded $10,000, 6) at any time during the calendar year.5 Understanding the requirement to file an FBAR is a task on its own but to make matters more complicated, the information return has a different deadline than the individual income tax return; FBAR is due by June 30th, and not on April 15th.

Thus, amongst the tax evaders and non-filers are also those who do not realize that they have a duty to disclose their interest in foreign accounts on an FBAR, but are nevertheless violators and liable for the hefty FBAR penalties.

The maximum civil penalty applicable for a willful failure to report foreign accounts on an FBAR is rather severe; it is the greater of 50 percent of the account or $100,000 per year.6 The penalty for non-willful failure to file may be up to $10,000 per violation if 1) the violation was due to “reasonable cause,” and 2) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.7 In addition to civil penalties, possible criminal charges include tax evasion, filing a false return, and failure to file an income tax return.8

Thus, with a reduced penalty structure and lowered risk of criminal prosecution, the OVDs have proven to be effective in bringing taxpayer into compliance (and in gathering data to further investigate willful tax evaders).

Brief Background of the Program

Beginning in 2003, the IRS has operated four offshore programs which provided incentives for taxpayers to disclose their offshore accounts and pay delinquent taxes, interest and penalties.9 According to a report issued by the Government Accountability Office, as of December 2012, the IRS has collected over $5.5 billion in revenue from taxpayers who participated in its OVDs.10 The programs attracted 39,000 disclosures by generally offering reduced penalties and lowered risk of criminal prosecution.11

The first of the four initiatives was offered in 2003 and was related to an offshore credit card project the IRS pursued starting in 2000.12 The IRS served “John Doe” summonses on major credit card companies seeking records on foreign bank accounts, but by the time the agency gathered enough data to place files in the hands of revenue agents, most cases had approached the end of the 3-year statute of limitations period for assessment.13 It was around the time of this project, in 2003, when the IRS announced its “Offshore Voluntary Compliance Initiative” (OVCI) in order to get taxpayers to come forward and “clear up their tax liabilities.”14 The 2003 OVCI resulted in $75 million dollars in taxes paid by taxpayers who participated.15

The next program took place in 2009 in conjunction with a crackdown on offshore tax evasion involving Swiss bank accounts, specifically those held at Union Bank of Switzerland (UBS).16 The U.S. government compelled UBS to name its U.S. clients and ended up charging the bank with “conspiring to defraud the United States by assisting accountholders in evading the IRS.”17 Following this suit, the IRS announced its 2009 Voluntary Disclosure Program and collected $3.4 billion from 15,000 disclosures.18 The window of opportunity that taxpayers had to come forward was from 03/23/2009 to 10/15/2009.19 After the close of the 2009 OVDP, taxpayers continued to seek compliance in regards to their offshore accounts and as a result, on February 8, 2011, the IRS announced its 2011 Offshore Voluntary Disclosure Initiative (OVDI).20 The agency reported that almost 12,000 disclosures were made under the 2011 OVDI.21

The 2012 Offshore Voluntary Disclosure Program

The IRS announced that it would continue its program into 2012, but this time the program would be open indefinitely whereas with the previous ones, the agency provided a specified timeframe where taxpayers could come forward. Moreover, the IRS has stated that the terms of the program can change at any time, including the disqualification of certain groups of taxpayers from participation.22

Under the 2012 OVDP, individuals voluntarily disclosing offshore bank accounts owe a 27.5 percent penalty on the highest aggregate account or asset balance from the last 8 years, i.e. 2003-2010 (“look-back period”).23 The 2009 OVDP imposed a 20 percent penalty with six years of look-back period; the 2011 OVDI imposed a 25 percent penalty with eight years of look-back period.24 For taxpayers who have offshore accounts totaling less than $75,000, the penalty is reduced to 12.5 percent.25 Furthermore, some taxpayers can qualify for a 5 percent reduced penalty if 1) they did not open the account, 2) had minimal contact with the account, 3) did not withdraw more than $1,000 in any year covered by the program, and 4) can establish that taxes were paid on the amounts they deposited.26

Making a Voluntary Disclosure

For taxpayers interested in participating in the program, a pre-clearance request must be submitted.27 Criminal Investigation will then notify taxpayers or their representatives via fax whether or not they have been cleared to make a voluntary disclosure using the Offshore Voluntary Disclosure Letter.28 However, pre-clearance does not guarantee a taxpayer acceptance into the OVDP.29 Once the letter has been submitted, Criminal Investigation will review the OVD letter and then, within 45 days, notify the taxpayers or their representatives whether their offshore voluntary disclosure has been preliminarily accepted or declined.30 Preliminary acceptance into the program is conditioned upon the information provided by the taxpayer being, and remaining, truthful, timely, and complete.31 Should this requirement not be met, the taxpayer will become ineligible and the IRS will open an examination, exposing the taxpayer to civil and criminal penalties.32 It is imperative that taxpayers or their representatives follow the instructions and requirements of the OVDP once taxpayers decide to disclose their foreign assets.

Risk of “Quiet Disclosures”

In the past, taxpayers who failed to report income could generally avoid accuracy-related penalties by filing “qualified amended returns” before being contacted by the IRS.33 However, with the implementation of the OVDP, should the IRS review the amended return and open examination, the taxpayer will not be eligible to participate in the program.34 Instead, the IRS will apply a series of civil penalties and may even recommend criminal investigation.35

Conclusion

The complexities of the OVDP along with the few alternate options (not discussed in this article) require careful analysis of each individual case. The rules are still evolving as the IRS gathers more data and draws a clear line between those individual taxpayers who voluntarily come forward to become compliant and those who continue to fail to meet their tax obligations. The IRS is aware of benign actors and those who willfully hide their assets, and has made it its goal to get both groups back into the U.S. tax system and “turn the tide against offshore tax evasion.”

Farzaneh Savoji is an Attorney at Tax Law Associates
fsavoji@taxlawassociates.com; 424-666-8676

Topics:  Bank Secrecy Act, Disclosure Requirements, DOJ, FBAR, IRS, Offshore Funds, OVDP, Tax Evasion

Published In: Criminal Law Updates, Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© CMCP - California Minority Counsel Program | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »