On September 29, 2018, the Internal Revenue Service closed for good the long-running Offshore Voluntary Disclosure Program (OVDP), its hugely successful tax amnesty program for undisclosed offshore financial assets. Since March 2009, the IRS has maintained an offshore voluntary disclosure program in some form or fashion, and more than 56,000 taxpayers have taken advantage of such programs to voluntarily return to tax compliance. The U.S. Treasury has collected a whopping $11.1 billion in back taxes, interest, and penalties from taxpayers participating in the OVDP. The IRS’s decision to close the OVDP last month was driven by declining participation in the program, falling from its peak in 2011, when about 18,000 taxpayers came forward, to only 600 disclosures in 2017.
The closure of OVDP does not, however, mark the end of the U.S. government’s crackdown on offshore tax evasion. To the contrary, IRS and Justice Department efforts to combat noncompliance in this area continue to be aggressive, as evidenced by public announcements by both just yesterday.
First, the Justice Department announced the guilty plea of yet another taxpayer with an offshore bank account. A California resident pleaded guilty to maintaining a secret bank account containing millions of dollars at Bank Leumi in Israel. According to the Justice Department’s press release, the taxpayer had an account at Bank Leumi from 1994 to 2011. In 2011, he closed that account and moved $2.4 million to another Israeli bank. The taxpayer also had undisclosed accounts at other bank in three different countries, each with a balance exceeding $1 million.
In December 2014, Bank Leumi entered into a deferred prosecution agreement with the Justice Department, pursuant to which the bank admitted to conspiring from at least 2000 until early 2011 to aid and assist U.S. taxpayers in preparing and presenting false tax returns by hiding income and assets in offshore bank accounts in Israel and other foreign locations. Under the terms of the deferred prosecution agreement, Bank Leumi paid the U.S. government a total of $270 million and is continuing to cooperate with respect to ongoing civil and criminal tax investigations.
Next, the IRS’s Large Business and International Division – responsible for, among other things, conducting audits of taxpayers with international activities – announced that it was adding two more offshore-focused campaigns to its growing list of “compliance campaigns.” LB&I is moving toward issue-based examinations and the compliance campaigns represent the issues identified by LB&I that present the greatest risk of tax noncompliance. A number of the previously-announced issue-focused campaigns center on offshore issues, such as the “OVDP Declines-Withdrawal Campaign” – which targets taxpayers who entered OVDP but later declined to participate or withdrew from the program – and the “Swiss Bank Program Campaign” – which leverages the legacy phase of the Swiss Bank Program by utilizing the mountain of data handed over to the Justice Department by the 80 participating Swiss banks.
The two new offshore-based campaigns unveiled by LB&I yesterday focus on offshore service providers and FATCA filing accuracy. The “Offshore Service Providers” campaign addresses taxpayers who utilized the services of offshore service providers to create foreign entities and structures to conceal the ultimate beneficial ownership of offshore assets. Perhaps the most well-known offshore provider in this area is the Panamanian law firm Mossack Fonseca of “Panama Papers” fame, but there are plenty of other firms throughout the world who catered to U.S. taxpayers and whose interactions with such clients will be the subject of this campaign.
The second campaign announced yesterday – entitled “FATCA Filing Accuracy” campaign – will focus primarily on the accuracy of annual reporting by offshore financial institutions required by the Foreign Account Tax Compliance Act (FATCA). Enacted in 2010, and effective as of July 1, 2014, FATCA requires foreign financial institutions and related offshore entities to annually disclose to the IRS the identities of their U.S. customers, or face severe financial penalties in the form of 30 percent withholding on U.S.-source payments. This campaign will presumably focus on the accuracy of the annual FATCA disclosures made by offshore financial institutions, with the potential penalty for noncompliance being termination of FATCA-compliant status.
These two latest developments – announced on the same day by the Justice Department and the IRS – should dispel any suggestion that the U.S. government may be ramping down its offshore tax compliance agenda in the post-OVDP world. By all accounts both the Justice Department and the IRS will continue to aggressively press their enforcement efforts in this area, both civilly and criminally (where appropriate). At the same time, even in the absence of OVDP, other voluntary disclosure options still exist for taxpayers seeking to come clean. Taxpayers with noncompliant offshore financial assets who fail to take prompt action do so at their peril.
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