In Depth
On March 13, 2018, the Internal Revenue Service (IRS) announced that it will begin ramping down the current Offshore Voluntary Disclosure Program (OVDP) and urged taxpayers with undisclosed foreign assets to apply for the program prior to its close on September 28, 2018. We have previously reported on developments in the OVDP.
The OVDP has existed since 2009 in several forms off and on, and more than 56,000 taxpayers have made disclosures under the OVDP, paying more than $11.1 billion in back taxes, interest and penalties. The program encourages taxpayers with undisclosed income from foreign financial accounts to voluntarily disclose those accounts and become compliant with their tax return and information reporting obligations. Since the OVDP’s introduction, there has always been the risk that the IRS would close the program at some point. The IRS noted that ending the program reflects advances in third-party reporting of foreign financial accounts and an increased awareness by US taxpayers’ of their offshore tax and reporting obligations.
Fortunately for taxpayers who may not have known of their obligations, the IRS will continue to offer the Streamlined Filing Compliance Procedures program for taxpayers whose failure to disclose the foreign financial accounts and pay taxes was non-willful. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.
While the IRS’s announcement that it will end the 2014 OVDP is somewhat of a shock, it is welcome news that the IRS understands that the circumstances of taxpayers with foreign financial assets vary widely and that the IRS will continue offering the following options for addressing previous failures to comply with US tax and information return obligations with respect to those assets: IRS-Criminal Investigation Voluntary Disclosure Program, Streamlined Filing Compliance Procedures, Delinquent FBAR Submission Procedures, and Delinquent International Information Return Submission Procedures.
The remaining programs are only available to (1) non-willful violators with unreported income (in case of the Streamlined and Delinquent International Information Returns programs) and (2) those that do not need to use either the OVDP or the Streamlined Filing Compliance Procedures and only have informational filing noncompliance (i.e., the Delinquent FBAR and Delinquent International Informational Return programs). For the streamlined programs, “non-willful” conduct is 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. Also of note, to use the Delinquent International Informational Return program to come into information reporting compliance, the taxpayer has to have reasonable cause for not timely filing the information returns. The use of any of these programs requires that the taxpayer to not already be under a civil examination or a criminal investigation by the IRS.
The main message conveyed by IRS’s announcement on March 13, 2018, is that those US taxpayers with international non-compliance that are unable to qualify for other programs (that all require either non-willfulness and/or reasonable cause) only have a finite period of time to enter the 2014 OVDP program before they are foreclosed from doing so. Taxpayers with “willfulness issues” holding undisclosed foreign accounts and assets, including those held through undisclosed foreign entities, should make a voluntary disclosure before the 2014 OVDP closes because it enables them to become compliant, to avoid substantial civil penalties, and generally eliminates the risk of criminal prosecution for all issues relating to tax noncompliance and failing to file FBARs. Without making an OVDP submission, the risk of criminal prosecution remains. Making a voluntary disclosure using the OVDP also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.
Finally, the FAQs that the IRS released clarifying why the IRS is shutting the OVDP down suggest that the IRS may intend to “repeal and replace” the OVDP with some other program. Both the IRS’s FAQs and announcement include a request for comments on the closure of the 2014 OVDP and request suggestions on future voluntary disclosure practice procedures. Such comments presumably would be taken into account under a new voluntary disclosure program in the future.
Voluntary disclosure has a long tradition in IRS practice. Regardless of a formal IRS program like the 2014 OVDP, practitioners generally expect that some form of voluntary disclosure will still be an option after September 28, 2018, in the right circumstances, for taxpayers with “willfulness issues” regarding their offshore assets. Even so, now is the time to come forward, if taxpayers have not already done so.
