On June 18, 2014 the Internal Revenue Service (“IRS”) announced a modification to the 2012 Offshore Voluntary Disclosure Program (“OVDP”). The 2014 OVDP is a continuation of the 2012 program with modified terms. The voluntary disclosure program is offered by the IRS to those taxpayers with undisclosed offshore accounts or unreported offshore assets. The objective of the modified 2014 OVDP is to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws. The voluntary disclosure period is the most recent eight tax years for which the due date has already passed.
The reason for the modification of the prior 2012 program was as a result of the implementation of the Foreign Account Tax Compliance Act (“FATCA”) and the IRS and Department of Justice offshore enforcement efforts. The new initiatives raise the risk of detection of taxpayers with undisclosed foreign accounts and assets. The 2014 modified OVDP is available to taxpayers who wish to voluntarily disclose their offshore accounts and assets to avoid prosecution and limit their exposure to civil penalties but have not done so.
This article provides a general roadmap on how to make an offshore voluntary disclosure under the program with updates for new procedures implemented under the 2014 program.
STEP 1: Obtaining a preclearance to file Offshore Voluntary Disclosures Letter to Criminal Investigation in Philadelphia.
Prior to entering the program, taxpayers are required to obtain a clearance from IRS Criminal Investigation. The preclearance request is made to the Criminal Investigations Lead Development Center (“CI LDC”), which determines whether taxpayers are eligible to submit an offshore voluntary disclosure. Eligibility is determined by inquiry into the following:
1. Whether the taxpayer is the subject of criminal investigation or civil investigation.
2. Whether the IRS has notified taxpayer that it intends to commence examination or investigation.
3. Whether the taxpayer is under investigation by any law enforcement agency.
4. Whether the source of undisclosed income is from illegal activity.
5. Whether the IRS has served John Doe summons or made a treaty request seeking information that may identify a taxpayer as holding an undisclosed foreign account or undisclosed foreign entity.
6. Whether the taxpayer appeals a foreign tax administrator’s decision authorizing the providing of account information to the IRS and fails to serve the notice as required under existing law.
7. Whether the IRS has announced that certain taxpayer groups that have or had accounts at specific financial institutions will be ineligible due to U.S. government actions in connection with the specific financial institution.
Criminal Investigation will notify taxpayers whether they have been cleared to submit an offshore voluntary disclosure.
**NEW PROCEDURE: Under the 2014 OVDP, taxpayers requesting a preclearance under FAQ 23 must disclose the following information to Criminal Investigation:
1. Applicant identifying information including complete names, dates of birth (if applicable), tax identification numbers, addresses, and telephone numbers.
2. Identifying information of all financial institutions at which undisclosed OVDP assets were held. Identifying information for financial institutions includes complete names (including all DBAs and pseudonyms), addresses, and telephone numbers.
3. Identifying information of all foreign and domestic entities (e.g., corporations, partnerships, limited liability companies, trusts, foundations) through which the undisclosed OVDP assets were held by the taxpayer seeking to participate in the OVDP; this does not include any entities traded on a public stock exchange. Information must be provided for both current and dissolved entities. Identifying information for entities includes complete names (including all DBAs and pseudonyms), employer identification numbers (if applicable), addresses, and the jurisdiction in which the entities were organized.
4. Executed power of attorney forms (if represented).
The preclearance request is faxed to IRS – Criminal Investigation Lead Development Center. The CI-LDC fax number to request preclearance before making an offshore voluntary disclosure is (267) 941-1115.
In the case of jointly filed returns, if each spouse intends to apply for OVDP, each spouse should request preclearance.
STEP 2: Submitting Offshore Voluntary Disclosures Letter to Criminal Investigation in Philadelphia.
After receiving a preclearance notification, taxpayers must truthfully, timely, and completely submit an Offshore Voluntary Disclosures letter and attachments to Criminal Investigation in Philadelphia. A separate attachment is completed for each foreign financial account the taxpayer wishes to disclose, which provides a detail overview of the taxpayers activity with regards to the account.
**NEW PROCEDURE: FAQ 1.1 provides that the Offshore Voluntary Disclosures Letter and attachment have been modified. However, as of July 19, the OVDP letter and attachments are the same as the 2012 Program.
The IRS will review the Offshore Voluntary Disclosures letter and notify taxpayers by mail whether the voluntary disclosure has been preliminarily accepted or declined. Preliminary acceptance into the OVDP is conditioned upon the information provided by the taxpayer being and remaining, truthful, timely, and complete.
Timeline: The timeline to submit the Offshore Voluntary Disclosures letter and attachments is 45-days after receiving a preclearance. Once the package is submitted to the Philadelphia office, a preliminary acceptance to the OVDP will be issued by the Criminal Investigation team. It is intended that Criminal Investigation will complete its work within 45 days of receipt of a complete Offshore Voluntary Disclosures letter. Generally, Criminal Investigation will issue the preliminary acceptance within two months of submission.
STEP 3: Complete Voluntary Disclosure Package.
Once the voluntary disclosure has been preliminarily accepted, the next step of the process requires taxpayers to submit the full voluntary disclosure package to the IRS Campus in Austin, Texas.
The complete voluntary disclosure package will include the following items:
1. Copies of signed Offshore Voluntary Disclosures letter previously submitted to Philadelphia.
2. Copies of Attachment To Offshore Voluntary Disclosures Letter previously submitted to Philadelphia.
3. Signed Penalty Computation.
**NEW PROCEDURE: Under the 2014 OVDP, taxpayers must submit the offshore voluntary disclosure penalty with the CI package. The offshore voluntary disclosure penalty is 27.5 % or 50 %, whichever is applicable, of the highest aggregate value of the foreign assets.
**NOTE: the payments for the OVDP penalty is an advance payment; consequently, any credit or refund of the payments is subject to the limitations of IRC § 6511. Therefore, taxpayers participating in the OVDP should consider filing Form 843 to preserve the right to claim a refund.
4. Foreign Account or Asset Statement – one for each account and foreign corporation.
5. Signed FBAR Penalty Extension.
6. Signed Form 872 – Consent to Extend Time to Assess Tax (including tax penalties).
NOTE: Failure to extend the period of time to assess tax and assess FBAR penalties will render the OVDP submission incomplete.
7. Copies of original filed Federal Income Tax Returns for prior eight years.
8. Signed Amended Federal Income Tax Returns.
9. Checks for Amended Federal Income Tax Returns.
10. Printed copies of electronically submitted FBARS, Form FinCEN 114, for prior eight years.
**NEW PROCEDURE: The 2014 OVDP FAQ 44 provides that Taxpayers filing delinquent FBARs are to file FinCEN Form 114 electronically at FinCEN’s website. On the cover page of the electronic form, the box “Other” should be marked with the explanation “OVDP”.
11. Copies of offshore financial account bank statements.
**NEW PROCEDURE: The 2014 OVDP requires that account statements be provided for all foreign financial accounts regardless of the account balance. See FAQ 1.1 and FAQ 25.
Applicants disclosing foreign entities.
• Statement identifying all foreign entities, whether held directly or indirectly.
• Statement of concerning ownership or control of such entities.
• Applicants disclosing foreign entities which held OVDP assets, a complete and accurate information returns are required to be filed.
• Statement of Abandoned Entities under FAQ 29. Previously a Statement of Dissolved Entities was filed under FAQ 29.
In situations where spouses both desire to participate in OVDP, they may do so jointly or separately. If the joint approach is chosen, the spouses should be sure to include all required information and documents for each spouse and clearly indicate the intention to disclose jointly.
**NEW PROCEDURE: Under the 2014 OVDP, Taxpayers may submit voluminous documents not requiring original signatures (e.g. bank statements, entity organization documents, etc.) on a compact disc (CD) or USB removable storage device (flash drive).
**IMPORTANT NOTE: Submission via CD or flash drive may be used only by professional firms with established record retention policies. The representative must submit an original, signed paper Agreement for Digital Submission of OVDP Documentation. A copy of the Form 2848 must be attached. There must be one signed agreement for each taxpayer. The only exception is that married taxpayers, who are submitting joint returns for all years included in the disclosures, may submit only one Agreement for Digital Submission of OVDP documentation.
All required OVDP documents being submitted digitally must be submitted in a format that does not permit editing or changing the stored information without warning, e.g. .PDF. The preferred format is .PDF.
The digital documents should be arranged in separate folders in the same sequence as a paper submission would be assembled.
See FAQ 25.2 for additional requirements on submission via CD or flash drive.
**FAQ 30 – NEW: For taxpayers having difficulty obtaining records from overseas, the modified 2014 OVDP has an update to FAQ 30, which instructs taxpayers carefully document their attempts. Documentation includes: for phone conversations, note the date, time, and duration of the call; note the complete name of the employee of the foreign financial institution with whom you speak. For correspondence, make a photocopy of all correspondence to and from the foreign financial institution. The IRS recommends using a delivery or postal service that provides delivery confirmation or a return receipt for all correspondence sent to foreign financial institutions. Taxpayers are to provide documentation relating to attempts to obtain records to the examiner handling your case, or if the case is not yet assigned, contact the IRS OVDP Hotline at (267) 941-0020.
Timeline: A full and complete submission is required for acceptance into the program. You have 45-days to submit a complete voluntary disclosure package from the date you are preliminary accepted to the OVDP. You may request an extension of the deadline to complete the submission. Requests for up to a 90-day extension must include a statement of those items that are missing, the reasons why they are not included, and the steps taken to secure them.
**NEW PROCEDURE: Under the 2014 OVDP, Taxpayers requesting an extension must submit his/her name, address, date of birth, social security number, and telephone number and should submit as much of the information required with a request for extension, including at a minimum a properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties.
Requests for extension must be made in writing and sent to the Austin Campus on or before the date specified in the preliminary acceptance letter from Criminal Investigation.
STEP 4: Certification Process.
After submitting your full and complete voluntary disclosure package, your case will be assigned to a civil examiner to complete the certification of your tax returns for accuracy, completeness and correctness. The examiner will certify that your voluntary disclosure is correct, accurate and complete by reviewing your records along with your amended or delinquent income tax returns. The examiner will also verify the tax, interest and civil penalties you owe.
The examiner has the right to ask any relevant questions, request any relevant documents, and even make third party contacts, if necessary, to certify the accuracy of the amended returns without converting the certification to an examination.
Timeline: Generally, an examiner will be assigned to your case in six months to a year after a full submission is made to Austin. Because every case is different, there is no way to predict how long the examination process will take for you.
Once the examination process, is complete the examining agent will issue a closing letter verifying the tax, interest and civil penalties. At this time, the examining agent will also calculate the offshore voluntary disclosure 27.5% miscellaneous penalty.
Next step for you:
Entering the voluntary disclosure program provides taxpayers a valuable opportunity to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution.
If you determine that you have previously undisclosed offshore financial accounts, unreported income, or foreign assets, should consult a tax professional to determine whether the OVDP is the right step in becoming compliant with regards to offshore accounts and/or assets.