On March 13, 2018, the Internal Revenue Service announced that it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (“OVDP”) and will close the program on September 28, 2018. The OVDP is currently offered to taxpayers with undisclosed offshore accounts or assets and is utilized by taxpayers with willfulness issues regarding their failure to disclose such accounts or assets in order to avoid criminal prosecution and to reduce or mitigate the penalties for non-compliance. The IRS has urged any taxpayers who would seek to voluntarily disclose the existence of any previously undisclosed foreign financial assets to participate in the OVDP before the program closes. McNees is encouraging clients who desire to participate in the OVDP to begin the process as quickly as possible, as the information gathering requirements of the OVDP can be lengthy, particularly when requesting information from foreign financial institutions.
By way of background, the Bank Secrecy Act requires United States persons to file a report with the government if they have a financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year. Taxpayers comply with this law by noting the existence of the account on their income tax return and by filing a FinCEN 114, Report of Foreign Bank and Financial Accounts (“FBAR”).
According to the FBAR instructions, a person must file an FBAR if all of the following elements are met: (i) a “U.S. person,” (ii) had a “financial interest” in, or “signature authority” over, or “other authority” over, (iii) one or more “financial accounts” (iv) located in a “foreign country,” (v) and the aggregated value of such account(s) exceeded $10,000, (vi) at any time during the calendar year. The FBAR instructions indicate that a “U.S. person” means a U.S. citizen regardless of where the citizen lives. Although there are a number of exceptions to the FBAR filing requirement, there is no exception for U.S. citizens living abroad.
For purposes of the FBAR, a direct interest and certain indirect interests qualify as “financial interests” in an account. A person has a direct “financial interest” in an account if such person is owner of record of, or holds legal title to, the account, regardless of whether the person maintains the account for personal benefit or for the benefit of others. Multiple people can have a direct interest in the same account. The definition of “financial account” includes bank accounts, securities accounts, securities derivatives accounts, other financial instruments accounts, savings accounts, demand accounts, time deposit accounts, mutual funds, and any other accounts maintained with either a financial institution or a person engaged in the business of a financial institution.
Taxpayers generally have 3 options when dealing with delinquent FBAR filings: (i) submit the delinquent FBARs; (ii) use the IRS’ Streamlined Filing Compliance Procedures (available only to taxpayers who have not willfully failed to file FBARs); and (iii) participate in the IRS’ Offshore Voluntary Disclosure Program. Each of these options has different considerations, benefits, and detriments, and each taxpayer’s situation should be independently analyzed to determine the best course of action.
According to the IRS, more than 56,000 taxpayers have made disclosures under the OVDP, paying more than $11.1 billion in back taxes, interest, and penalties. The IRS, through its Criminal Investigation Division, conducts the OVDP with the stated purpose of bringing taxpayers that have used undisclosed foreign accounts and assets, including those held through undisclosed foreign entities, to avoid or evade tax into compliance with United States tax and related laws. When a taxpayer participates in the OVDP, the IRS takes timely, accurate and complete voluntary disclosures into account in deciding whether to recommend to the Department of Justice that a taxpayer be criminally prosecuted. The IRS has stated that “[w]hen a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice for any issue relating to tax noncompliance or failure to file Report of Foreign Bank and Financial Accounts (commonly known as an FBAR reported on FinCEN Form 114, previously Form TD F 90-22.1).”
The OVDP is offered to those taxpayers with undisclosed offshore accounts or assets and is utilized by taxpayers with willfulness issues regarding their offshore accounts or assets. While it is expected that the IRS will provide some type of program after September 28, 2018, for these taxpayers, the parameters or timing of such a program are not yet known. Where it is advisable, McNees is encouraging clients who desire to participate in the OVDP to begin the process as quickly as possible before it comes to a close.
Fortunately, for taxpayers who are eligible to participate in the IRS’ Streamlined Filing Compliance Procedures (both domestic and foreign), no changes have been announced by the IRS at this time. However, the IRS has stated that it may end the Streamlined Filing Compliance Procedures at some point.