IRS Announces Significant Changes to Offshore Account Disclosure Programs
The Internal Revenue Service (IRS) recently announced significant changes to its Offshore Voluntary Disclosure Program (OVDP), which it first offered in 2009. The IRS revised OVDP over the years, including introducing the Streamlined Filing Compliance Procedures program (Streamlined Procedures) in September 2012. According to the announcement, more than 56,000 taxpayers have used one of the disclosure programs to comply voluntarily, resulting in payments of $11.1 billion in back taxes, penalties and interest. The disclosures peaked in 2011 (approximately 18,000 submissions) and fell to only 600 disclosures in 2017. In contrast, approximately 65,000 taxpayers have made submissions under the Streamlined Procedures program.
The announcement also indicated that since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations. Don Fort, Chief of the IRS Criminal Investigation Division, stated that the “IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics.” Mr. Fort also said that stopping offshore tax noncompliance “remains a top priority of the IRS.”
The IRS is closing OVDP on September 28, 2018. Acting IRS Commissioner David Kautter stated that taxpayers “have had several years to come into compliance with US tax laws under this program” and noted that the IRS had been clear that it would close OVDP “at the appropriate time.” Mr. Kautter also stated that those taxpayers “who still wish to come forward have time to do so.” Although the IRS is closing OVDP, it announced that it will keep the Streamlined Procedures program in place for eligible taxpayers, as well as continue the IRS-Criminal Investigation Voluntary Disclosure Program, the delinquent Report of Foreign Bank and Financial Accounts (FBAR) submission procedures, and the delinquent international information return submission procedures.
We have previously written about OVDP and the Streamlined Procedures program (see IRS Voluntary Disclosure of Offshore Accounts: Recent Developments, IRS Introduces New Streamlined Filing Compliance Procedures for Offshore Accounts and IRS Issues Interim Guidance for Foreign Bank and Financial Accounts Penalties; Congress Changes Deadline for Filing). While we have made numerous OVDP submissions for clients, we have found that most taxpayers are eligible to file under one of the Streamlines Procedures programs (US taxpayers residing in the US and US taxpayers residing outside of the US) and have used the Streamline Procedures program in lieu of OVDP. A key aspect of the Streamlined Procedures program is that a taxpayer must certify that the failure to report all income, pay the tax, and submit all information returns, including FBARs, was due to non-willful conduct.
Assuming a taxpayer can meet the “non-willful conduct” standard, a submission under the Streamlined Procedures program was much less costly than under OVDP, due to the fact that only three years of amended tax returns and six years of FBARs needed to be filed, compared to eight years of amended tax returns and eight years of FBARs. Most significantly, the offshore penalty under the Streamlined Procedures program is 5% of the highest annual offshore account/asset value, as opposed 27.5% (or in some cases 50%) under OVDP. If a US taxpayer qualifies under the Streamlined Procedures program for those residing outside of the United States, there will be no failure-to-file penalties, failure-to-pay penalties, or accuracy-related penalties for amounts reported on the amended returns, or penalties for the failure to file information returns or FBARs, unless the IRS can demonstrate that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful.
We suggest that you discuss any offshore account compliance issues with your tax advisor and that you take into consideration how the expiration of OVDP on September 28, 2018 might impact any associated reporting and disclosure.
For questions, information, or guidance, please contact John Eagan (firstname.lastname@example.org; 212.868.4835) or another member of our Tax and Estates Group.