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The IRS has begun to hint that the end of the Offshore Voluntary Disclosure Program (OVDP) is coming. Those hints became clearer at a recent panel discussion in Florida. Find out why the OVDP is on the way out, and what options taxpayers may have going forward.
Every year, IRS officials and tax attorneys get together at the Florida Bar Association / Florida Institute of CPAs International Tax Conference in Miami, Florida, to talk about changes in tax law and IRS enforcement. At this year's conference, Robert E. Panoff, a private tax litigator, moderated a panel including:
The panel took questions about a variety of tax enforcement matters, but the issue that took center stage was the IRS's transition from OVDP to the streamlined program. Despite efforts over the last year by IRS Commissioner John Koskinen and others, the OVDP is on its way out. 2017 was the first year when the IRS did not release how many OVDP submissions had been made. At the panel discussion Price admitted filings were on the decline. "That door will eventually shut," he said.
Tax practitioners and panelists alike recognized that taxpayers don't generally want to voluntarily disclose tax filing or Financial Bank Account Reporting (FBAR) omissions using the OVDP. The penalties are simply too high for the benefit. OVDP requires participants to file eight years of past tax returns and FBAR reports, plus foreign account statements and extensions of the statute of limitations. Taxpayers must pre-pay taxes and interest, as well as anticipated FBAR penalties. All together, those penalties could add up to 50% of the balance of the foreign bank accounts not previously disclosed. When attorney fees are added in, that total climbs even higher.
In exchange for all that voluntary disclosure of information and all those costs, taxpayers are promised that there will be no criminal prosecution for non-disclosure, and that the matter would resolve in a compromise agreement. However, what became clear from the panel discussion was that there really wasn't any guarantee. Over 6,000 cases were declined for OVDP participation or withdrew from the system in recent years. If a taxpayer makes a payment toward the OVDP, he or she doesn't get the money back, and may not transfer those payments to any other year.
When taxpayers find they cannot make the full payment at one time, or fail to fully disclose all of their accounts in the OVDP, those circumstances can further limit the effectiveness of the closing agreement. An additional disclosure can open the taxpayer up to new investigations and an even longer statute of limitations if the IRS comes to believe there is fraud. Daly also admitted that the Department of Justice is not legally required to honor an OVDP closing agreement; it merely chooses to do so. If unpaid taxes or penalties are owed, the Justice Department will enforce those obligations indefinitely. "We've gone all the way back," said Hylton, referencing enforcement actions going on 9 years in some cases.
All together, these disclosure requirements, penalties, and limitations on the closing agreement make the OVDP less than desirable for most taxpayers. Some are choosing to take the risk of an IRS audit rather than opening themselves up to the investigation process.
The panel emphasized that the streamlined procedure for voluntary disclosure of non-willful failure to file FBAR reports is easier and has lower penalties than the OVDP (5% of the account balance for U.S. residents, and zero for nonresident citizens). It only requires three years of tax returns and 6 years of FBARs.
But unlike the OVDP, the streamline process does not contain the certainty of a closing agreement or bar against criminal prosecution. If a taxpayer is found to have misrepresented his or her assets, he or she could face full IRS enforcement even after engaging in the streamline process. The streamline process is also only available to individuals, not corporations. Once the OVDP door is shut, companies needing to disclose erroneous omissions will need to instead use a noisy amended return filing along with arguments for avoiding penalties. This system will not bring with it any systematic penalty forgiveness.
The OVDP has lost favor with tax payers and tax attorneys over recent years, as is evidenced by the decrease in filings. But whether it is time for the IRS to close the program entirely, and what will be available to fill the gap remains to be seen. One thing is clear: internally, the IRS has decided the time has come for the end of the Offshore Voluntary Disclosure Program.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years’ experience. If you have questions regarding voluntary disclosures of non-willful reporting errors, contact Joe Viola to schedule a consultation.