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Over the last decade, thousands of U.S. taxpayers have taken advantage of the offshore voluntary disclosure program (OVDP) to correct reporting errors connected to foreign financial accounts. They have voluntarily reported their accounts to the IRS to minimize the financial and criminal consequences of non-reporting. Now the IRS has announced it will end the OVDP in September 2018, cutting off one avenue to taxpayers' peace of mind.
In 2009, the IRS under the Obama Administration created the Offshore Voluntary Disclosure Program (OVDP). The program was intended to engage taxpayers and encourage compliance with the mandatory reporting requirements for foreign financial accounts under the Bank Secrecy Act and the Foreign Account Tax Compliance Act (FATCA). It provided non-compliant taxpayers with peace of mind that they would not be subject to audit as long as they fully disclosed their foreign financial assets.
The OVDP also provides for certainty. It fixes the total penalty at 27.5% of the highest balance of undisclosed accounts during the last 8 years. Under the OVDP that taxpayer is required to admit willful nondisclosure and agree to pay the tax penalties in place of any other penalties. In exchange, the taxpayer knows that there won't be any additional fines or criminal charges issued later for non-disclosure during the covered period.
The OVDP was launched in 2009, and was amended in 2011, 2012, and 2014, as the IRS refined the process. Over nearly the last decade, more than 56,000 taxpayers have filed voluntary disclosures, paying over $11.1 billion in back-owed taxes, interest and penalties to the IRS. However, use of the OVDP peaked in 2011 when it was used by 18,000 taxpayers. In the years since, tax preparers and practitioners have found that, for many taxpayers, the OVDP was not the best way to protect their interests, or their assets. In 2017, only 600 disclosures were filed with the IRS under the program.
On March 13, 2018, the IRS issued a statement that it intended to "ramp down" the 2014 Offshore Voluntary Disclosure Program and close the program on September 28, 2018. IRS representatives have been hinting that the OVDP may be on the way out for a while. In 2016, after the presidential election, then-IRS Commissioner John Koskinen promised that the program would continue through 2017. But he warned "At some point it's going to end and then you're going to be stuck with the normal process."
Now that time has come. Tax professionals received advanced warning at the Florida Bar Association / Florida Institute of CPAs International Tax Conference in Miami, Florida, earlier this year. But the details of the end of the OVDP were still not final. With the public statement on March 13, it is now clear that US taxpayers will only have a few months to get their documents in order and qualify for the program. Acting IRS Commissioner David Kautter said in the statement:
“Taxpayers have had several years to come into compliance with U.S. tax laws under this program. . . . All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so."
The "ramp down" of the OVDP may seem to be a shift away from offshore tax enforcement. But if anything, the statement makes it seem the opposite is true. The FATCA, automatic third-party account reporting by international financial institutions, and arrangements between the US and other countries have given the IRS other ways to uncover unreported foreign financial assets. The IRS also continues to use John Doe Summonses to gather information about potential income and assets held by US taxpayers overseas.
In fact, on March 20, 2018, the IRS named nondisclosure of offshore assets as one of its "'Dirty Dozen' tax scams for 2018". As it has in past years, the IRS has used this "Dirty Dozen" list to signal its priorities for tax enforcement in the coming year. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers for criminal violations connected to international activities. 671 of those were indicted for international tax crimes.
“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,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS.”
The OVDP may be on the way out, but it isn't gone yet. Taxpayers who want to take advantage of the program to avoid an audit and get certainty on their tax consequences, can do so until September 28, 2018. But preparing an OVDP doesn't happen overnight. The IRS has indicated that only complete offshore voluntary disclosures that meet the policy's requirements will be considered. If a submission is a placeholder, partial disclosure, or otherwise incomplete, it will disqualify the taxpayer from OVDP consideration.
This means time is of the essence for US taxpayers with unreported assets overseas. If you think you may need the OVDP to avoid criminal or tax penalties for willful nondisclosure of foreign financial accounts, you should schedule a meeting with an experienced tax attorney now to make sure everything is ready, so you won't miss the deadline.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions about the OVDP or other tax disclosure programs, contact Joe Viola to schedule a consultation.