Experienced · Local · Affordable
Since the IRS announced that the OVDP is ending on March 13, 2018, you may be wondering what you can do to limit your exposure to audits or tax penalties for unreported financial assets overseas. Here are some options to consider with your tax attorney.
The last blog post discussed the IRS's formal announcement that the Offshore Voluntary Disclosure Program would end on September 28, 2018. This creates a degree of uncertainty for US taxpayers with foreign financial assets held overseas. The statement is concerning, since the IRS has also named overseas accounts as a priority for enforcement. However, it does leave certain avenues open to taxpayers hoping to avoid criminal and financial penalties for disclosure errors or omissions.
The Offshore Voluntary Disclosure Program allows taxpayers to admit to willful nondisclosure of foreign financial accounts to lock in lesser penalties and avoid criminal tax indictments later on. The OVDP is ending, but it's not gone yet. Taxpayers who need to correct willful nondisclosures may need to meet with a tax attorney experienced in foreign tax issues quickly. To beat the OVDP deadline, taxpayers must file complete disclosures no later than September 28, 2018. It takes time to gather the necessary information and satisfy the disclosure requirements, so choosing this option is a limited time offer.
The IRS offers a separate program, the Streamlined Filing Compliance Procedures (SFCP) for US taxpayers who discover they inadvertently missed disclosing foreign assets. The SFCP allows for taxpayers to correct non-willful violations of the Bank Secrecy Act's FBAR reporting requirements or the Foreign Account Tax Compliance Act (FATCA). Unlike the OVDP, taxpayers using the SFCP must be able to state under oath that the errors were non-willful.
For those who qualify, the SFCP is may the better option anyway. The penalties for non-disclosure are lower (sometimes as low as 5% of the highest balance of undisclosed accounts rather than 27.5%). The time period that applies is also shorter (3 years instead of 8 years), which makes reporting easier. In recent years, tax professionals have tended to recommend the SFCP over the OVDP for taxpayers who qualify.
However, the SFCP does have its drawbacks. If a later audit of a taxpayer's tax return reveals additional undisclosed accounts or evidence that the non-disclosure was willful, the taxpayer could still face additional penalties, or even criminal indictment. With offshore reporting enforcement on the rise, taxpayers choosing this option should be certain their disclosures are complete and their behavior was non-willful before their options decrease.
The SFCP will remain available after September 28, 2018 when the OVDP closes, but the IRS has already suggested that this program too, could come to an end. Taxpayers are well advised to act quickly to take advantage of the SFCP's penalty avoidance options.
If taxpayers discover errors in reporting that do not include tax noncompliance, they may be able to use the IRS's delinquent FBAR procedures or delinquent international information return procedures to correct those errors. Delinquent FBAR procedures area available if you:
If the errors instead require an amended tax return to report and pay additional taxes, you can use the delinquent international information return procedures if you:
This amended return must be filed with a statement that describes the facts behind your reasonable cause for the failure to file. It is important to talk to a tax professional experienced with the disclosure of foreign assets before using delinquent reporting procedures. A tax attorney can help prepare your reasonable cause statement and make certain your circumstance qualifies for the programs.
Now that the OVDP is ending, taxpayers whose filing issues may be considered willful will face limited options. The IRS does have a voluntary disclosure practice in its criminal manual. Taxpayers who make these voluntary disclosures may be reviewed for criminal investigation. If the IRS provisionally accepts them into the voluntary disclosure program, the case can be referred to civil enforcement instead.
Taxpayers using this disclosure should expect to pay more in taxes and penalties. However, making voluntary disclosures in a criminal investigation may be a way to avoid an indictment and potential prison time. Before making any disclosures to the IRS, especially in a criminal investigation, a taxpayer should have a thorough conversation with a tax attorney familiar with all the options. Depending on the circumstances, and the deadlines, there may be other options that better serve their interests.
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 voluntary disclosure options, contact Joe Viola to schedule a consultation.