Tax Law Update | March.23.2018
On March 13th, the Internal Revenue Service ("IRS") announced that the offshore voluntary disclosure program ("OVDP"), which was first launched in 2009 and modified several times, will close to new taxpayers after September 28, 2018.
U.S. taxpayers have an obligation to report certain foreign financial assets and any income earned from those assets. Each U.S. taxpayer with an interest in, signature or other authority over, one or more bank, securities, or other financial accounts in a foreign country must file a Report of Foreign Bank and Financial Accounts (an "FBAR") if the aggregate value of such accounts exceeds $10,000 at any time during a calendar year (on FinCEN Form 114, which replaced Form TD F 90‑22.1). The FBAR requirement applies even if the account produces no taxable income. U.S. taxpayers may also have additional reporting requirements with respect to foreign financial assets, including: statements of specified foreign financial assets (Form 8938), information returns with respect to certain foreign corporations (Form 5471), reports of transactions with foreign trusts and receipt of certain foreign gifts (Forms 3520 and 3520-A), and returns with respect to certain foreign partnerships (Form 8865). Surprisingly harsh civil and criminal penalties apply to the failure to file FBARs and other information returns (just ask Paul Manafort and Richard Gates).
The OVDP enables U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns, allowing a taxpayer to avoid criminal penalties and reduce civil penalties. A taxpayer participating in the OVDP program must file original or amended tax returns and pay back taxes, interest, and civil penalties for the voluntary disclosure period (i.e., the most recent eight tax years for which the filing due date has already passed). The penalties that participating taxpayers must pay include accuracy related penalties, failure to file penalties, and a miscellaneous penalty equal to 27.5% of the highest aggregate value of the unreported accounts and assets during the voluntary disclosure period (increased to 50% if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement is publicly identified as being under investigation or as cooperating with a U.S. government investigation). In exchange for participating in the program, a taxpayer generally avoids substantial civil penalties and the risk of criminal prosecution.
The IRS has now decided to close the OVDP, effective September 28, 2018. In justifying the closure, the IRS noted that there has been a significant decline in the number of taxpayers participating in the OVDP as well as an increase in the awareness of offshore tax and reporting obligations due to implementation of the Foreign Account Tax Compliance Act ("FATCA") and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations.
Taxpayers considering entering the OVDP should act promptly before the deadline. The IRS has stated that, to meet the closing deadline, a complete voluntary disclosure submission must be postmarked by September 28, 2018, to qualify for the OVDP and may not be a "partial, incomplete, or placeholder" submission.
Streamlined Filing Compliance Procedures
Separate from the OVDP, taxpayers can still take advantage of the IRS's "streamlined filing compliance procedures" (the "Streamlined Procedures"). The IRS does not currently have plans to terminate the Streamlined Procedures but has stated that it may do so at some point in the future. The Streamlined Procedures permit the filing of amended or delinquent returns by taxpayers with foreign financial asset reporting and compliance issues that did not result from willful conduct on the part of the taxpayer. The Streamlined Procedures are designed for only individual taxpayers, including estates of individual taxpayers, and are available to U.S. individual taxpayers, whether they reside inside or outside the United States (specific eligibility requirements for the Streamlined Procedures apply depending on the U.S. residency status of a taxpayer).
The Streamlined Procedures are less onerous than the OVDP. Under the Streamlined Procedures, a taxpayer must file FBARs due for the last six years and amended income tax returns, if necessary, for the last three years. The Streamlined Procedures also require taxpayers to certify, under penalties of perjury, that any failure to report foreign financial assets and pay all tax due in respect of those assets was due to non-willful conduct. The Streamlined Procedures require the taxpayer to pay any income tax due, plus interest, and imposes a 5% miscellaneous penalty on taxpayers residing in the United States (and no miscellaneous penalty for taxpayers residing outside the United States).
A requirement of both the OVDP and the Streamlined Procedures (and other IRS voluntary compliance programs) is that the taxpayer must get to the IRS before the IRS gets to the taxpayer. Specifically, if the IRS has initiated a criminal investigation of the taxpayer or a civil examination of the taxpayer's returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use any voluntary compliance program.
Other IRS Voluntary Compliance Programs
In addition to the Streamlined Procedures, the IRS continues to offer other options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets, including the: IRS-Criminal Investigation Voluntary Disclosure Program, the delinquent FBAR submission procedures, and delinquent international information return submission procedures.Taxpayers generally may not participate in more than one program. For example, once a taxpayer makes a submission under the Streamlined Procedures, the taxpayer may not participate in OVDP. Similarly, a taxpayer who submits an OVDP voluntary disclosure letter is not eligible to participate in the Streamlined Procedures. The decision of whether to participate in the OVDP, Streamlined Procedures, or one of the other IRS programs available can be complicated and will depend on the particular circumstances of the taxpayer. Taxpayers should consult with their tax advisors to determine which program is most suitable for the taxpayer.