On March 13, 2018. the Internal Revenue Service announced that it is ending the Offshore Voluntary Disclosure Program on September 28, 2018. The IRS has made the announcement to allow time for taxpayers who have undisclosed foreign financial accounts and assets to enter into the program and make a OVDP voluntary disclosure before the program ends.
The IRS created the offshore voluntary disclosure program after some high profile investigations, including the investigation of Swiss Bank UBS, disclosed a significant number of U.S. citizens and residents who were failing to comply with requirements to disclose foreign financial accounts.
A U.S. person with foreign financial accounts exceeding $10,000 in the aggregate at any time during the year is required to file FINCEN Form 114 Report of Foreign Bank and Financial Accounts, more commonly known as the FBAR.
In addition to ramping up its enforcement, Congress and Treasury created additional measures requiring increased transparency from taxpayers with foreign assets, and from foreign financial institutions doing business with U.S. persons.
The IRS created the OVD Program in 2009, to allow taxpayer to come clean with respect to their foreign financial accounts and assets without fear of criminal prosecution. The program has been extended and modified over the years, and the penalties under the IRS OVDP have been increased.
The OVDP allows taxpayers to come clean about previously undisclosed financial accounts and certain other foreign investments without the risk of criminal prosecution. The OVDP also limits the penalty to 27.5 percent of the taxpayer’s highest aggregate balances in foreign financial accounts, and certain other foreign assets. Although the penalty is substantial, it is less than the willful penalty for failing to file an FBAR, which is 50 percent of highest balance in the account for each violation.
A taxpayer who wishes to enter the program must request a pre-clearance from the IRS Criminal Investigation Division. The taxpayer must not be already under audit, and the IRS must not have otherwise received the taxpayer’s name from a bank or other institution. After receiving the IRS pre-clearance letter, the taxpayer must then comply with the requirements of making the voluntary disclosure.
While the penalty of 27.5 percent can be quite steep, particularly for those with substantial amounts in foreign financial accounts and other foreign assets, the penalty is less than the willful FBAR penalty that might otherwise be imposed. In addition, the taxpayer gets the certainty the he or she will not be criminally prosecuted for failing to disclose the applicable foreign financial accounts and assets.
Once OVDP ends, taxpayer may be eligible to use the IRS Criminal Investigation Division voluntary disclosure program, but that program does not provide the same protections from criminal liability and penalties.
IRS Streamlined Disclosure Program
In September, 2012, the IRS created the Streamlined Disclosure Program for individuals who did not willfully fail to comply with FBAR and other foreign asset disclosure and filing requirements. Under the streamlined program, U.S. residents are subject to a lesser 5 percent penalty on the applicable foreign financial accounts and assets, and individuals living abroad are subject to no penalty for the failure to disclose foreign accounts and certain other foreign assets.
The IRS Streamlined program will continue after September 28, 2018, but the IRS did state in the March 13 notice that it will end the Streamlined Program at some point.
U.S. taxpayers with undisclosed foreign financial accounts and assets are at great risk if they continue their failure to comply with filing and disclosure obligations. Congress enacted the Foreign Account Tax Compliance Act requiring foreign banks to report U.S. account holders. In addition, other countries have followed the United States’ lead in enacting banking transparency and information sharing provisions.
U.S. taxpayers having undisclosed foreign financial accounts and other foreign assets should seek immediate tax advice from a qualified tax profession. A seasoned tax professional familiar with the IRS OVDP and other programs will be able to guide you to the best choice for reporting your undisclosed foreign accounts and assets. Taxpayers are quickly running out of time to take advantage of the IRS’s more advantageous programs to avoid criminal prosecution, and limit the financial penalties for failing to make the required disclosures.
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