New Changes to the Offshore Voluntary Disclosure Program
Recently, the IRS announced additional streamlined procedures and changes to its Offshore Voluntary Disclosure Program, in order to make it easier for taxpayers to satisfy their obligations regarding reporting offshore accounts. These changes do not result in an entirely new OVDP program; rather, they are a continuation of the previous OVDP programs introduced in 2009, 2011 (OVDI), and 2012. The IRS announcement contains expanded streamlined provisions for OVDP as well as changes to the existing 2012 OVDP program already in place.
Purpose of the Offshore Voluntary Disclosure Program
Under Internal Revenue Code § 7201, any willful attempt to evade or defeat the payment of tax is punishable as a criminal offense.[1] The violation is considered a felony punishable with fines and possible imprisonment for up to five years. The IRS has a longstanding practice of considering any voluntary disclosure made by the taxpayer as a factor in whether to pursue criminal charges for taxes evasion. However, a taxpayer who is already under criminal investigation by the IRS’s Criminal Investigation for hiding offshore account cannot avail itself of the protections offered by OVDP. Such taxpayers may instead file amended returns in the hope of dissuading prosecution or mitigate punishments, a tactic which has been used with varying results.[2] In short, OVDP allows taxpayers to possibly escape the threat of criminal investigation by the IRS through preemptively disclosing their foreign financial accounts.
2014 OVDP – Expanded Streamlined Provisions
In keeping with the IRS’s desire to increase participation in the voluntary disclosure program, the 2014 changes expand eligibility and eliminating or reducing some penalties associated with the program. Specifically, these streamlined procedures were previously only available to nonresident taxpayers with undisclosed foreign financial accounts. Under the new 2014 changes, however, streamlined OVDP procedures are available to certain U.S. taxpayers still residing in the United States.
Another change found in 2014 OVDP is the elimination of the risk questionnaire required under previous versions of the program. The 2014 OVDP also removes the cap on unpaid taxes which previously barred certain taxpayers from participating. Earlier versions of OVDP required the taxpayer to have unpaid taxes of less than $1,500 but 2014 OVDP has no such cap. Finally, under 2014 OVDP, taxpayers no longer have an affirmative requirement to demonstrate or certify that their previous failure to comply with reporting obligations was non-willful.
With respect to penalties associated with OVDP, the new changes state that all penalties for eligible non-resident participants in the program will be waived. Eligible U.S. residents will be subject to a small “miscellaneous” offshore penalty of 5 percent of the foreign financial assets that gave rise to the tax compliance issue.
Significant Changes from the 2012 OVDP
In addition to an expansion of the streamlined procedures as described above, the IRS 2014 OVDP announcement creates numerous significant changes to the existing 2012 OVDP program.
Under the new 2014 OVDP, a 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account becomes publicly identified as being under investigation or as cooperating with a government investigation. This 50% offshore penalty also applies to taxpayers who have a “facilitator” that is being investigated by the IRS, and is an increase from the 27% penalty that applied under 2012 OVDP. Taxpayers who fall into this category will have until August 3, 2014 to participate in OVDP, or else be subject to the 50% penalty.
Another significant change from 2012 OVDP is described in IRS Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers, FAQ 23.[3] This rule concerns the information taxpayers are required to provide to the IRS when applying for the program to obtain preclearance through the Criminal Investigation Division of the IRS. In addition to the preclearance phase, the 2014 OVDP now requires taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application.
Changes to Delinquent FBAR and Other Informational Returns Submissions Procedures
The 2014 OVDP program contains changes to the procedures for filing delinquent FBARs and other informational returns. These changes are described in FAQs 17 and 18 of the IRS announcement.[4] Taxpayers who do not qualify for OVDP or the streamlined procedures described above may file delinquent FBAR forms pursuant to the standard procedures and escape penalties, assuming the income from foreign financial accounts was properly reported on income tax returns. For other informational returns, taxpayers who are not eligible for OVDP or streamlined procedures should file any delinquent informational returns and include a statement of all facts establishing reasonable cause for the failure to file.[5]
How a Tax Attorney Can Help
These new changes to the OVDP program are momentous and may have serious implications for all eligible taxpayers. If you have offshore accounts or are unsure whether you are qualified for OVDP, you should contact an experienced tax attorney immediately.
[1] IRC § 7201.
[2] See, e.g., United States v. Ellefsen, 655 F3d 769 (8th Cir. 2011) .
[3] Internal Revenue Service, http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised.
[4] Internal Revenue Service, http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntar....
[5] Internal Revenue Service, http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-International-Information-Return-Submission-Procedures.