United States: The High Cost Of Being Noncompliant With The Internal Revenue Code

Kevin E. Packman is a partner with Holland & Knight's Miami office

The IRS currently offers the following five programs for noncompliant taxpayers:  (i) the Offshore Voluntary Disclosure Program (OVDP), (ii) Streamlined Domestic Offshore Procedures, (iii) Streamlined Foreign Offshore Procedures, (iv) Delinquent FBAR Submission Procedures and (v) Delinquent International Information Return Submission Procedures.  While the details and requirements of each program are beyond the scope of this newsletter, there are recent developments within the OVDP and streamlined programs that will be discussed. 

Current Statistics

On October 21, 2016, the IRS announced that it had collected more than $10 billion in tax, interest and penalties from more than 100,000 taxpayers who participated in OVDP and the streamline programs.  Between 2009 when OVDP was first introduced and today, 55,800 taxpayers have taken part in OVDP paying more than $9.9 billion.  This is compared to the 48,000 taxpayers who have participated in one of the streamline programs since they were first announced in July 2014. Those participating in streamline have paid approximately $450 million. In two years, 7000 fewer taxpayers participated in streamline, than participated in the OVDP over eight years.  Based upon these numbers, it is reasonable to conclude that a number of OVDP participants would have qualified for streamline had the program existed prior to 2014.  Additionally, it is also quite likely that streamline was used inappropriately by taxpayers for whom OVDP was more appropriate.

Costly Increase with OVDP

While the OVDP requires taxpayers to resolve the last eight years of noncompliance, pay tax, interest and tax penalties, it also includes an OVDP penalty.  The penalty is 27.5 percent of the highest aggregate value of undisclosed offshore assets during the eight year period. The penalty also applies to previously disclosed assets if there is unreported income associated with the asset.  Additionally, if an asset does not generate income, but was purchased with previously unreported income, then the penalty applies to that asset as well.1

The OVDP penalty jumps to 50 percent if any of the taxpayers undeclared assets were held at an institution or were affiliated with a facilitator included on a list titled Foreign Financial Institutions or Facilitators (hereinafter referred to as the Bad Boy list).  Once the 50 percent penalty applies to any account or asset, it applies to all of the taxpayer's assets subject to the OVDP penalty.  The Bad Boy list is essentially comprised of institutions and facilitators that are or were under investigation by the IRS or the Department of Justice. What is notable about the Bad Boy list is that it includes financial institutions from around the globe2.  The concept of a Bad Boy list was first introduced in the current iteration of the OVDP in July 2014.  Frequently Asked Question #7.2 applicable to the OVDP discusses the imposition of the 50 percent penalty and indicates that it also applies to facilitators. Specifically, FAQ 7.2 states:

Beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50 percent miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation:  an event has already occurred that constitutes a public disclosure that either:

(a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer's offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person;

(b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person; or

(c) the foreign financial institution or other facilitator has been identified in a court-approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a "John Doe summons") at the foreign financial institution or have accounts established or maintained by the facilitator. 

Examples of a public disclosure include, without limitation:  a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.

Despite providing the warning in July 2014 that facilitators could be added to the Bad Boy list, until recently the IRS had failed to do so.  However, that changed on October 14, 2016 when the IRS added 47 individuals or entities to the Bad Boy list.  The effective date of their addition was delayed until November 15, 2016.  Consequently, as financial institutions and facilitators continue to be added to the Bad Boy list, which now includes 114 names, the financial costs associated with the OVDP are going to become increasingly more prohibitive for taxpayers.  This may lead taxpayers to look for other options with which to resolve their noncompliance.

Issue with Streamline

There are no tax penalties associated with the either of the streamline programs.  Notwithstanding, the domestic streamline program contains a 5 percent penalty on the value of certain foreign holdings, whereas, the foreign streamline does not contain any penalty on the value of foreign holdings.  Accordingly, either streamline option appears more appealing when compared against OVDP.  As many practitioners have likely experienced since the introduction of the streamlined programs, noncompliant taxpayers now claim that their failures are due to nonwillful conduct.  Practitioners should never accept the statement at face value, and must investigate the facts and underlying documents to confirm the taxpayers conclusion.  

Both streamline programs require taxpayers to certify under penalties of perjury that their noncompliance was non-willful.  The forms taxpayers need to complete define non-willful conduct, as "conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law."3

The Government is reviewing the taxpayer streamline certifications, which makes it more crucial for taxpayers to be truthful and not stretch the truth.  Thomas E. Bishop, Director of Field Operations (International) spoke on a panel at the 4th annual International Tax Enforcement and Controversy Conference in Washington DC on October 28, 2016 (DC Conference).  During his comments, Bishop warned practitioners to challenge the taxpayer's assertion of nonwillful behavior.  He stated, "[j]ust keep in mind that we are looking at the actual account documents, the things that we see that show that the particular account holders are acting in a knowledgeable and intended way to conceal their wealth and income from the IRS."4

Caroline D. Ciraolo, Principal Deputy Assistant Attorney General in the Justice Department Tax Division also spoke at the DC Conference.  Ciraolo mentioned that "it's our job to make sure that those people who chose the streamlined program chose appropriately."  She indicated that those who "lied their way through a streamlined narrative," would be prosecuted. Additionally, Ciraolo noted that the Government has a great deal of information that it has received from the banks, which it can compare against the certifications.  More chillingly, they are following the money that left Switzerland "into jurisdictions around the world" and looking at institutions other than banks, such as "asset management companies, corporate service providers financial advisers, and insurance companies."5

A few days after the DC Conference, Ciraolo delivered the keynote address on November 2, 2016 at the American Bar Association's 27th Annual Philadelphia Tax Conference.  During her prepared remarks, she reiterated the warning to taxpayers thinking they can skirt through with a streamline filing.  She indicated that the "Tax Division prosecutors are reviewing certain streamlined filings and will investigate and prosecute taxpayers who willfully submit false statements in an effort to obstruct and impede the IRS and evade the payment of tax due."  She also referenced that DOJ has three dozen FBAR cases currently being litigated. 

On November 14, 2016, Ciraolo was at the American Institute of CPAs National Conference and speaking again about taxpayers inappropriately using streamline when she said "these are potential criminal investigations and we're pursuing them."6

It is not just the possibility of having your certification challenged that should worry taxpayers it is the fact that the false certification can lead to a prosecution.  Tino M. Lisella, Assistant Chief of the Western Criminal Investigation Section of the Tax Division stated at the DC Conference a false streamlined submission could "lead to charges under section 7206(1) for filing a false document signed under perjury, section 7212(a) for tax obstruction, and evasion under section 7201."7

These warnings from Government officials must, however, be weighed against those from John McDougal, special trial attorney and division counsel, IRS Small Business/Self Employed Division.  On October 21, 2016 when speaking at the University of San Diego School of Law-Procopio's International Tax Institute annual conference he said that taxpayers who were grossly negligent could use streamline. McDougal said, "[as long as you were not fraudulent or willful in the FBAR sense...even gross negligence is an appropriate basis for filing streamlined."8

Were Warnings a Mere Foreshadow?

On November 4, 2016, Dan Horsky, an emeritus professor of business administration at the University of Rochester pled guilty to conspiring with others to defraud the US and to submitting a false expatriation statement to the IRS.9 Horsky, who made more than $200 million investing in startup companies through his foreign accounts, agreed to pay an FBAR penalty of $100 million.

Ciraolo in announcing the guilty plea stated: "[d]espite his extraordinary wealth, Mr. Horsky concealed funds offshore, failed to report substantial income, conspired to submit false expatriation documents to cover up his fraudulent scheme, and evaded paying his fair share of tax."  She added, "[t]oday's guilty plea proves, once again, that taxpayers will pay a heavy price when they choose to secrete funds in foreign bank accounts and evade tax and reporting obligations."

According to the DOJ News Release, Horsky invested through an entity, Horsky Holdings in the stock of Company A.  It appears that he used his own money, margin loans from a Swiss bank, and funds from his father and sister for purposes of obtaining the stock.  Eventually, he owed 4 percent of Company A, which was then sold to Company B for $1.8 Billion in 2008.  Horsky received approximately $80 from the sale, which was then invested in Company B.  By 2013, Horsky's investment in Company B was valued at approximately $200 million.

So what did Horsky, a citizen of the US, United Kingdom and Israel do wrong?  When Company A was sold in 2008, Horsky only reported a gain of $7 million to the IRS and paid tax on that amount.  He failed to file FBARs through 2011, reporting his foreign accounts, and then filed false FBARs in 2012 and 2013.  In an effort to disguise his ownership of the foreign account, Horsky provided another individual (not named) with signature authority over his account in 2011.  This individual provided investment instructions and directions to the bank.  Then in 2013, this individual relinquished his U.S. citizenship. 

According to DOJ, this individual expatriated to avoid the possibility of Horsky's accounts coming to light.  When the individual filed the Form 8854 in 2014 to advise the IRS of his expatriation in 2013, the individual failed to disclose his net worth on the date of expatriation, his ownership of foreign assets, and falsely certified under penalties of perjury that he was in compliance with his tax obligations for the five preceding tax years.  He was accused of conspiring with Horsky.  While the release does not indicate the penalties for the individual, Horsky paid an FBAR penalty of $100 million, agreed that his tax loss was at least $10 million, and will be sentenced on February 10, 2017. 

How did the DOJ Learn About Horsky?

While the DOJ release does not share how they identified Horsky's noncompliance, on November 22, 2016 Bloomberg broke that Horsky's accounts were at Credit Suisse.  They indicate that the "U.S. learned about Horsky's accounts independent of Credit Suisse and after the banks had entered its guilty plea."10   As a result, the article states Credit Suisse could face itself under a new investigation.  Perhaps, fearing such a result, Credit Suisse began to freeze the accounts of those individuals who they believe to have a U.S. nexus.11

According to the DOJ Release,  "it was readily apparent, in communications with employees of the bank, that Horsky was a resident of the United States.  Bank representatives routinely sent emails to Horsky recognizing that he was residing in the Unites States."   So while certain bankers may have been complicit with Horsky's noncompliance, the take away for noncompliant taxpayers is that despite any promises that may have been made regarding the confidentiality of your account by your banker, the DOJ will find out. There are simply too many hurdles to overcome with FATCA and whistleblowers historically being the two largest threats.  Now, however, there is an even bigger threat. As stated on their website, The International Consortium of Investigative Journalists (ICIJ) "is a global network of more than 190 investigative journalists in more than 65 countries who collaborate on in-depth investigative stories."   The ICIJ is the organization that broke the Panama Papers earlier this year. They are also the organization that in 2013 broke "Secrecy for Sale: Inside The Global Offshore Money Maze."  Both of their releases have included searchable databases on the pilfered information that someone leaked to ICIJ. 


Unless President Elect Trump disbands the IRS, do not expect their focus on unreported offshore assets to stop.  The streamline programs are by far the best programs available for noncompliant taxpayers.  Notwithstanding, they are not appropriate for all taxpayers.  For anyone with criminal exposure, certainly the OVDP is your only option.  But what should those taxpayers for whom streamline is inappropriate and OVDP is prohibitive do to come into compliance?  It is a wonderful question for which there is no perfect answer.  One thing is certain, however, remaining noncompliant is a dangerous game.

Published as LISI International Tax Planning Newsletter #14 (December 6, 2016)


1 Id.

2 Amongst the many jurisdictions included on the Bad Boy list are financial institutions from India, Israel, Switzerland, and the Caribbean.

3 See Form 14653 at https://www.irs.gov/pub/irs-pdf/f14653.pdf and Form 14654 at https://www.irs.gov/pub/irs-pdf/f14654.pdf

4 Nathan J. Richman, "DOJ Looking Beyond Non-Willfulness in Filing Claims," Tax Notes, November 7, 2016.

5 Id.

6 Alison Bennett, "DOJ Cracking Down on Offshore Disclosure Tax Cheats," Bloomberg BNA Daily Tax Report, 220 DTR G-9 (November 15, 2016).

7 Nathan J. Richman, "DOJ Looking Beyond Non-Willfulness in Filing Claims," Tax Notes, November 7, 2016.

8 William Hoke, "Practitioners Question Use of OVDP Over Streamlined Program," Tax Notes, October 31, 2016.

9 Richard Rubin, "U.S. Professor to Pay $100 Million Tax Penalty Over Swiss Accounts," The Wall Street Journal, November 4, 2016.

10 David Voreacos, "Credit Suisse to Face Tax Probe over Undeclared Accounts," Bloomberg, November 22, 2016.  https://www.bloomberg.com/news/articles/2016-11-22/credit-suisse-said-to-face-tax-probe-over-undeclared-accounts

11 William Hoke, "Credit Suisse Reportedly Freezing Accounts Over FATCA Concerns," Tax Notes, November 30, 2106. http://www.taxnotes.com/tax-notes-today/criminal-violations/credit-suisse-reportedly-freezing-accounts-over-fatca-concerns/2016/11/30/18683761

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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