United States: The End Is Near: Correcting Offshore Tax Problems Before And After IRS Closes Offshore Voluntary Disclosure Program On September 28, 2018

It's not too late to correct your U.S. tax filing compliance errors related to offshore holdings, but time is quickly running out. On March 13, 2018, the Internal Revenue Service announced that the Offshore Voluntary Disclosure Program (OVDP) started in March 2009 will finally come to a close on September 28, 2018. After that date, taxpayers with noncompliant foreign financial matters must resort to other programs, other traditional procedures and new procedures to be announced by the IRS for dealing with undisclosed offshore accounts and holdings.

Qualifying for the OVDP

In order to qualify for the soon-to-expire OVDP, a U.S. taxpayer on or before September 28, 2018, must make a complete disclosure to the IRS. This will require that a complete Offshore Voluntary Disclosure conforming to certain requirements is received or postmarked by September 28, 2018. The disclosure may not be "partial, incomplete or placeholder submission." 

On or before September 28, 2018, a taxpayer seeking admission to the OVDP must provide the following:

  • The Offshore Voluntary Disclosure Letter and attachments. This submission includes the following information:
    • Taxpayer identifying information (name, address, SSN, date of birth, passport number, occupation)
    • Bank names, name on account, account numbers
    • Identification of the source of funds in the account
    • Whether the account records are "susceptible to being turned over to the U.S. government pursuant to an official request"
    • Whether there has been an objection to the official request, and if so was the U.S. given notice of the objection?
    • Whether the taxpayer or "any related entities" are under IRS audit or criminal investigation by the IRS "or any other enforcement authority"
    • Whether the taxpayer believes that the IRS has obtained information regarding the tax liability at issue
    • An estimate of the highest aggregate value of the offshore accounts
    • An estimate of the total unreported income from the offshore account
  • For each disclosed account:
    • The name and address of the financial institution
    • The open and closing dates
    • The names of the persons who advised or assisted in the opening of the account and an explanation of the communications with those people
    • Whether those persons met or called the taxpayer in the U.S.
    • Whether anyone suggested the use of entities or particular foreign countries to avoid disclosure of the ownership of the account
    • Whether anyone suggested surreptitious means for communicating with the bank
    • Did anyone suggest moving the funds in the account to another bank or a different country?
    • How were funds in the account accessed?
    • Were funds moved to the U.S.?
    • The names of all the persons and entities "affiliated" with the account

Do Not Delay Filing

Many times in the past, a taxpayer has made an incomplete OVDP application to the IRS in order to meet some perceived deadline. For instance, if concerned that the IRS would receive information about the taxpayer's specific noncompliance, the taxpayer may have made a "quickie" disclosure providing some but not all required information. Historically the IRS has been very flexible in granting extensions to a taxpayer to provide the balance of the required information. With these new requirements of a "complete" disclosure by September 28, the flexibility appears to have evaporated.

Securing "complete" information to make a "complete" disclosure is not easy. Foreign banks, especially small institutions, are not quick to react to a request for information. Closed accounts will receive even slower consideration. Accordingly, if a disclosure is anticipated, the search for bank records should start immediately.

What happens if information is incomplete? Guidance has not been provided, but it is possible that "substantial" completeness may be sufficient. Perhaps disclosure of the name of the financial institution, location, owner of record, estimated date of opening and closing, and a reasonable estimate of highest balances may suffice where it can be demonstrated that a real but unsuccessful effort was made to timely secure account information.

Note: "Substantial" completeness, to be acceptable by the IRS, means that accounts that should have been obvious to the taxpayer are not omitted. The omission of an account that the taxpayer recently accessed or transferred to another bank will likely be looked upon unfavorably.

Missing the Deadline Is Not Fatal

Should a taxpayer with offshore compliance issues not meet the September 28, 2018, deadline, other alternatives may be available to resolve the problem.

The IRS has announced that the Streamlined Filing Compliance Procedures (the "Streamlined Procedures") and the Delinquent International Information Return Submission Procedures will remain available after the September 28 deadline. That means that the existing programs for filing delinquent Report of Foreign Bank and Financial Accounts (FBAR) and other international information returns remain available and a penalty-free filing can be made under certain circumstances. Streamlined Procedures for U.S. taxpayers residing in and outside the United States are available, permitting the filing of income tax returns for only three years and FBARs for six years with either a 5 percent or no penalty. However, taxpayers participating in the Streamlined Procedures must have a situation which permits them to file, under penalties of perjury, a certification that their tax compliance errors were not willful. Any individual who meets that qualification would ordinarily not want to participate in the 2014 OVDP, in most events.

The 2014 OVDP provides many benefits, including an assurance of no criminal prosecution. However, that assurance comes with a significant price, including the payment of a penalty of between 27.5 percent and 50 percent of the highest value of offshore accounts which were undisclosed. In addition, a participant in the 2014 OVDP must file eight years' worth of amended income tax returns and pay the tax, a 20 percent accuracy-related penalty and interest. Also, FBARs and other foreign financial reports are required for the previous eight years. This can be a very heavy price to pay, but is an excellent resolution for someone who has engaged in willful or criminal conduct. Those individuals who have not engaged in willful or criminal conduct would rarely want to utilize the "benefits" of the 2014 OVDP and would opt for the Streamlined Procedures.

As stated, the IRS has reported that the existing Streamlined Procedures will remain in effect. In addition, the IRS has stated it will issue new guidelines for dealing with undisclosed foreign accounts. In the past, the IRS has refined the then-existing OVDP. For instance, the Miscellaneous Offshore Penalty (on the highest value of noncompliant accounts) started at 20 percent in 2009, was escalated to 25 percent, then 27.5 percent with a 50 percent penalty for accounts related to certain "bad" banks. It is unlikely that any new program will simply increase the penalty. Any new initiative may well include many new components and certainly a much higher financial cost. 

Aside from the potential new programs that will be forthcoming, taxpayers who do not qualify for the Streamlined Procedures may still make a voluntary disclosure provided their income is from legal sources and the taxpayer has not been contacted by the IRS. The voluntary disclosure will be a major factor in whether the Department of Justice (DOJ) decides to bring criminal proceedings. Historically, individuals making a truthful, complete and accurate voluntary disclosure are not criminally prosecuted; however, they do face the prospect of significant civil penalties including the potential for a civil fraud penalty and large FBAR penalties. Nonetheless, the prospect of eliminating the likelihood of criminal prosecution makes the traditional voluntary disclosure program very attractive for certain taxpayers.

New Means and Methods for the IRS to Secure Information of Offshore Accounts

The IRS announced that it was stopping the 2014 Voluntary Disclosure Program in part because the number of individuals applying to the program has steadily declined. In addition, the IRS stated that it is receiving very significant information about taxpayers with respect to information received under the Foreign Account Tax Compliance Act (FATCA), the network of intergovernmental agreements between the U.S. and partner jurisdictions, automatic third-party account reporting and other data-rich sources, such as the DOJ Swiss Bank Program and various John Doe summonses. This information is used to initiate examinations and investigations of noncompliant taxpayers. For instance, the IRS/DOJ continue to negotiate settlements with numerous financial institutions including Swiss and Israeli banks. For example, Bank Hapoalim is in the midst of negotiating a settlement with the DOJ that will likely include the disclosure of U.S. customer account information.

In addition, the IRS has recently been issuing letters to taxpayers who started the Offshore Voluntary Disclosure process and stopped for some undisclosed reason. Those taxpayers are being asked to either make a submission under the Streamlined Procedures, file amended returns or explain why they are compliant with IRS laws. It is interesting to note that the IRS in these recent letters to taxpayers did not offer the opportunity to reapply for the OVDP.

For Further Information

If you would like more information about voluntary disclosure for offshore accounts, please contact Thomas W. Ostrander, the author of this Alert; Hope P. Krebs in Philadelphia; Jon Grouf or Megan R. Worrell in New York; Anthony D. Martin in Boston; William D. Rohrer, P.A. or Jennifer Migliori in Miami; any  member of the International Practice Group; Michael A. Gillen of the Tax Accounting Group; or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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