IRS to Ramp Down and Then End OVDP on 9/28/18, But the Streamlined Procedures for Offshore Assets Will Continue for Now (3/13/18)

The IRS has announced that it will "begin to ramp down [OVDP] * * * and close the program on Sept. 28, 2018."  IR-2018-52, here   Related FAQs, titled Closing the 2014 Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers are here.  I discuss the FAQs at the end of the blog.

First, the contents of the news release are:

Issue Number:    IR-2018-52 

IRS to end offshore voluntary disclosure program; Taxpayers with undisclosed foreign assets urged to come forward now 

WASHINGTON – The Internal Revenue Service today announced it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close the program on Sept. 28, 2018. By alerting taxpayers now, the IRS intends that any U.S. taxpayers with undisclosed foreign financial assets have time to use the OVDP before the program closes.  

“Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.” 

Since the OVDP’s initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties. The planned end of the current OVDP also reflects advances in third-party reporting and increased awareness of U.S. taxpayers of their offshore tax and reporting obligations. 

The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward. The number steadily declined through the years, falling to only 600 disclosures in 2017. 

The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed voluntary programs offered in 2011 and 2009. The programs have enabled U.S. taxpayers to voluntarily resolve past non-compliance related to unreported foreign financial assets and failure to file foreign information returns. 

Tax Enforcement 

The IRS notes that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution. Since 2009, IRS Criminal Investigation has indicted 1,545 taxpayers on criminal violations related to international activities, of which 671 taxpayers were indicted on international criminal tax violations. 

“The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” said Don Fort, Chief, IRS Criminal Investigation. “Stopping offshore tax noncompliance remains a top priority of the IRS." 

Streamlined Procedures and Other Options 

A separate program, the Streamlined Filing Compliance Procedures, for taxpayers who might not have been aware of their filing obligations, has helped about 65,000 additional taxpayers come into compliance. The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point. 

The 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 have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets.  Because the circumstances of taxpayers with foreign financial assets vary widely, the IRS will continue offering the following options for addressing previous failures to comply with U.S. tax and information return obligations with respect to those assets: 

• IRS-Criminal Investigation Voluntary Disclosure Program;
• Streamlined Filing Compliance Procedures;
• Delinquent FBAR submission procedures; and
• Delinquent international information return submission procedures. 

Full details of the options available for U.S. taxpayers with undisclosed foreign financial assets can be found on IRS.gov.

JAT Comments:

1.  With the availability of the Streamlined Procedures, OVDP is only for those taxpayers who were willful with respect to delinquencies in their income tax and FBAR obligations or at least were at high risk of being considered willful.  (Or, perhaps another way of stating that is that they were at high risk if they tried the Streamlined route with a false or dicey narrative supporting the certification of nonwillfulness.)

2.  Since the OVDP program started in 2009 (going through several iterations until the current iteration), those taxpayers who were willful almost certainly knew early of the program and, if they have not resolved their delinquencies either by joining OVDP or otherwise, have made a deliberate choice not to join.  Some have undoubtedly attempted either a "quiet disclosure" (coupled with compliance going forward) or just go-forward compliance with no resolution of the past.  Under either of these approaches, if adopted soon after the first version of OVDP was announced in 2009, they almost certainly have no continuing criminal risk (6-year statute for income tax, but subject to statute suspensions that should be considered)and 5-year statute for FBAR), no FBAR civil penalty risks (6-year statute), and their practical risks on the income tax side would only be if the IRS really wanted to devote the investigative civil only resources to pre-2009 or pre-2010 income tax years.  Those who did not move promptly after the original OVDP announcement and continued their past delinquencies after that almost certainly have a risk and should seriously consider joining OVDP promptly.

3.  Those who can make a credible certification of nonwillfulness should consider the Streamlined Procedures.  The Press Release does caution that the IRS can withdraw the Streamlined Procedures as well.  There is no assurance that it will not do so and that it will give a generous period so that procrastinators can get in.  Of course, the Streamlined Procedures require three years of income tax returns (and resulting tax payments) and six years of FBARs, with no FBAR penalty for foreign taxpayers and a relatively small FBAR penalty (5%) for domestic taxpayers.  The key is the ability to certify nonwillfulness.  And, taxpayers on the good end  of the nonwillfulness spectrum may not have much practical risk of significant penalties or a statute of limitations for tax beyond three or six-years (these  would mostly be taxpayers with relative small offshore accounts or assets) and might even find that compliance going forward may be a reasonable choice.

4.  In a way, as a practitioner, seeing the OVDP close will be the end of this era.  The OVDP has given willful actors plenty of opportunity to come clean and, at least, going forward from the time that they first learned that the vice was closing, they have moved themselves into compliance so that, over time, the risks may diminish even if they don't now join OVDP.

5.  Let's consider a situation, a variation on comments above.  In May 2009, the IRS announced OVDP with a 20% miscellaneous penalty (in lieu of all other penallties, including FBAR) for foreign accounts. The taxpayer became aware of the program, consulted with lawyers (some of whom could, rightly I think, advise the taxpayer that there is no obligation to file amended returns or FBARs or delinquent returns or FBARs.  The penalties that might apply to the original noncompliance is not, technically, relieved by filing amended returns or FBARs or delinquent returns or FBARs.  So, in terms of the law's command as of the date of the consultation, it is to comply in the future.  So, let's assume that that taxpayer started compliance for the year 2010 -- i.e. correct and complete income tax returns filed on 4/15/11 and correct and complete FBARs filed 6/30/11.  There is no civil or criminal FBAR noncompliance for any open year, there is no criminal income tax noncompliance for any open year (again, though check the suspensions on the statute), and the only years in which civil income tax, penalties and interest can be asserted relate to years prior to 2010 which require that the IRS prove civil fraud by clear and convincing evidence.  While there is some possibility that the IRS may get information from foreign banks that go back to those years and, with that information, may be able to determine an underpayment based on the account earnings, that will not satisfy the requirement that the IRS prove civil fraud by clear and convincing evidence.  Lawyers who have tried civil fraud cases either actually or vicariously will know that the investigation for the IRS to assert civil fraud is time consuming and administratively expensive and the burden of  proof is significant.  Of course, the foreign bank may not only deliver account statement (balances and earnings) information but also correspondence and notes from the taxpayer that could meet that burden of proof and incentivize the IRS to press the claim of civil fraud.

6.  I am confident that there will be a flurry of comment from taxpayers and from professionals on other sources.  I will add links to the more useful of those that I become aware of.

Addendum 3/13/18 9:30pm to discuss the FAQs, here:

7.  FAQ #3 requires immediate attention to insure the deadline can be met (keep in mind the difficulties some have had in getting documentation from foreign banks and other sources):  Complete offshore voluntary disclosures conforming to the requirements of 2014 OVDP FAQ 24 must be received or postmarked by September 28, 2018 and may not be partial, incomplete, or placeholder submissions. Practitioners and taxpayers must ensure complete submissions by the deadline to request to participate in the 2014 OVDP.

8. FAQ #4 indicates that the IRS will continue to devote audit resources to offshore noncompliance and is "using 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 Department of Justice’s Swiss Bank Program and various John Doe Summonses."

9.  FAQ #7 answer NO to this question:  "Can a taxpayer that uses the Streamlined Filing Compliance Procedures make a voluntary disclosure to Criminal Investigation after September 28, 2018?"  I am not sure exactly what this is getting at.  The taxpayer certifying nonwillfulness with supporting narrative would not, if accurate, have criminal exposure.  Making a voluntary disclosure to CI would thus seem to signal that the certification and narrative are incorrect.  But, this implies that it can be done by Streamlined participants upo to September 28, 2018.

10. FAQ #8 says "all quiet disclosures will be reviewed" and subject to appropriate civil or criminal penalties.  I think we all anticipated this statement.  But the question is whether, if the taxpayer makes a truthful quiet disclosure and fully cooperates will be criminally prosecuted.  This holds open that possibility, so it would probably be unwise for taxpayers to test the statement if they can avoid it.

11.  FAQ #10 offers a process for persons to submit input to the IRS on the process for closing OVDP.