IRS Closing the Offshore Voluntary Disclosure Program for Taxpayers with Foreign Assets
By: Brian Gardner
The IRS recently announced that it will be discontinuing the Offshore Voluntary Disclosure Program (“OVDP”) on September 28, 2018. Taxpayers wanting to enter the Offshore Voluntary Disclosure Program must postmark their Voluntary Disclosure Letter and requisite attachments (FAQ 24) by September 28, 2018. Taxpayers entering the program can avoid onerous penalties and possible criminal prosecution by voluntarily disclosing their offshore assets and paying reduced penalties.
The IRS created the current OVDP in 2012 and modified the terms in July of 2014. In June of 2014, the IRS announced additional streamlined procedures for taxpayers who meet certain requirements and who certify under penalties of perjury that their conduct was non-willful. The OVDP and the streamlined procedures require, among other things, that taxpayers come forward before the IRS initiates a civil examination or criminal investigation for any tax year in the disclosure period. Taxpayers who were aware of their filing obligations would enter the OVDP program, whereas taxpayers who were negligent in their filing obligations have the option of the streamlined procedures.
The termination of the Offshore Voluntary Disclosure Program does not mean that the IRS is relaxing its focus on offshore assets. To the contrary, the IRS has been gathering vast amounts of information from foreign financial institutions and other foreign government data through the network of intergovernmental agreements between the United States and foreign jurisdictions through the Foreign Account Tax Compliance Act (“FATCA”). The IRS and the Department of Treasury have been gathering data for several years and are continuing to prioritize offshore tax noncompliance.
Individuals and businesses with undisclosed foreign assets such as bank accounts, rental properties or foreign entities, whether purchased or inherited, should be aware that they may have a U.S. filing obligation. U.S. taxpayers, including U.S. resident aliens and green card holders, are required to file a Report of Foreign Bank and Financial Accounts (“FBAR”) for any foreign account that they have an interest in or signature authority over, if the aggregate value of such account(s) exceeds $10,000 at any time during a calendar year. Taxpayers are required to file an FBAR even if the account(s) do not produce any income.
Failure to file an FBAR results in a penalty of $10,000 per undisclosed account per year for the previous six years if the failure to file was non-willful. For example, a U.S. green card holder who has one checking account and one savings account in their home country, which combine to exceed $10,000, would face penalties of $120,000 for failing to disclose those two accounts. If the IRS determined that the failure to disclose was willful, the penalties would jump to a minimum of $100,000 per account, per year.
U.S. taxpayers with other foreign assets may have additional filing obligations such as:
- Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Gifts;
- Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations;
- Form 8938, Statement of Specified Foreign Financial Assets; and
- Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in U.S. Trade or Business.
Taxpayers with foreign assets may have an obligation to file more than one of these forms. Each form comes with its own daunting penalties if a taxpayer fails to timely file. For example, a taxpayer who fails to file Form 5471 will face a penalty of $10,000 per Form 5471, and a continuation penalty of $10,000 per Form 5471 for every 30-day period beginning 90-days after the taxpayer was notified that a failure exists, up to $50,000.
In addition to protection from criminal prosecution, the Offshore Voluntary Disclosure Program, allows taxpayers to come forward to correct their noncompliance. Taxpayers participating in the program are required to file original and/or amended income tax returns and pay tax, interest and civil penalties for the last eight years. Taxpayers are also required to pay a miscellaneous offshore penalty equal to 27.5% of the highest aggregate value of the unreported accounts and assets over the last eight years. The offshore penalty increased to 50% if the taxpayer’s bank or other facilitator is or has been under investigation by the IRS or the Department of Justice or otherwise identified by the IRS on its list of 146 foreign financial institutions or facilitators.
The IRS has two “streamlined” procedures available for U.S. taxpayers with assets abroad who were negligent in completing their filing obligations. The foreign offshore streamlined procedures are available for expat taxpayers who have lived abroad for 330 days or more in one of the last three tax years. The domestic offshore streamlined procedures are available for taxpayers who reside in the U.S., or otherwise spend too much time in the U.S. to qualify for the foreign offshore streamlined procedures.
Taxpayers in both streamlined procedures are required to file FBARs due for the last six years, tax returns or amended tax returns for the last three years, and a certification under penalties of perjury that they were non-willful in failing to report the foreign assets. Taxpayers filing under the domestic streamlined procedures are required to pay a miscellaneous penalty equal to 5% of unreported foreign financial assets. There is no miscellaneous penalty under the foreign offshore streamlined procedures.
The IRS reiterated that it is targeting taxpayers with foreign reporting requirements who simply file amended returns to report income from previously undisclosed foreign financial assets without making a voluntary disclosure (commonly referred to as a quiet disclosure). The IRS will review all quiet disclosures and taxpayers will be subject to civil or criminal penalties.
The IRS’s focus on foreign accounts and assets continues to intensify. The U.S. tax base extends beyond the border and reaches resident aliens, and green card holders in addition to U.S. citizens. People with foreign assets need to make sure they have properly disclosed and reported foreign income and assets while they are still able to come forward voluntarily.