Hurry, the IRS is Ending the Offshore Voluntary Disclosure Program

Offshore Voluntary Disclosure Program (OVDP) is Over

The Inter­nal Rev­enue Ser­vice (IRS) announced on March 13, 2018 (IR-2018–52) that it will be clos­ing the 2014 Off­shore Vol­un­tary Dis­clo­sure Pro­gram (OVDP) on Sep­tem­ber 28, 2018. This is an impor­tant announce­ment for U.S. tax­pay­ers who may be delin­quent with their U.S. tax and report­ing oblig­a­tions and are eli­gi­ble to par­tic­i­pate in the OVDP. To the IRS cred­it, the Ser­vice gave tax­pay­ers a rea­son­able advance notice that gives poten­tial OVDP can­di­dates some time to take advan­tage of the OVDP, while it is still avail­able. Accord­ing to the IRS announce­ment, since the OVDP’s ini­tial launch in 2009, more than 56,000 tax­pay­ers have used the 2009, 2011, 2012 or 2014 pro­grams to come into com­pli­ance with their U.S. tax oblig­a­tions. The IRS has not­ed that it has always intend­ed on clos­ing the pro­gram and empha­sized that the gov­ern­ment had giv­en eli­gi­ble tax­pay­ers ample oppor­tu­ni­ty to come for­ward vol­un­tar­i­ly. It is true that the pro­gram could have been closed any time, but pre­vi­ous­ly the IRS did not indi­cate that it had any inten­tion on clos­ing it. The advance­ment in third-par­ty report­ing, unpar­al­leled glob­al trans­paren­cy, grow­ing infor­ma­tion exchange between the IRS and tax author­i­ties of oth­er juris­dic­tions, as well as the increased aware­ness by U.S. tax­pay­ers of their off­shore tax and report­ing oblig­a­tions has led the IRS to the deci­sion to close the pro­gram. For exam­ple, the Cana­da Rev­enue Agency (CRA) has already trans­mit­ted to the IRS infor­ma­tion on over half a mil­lion U.S. per­sons who hold bank accounts with Cana­di­an finan­cial insti­tu­tions under the Mod­el I Inter­gov­ern­men­tal Agree­ment (IGA). The IRS has issued Fre­quent­ly Asked Ques­tions and Answers sec­tion on its web­site, which can be found at https://​www​.irs​.gov/​i​n​d​i​v​i​d​u​a​l​s​/​i​n​t​e​r​n​a​t​i​o​n​a​l​-​t​a​x​p​a​y​e​r​s​/​c​l​o​s​i​n​g​-​t​h​e​-​2​0​1​4​-​o​f​f​s​h​o​r​e​-​v​o​l​u​n​t​a​r​y​-​d​i​s​c​l​o​s​u​r​e​-​p​r​o​g​r​a​m​-​f​r​e​q​u​e​n​t​l​y​-​a​s​k​e​d​-​q​u​e​s​t​i​o​n​s​-​a​n​d​-​a​n​s​w​ers. This FAQ sec­tion offers insight into the IRS ratio­nale for clos­ing the pro­gram. In its notice, the IRS stat­ed that it will use alter­na­tive tools to com­bat off­shore tax avoid­ance, includ­ing con­tin­ued edu­ca­tion of tax­pay­ers, Whistle­blow­er leads (those “good Samar­i­tans”), civ­il exam­i­na­tion, and crim­i­nal pros­e­cu­tion. Accord­ing to the IRS announce­ment, since the program’s incep­tion in 2009, the IRS Crim­i­nal Inves­ti­ga­tions unit has indict­ed 1,545 tax­pay­ers on crim­i­nal vio­la­tions relat­ed to inter­na­tion­al activ­i­ties, of which 671 tax­pay­ers were indict­ed on inter­na­tion­al crim­i­nal tax vio­la­tions.

Streamlined Filing Compliance Procedures

The good news is that the IRS will con­tin­ue the Stream­lined Fil­ing Com­pli­ance Pro­ce­dures for tax­pay­ers who have non-will­ful con­duct and meet cer­tain oth­er require­ments (such as the non-res­i­den­cy test). Accord­ing to the IRS announce­ment, that pro­gram has helped around 65,000 tax­pay­ers come into com­pli­ance. How­ev­er, every­thing good comes to an end even­tu­al­ly. The IRS has stat­ed in the announce­ment that the Stream­lined Fil­ing Com­pli­ance Pro­ce­dures would end at some point as well. Any U.S. per­sons with undis­closed for­eign bank accounts and assets and with delin­quent tax fil­ing oblig­a­tions should seri­ous­ly con­sid­er com­ing into com­pli­ance now, while the Stream­lined Fil­ing Com­pli­ance Pro­ce­dures can pro­tect them from hefty penal­ties and pos­si­ble crim­i­nal pros­e­cu­tion. Wait­ing is no longer an option!

Quiet Disclosures are Bad

The IRS announce­ment not­ed that some tax­pay­ers still sim­ply file amend­ed returns, report­ing income from pre­vi­ous­ly undis­closed for­eign finan­cial assets, with­out mak­ing a vol­un­tary dis­clo­sure under one of the IRS amnesty pro­grams. This process is known as qui­et dis­clo­sure. The IRS specif­i­cal­ly stat­ed back in 2014 that tax­pay­ers who make qui­et dis­clo­sures may be sub­ject to exam­i­na­tion. In addi­tion, such tax­pay­ers may be found to have a will­ful con­duct in non-com­pli­ance with applic­a­ble U.S. tax fil­ing and report­ing oblig­a­tions. In the announce­ment, the IRS cau­tioned tax­pay­ers mak­ing qui­et dis­clo­sures and stat­ed that such dis­clo­sures will be reviewed by the IRS and are sub­ject to civ­il or crim­i­nal penal­ties.

What’s Next?

With the imple­men­ta­tion of For­eign Account Tax Com­pli­ance Act (FATCA) along with the IRS and U.S. Depart­ment of Jus­tice focus on off­shore enforce­ment, the IRS will con­tin­ue to offer var­i­ous options to address the fail­ure to com­ply with U.S. tax and infor­ma­tion return oblig­a­tions with respect to for­eign finan­cial assets, includ­ing:

1. IRS-Crim­i­nal Inves­ti­ga­tion Vol­un­tary Dis­clo­sure Pro­gram (it is not clear from the IRS announce­ment whether this is OVDP, but like­ly it is the case and as such it would only be offered until Sep­tem­ber 28, 2018);
2. Stream­lined Fil­ing Com­pli­ance Pro­ce­dures;
3. Delin­quent FBAR Sub­mis­sion Pro­ce­dures; and
4. Delin­quent Inter­na­tion­al Infor­ma­tion Return Sub­mis­sion Pro­ce­dures.

The IRS will be issu­ing addi­tion­al guid­ance after Sep­tem­ber 28, 2018.

But Can We Still Do It?

The IRS gives tax­pay­ers till Sep­tem­ber 28, 2018 to come into com­pli­ance under the OVDP. Specif­i­cal­ly, the IRS spec­i­fied that entrance into the OVDP would still be allowed, pro­vid­ed the com­plete sub­mis­sion is received by the IRS or post­marked by Sep­tem­ber 28, 2018. Con­sid­er­ing pre-clear­ance and the time required to pre­pare the whole sub­mis­sion and the 2017 tax sea­son well under way, this dead­line may be espe­cial­ly tough to meet. So, tim­ing is of the essence. Any tax­pay­ers with undis­closed for­eign bank accounts and assets and with any pos­si­bil­i­ty of crim­i­nal pros­e­cu­tion (in case of will­ful con­duct in non-com­pli­ance) should con­tact their U.S. tax advi­sor or an attor­ney (for attor­ney-client priv­i­lege) to deter­mine the best pos­si­ble steps and whether OVDP is the prop­er forum to become tax-com­pli­ant. If so, the affect­ed tax­pay­ers should work fast on prepar­ing and fil­ing their OVDP sub­mis­sion as soon as pos­si­ble. Even non-will­ful tax­pay­ers who are “hid­ing” should take advan­tage of the Stream­lined Fil­ing Com­pli­ance Pro­ce­dures, while they still can.

For any questions, concerns or inquires related to this announcement or any concerns related to potentially undisclosed foreign assets, please reach out to U.S. Tax IQ Team and we will be happy to assist you or answer any questions.