IRS Offshore Voluntary Disclosure Program (OVDP) – No More! Why Should You Care and Where Do You Go from Here?

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Why Should You Care and Where Do You Go from Here?

On Sep­tem­ber 28, 2018, as pre­vi­ous­ly announced, the IRS closed the Off­shore Vol­un­tary Dis­clo­sure Pro­gram (“OVDP”). The OVDP start­ed back in 2009 and went through sev­er­al iter­a­tions, with the most recent changes made to the pro­gram in June 2014. The OVDP is designed for those U.S. tax­pay­ers who have undis­closed for­eign (non‑U.S.) bank accounts and finan­cial assets, have been non-com­pli­ant with their U.S. tax fil­ing oblig­a­tions, and had will­ful con­duct in their fail­ure to com­ply with the applic­a­ble U.S. laws. In Cana­da, OVDP pri­mar­i­ly was use­ful for those U.S. cit­i­zens and green card hold­ers who had U.S. tax fil­ing oblig­a­tions, but inten­tion­al­ly chose not to file their U.S. tax­es and/or dis­close their bank accounts and assets locat­ed out­side the Unit­ed States. OVPD his­tor­i­cal­ly was a prop­er venue to address one’s non­com­pli­ance when the tax­pay­er had expo­sure for crim­i­nal pros­e­cu­tion. Fail­ure to use OVDP in their cir­cum­stances would have led to large penal­ties and, poten­tial­ly, to jail time. With OVDP hav­ing been closed, many tax­pay­ers who share the above sce­nar­ios and con­cerns are faced with a ques­tion – “what now?” Some­one who may be will­ing to become com­pli­ant but fails to meet the eli­gi­bil­i­ty cri­te­ria for one of the remain­ing three IRS Amnesty Pro­grams (Stream­lined Fil­ing Com­pli­ance Pro­ce­dures, IRS Delin­quent FBAR Sub­mis­sion Pro­ce­dures, and IRS Delin­quent Inter­na­tion­al Infor­ma­tion Return Sub­mis­sion Pro­ce­dures), would need advice on how to become com­pli­ant under the cur­rent­ly effec­tive IRS pro­ce­dures. The IRS has not yet updat­ed its web­site with a new pro­gram. In this doc­u­ment we dis­cuss what tax­pay­ers in the above described sce­nar­ios should do to become com­pli­ant before the IRS gets to them first. How­ev­er, the infor­ma­tion con­tained in this doc­u­ment is basic and does not address all pos­si­ble con­sid­er­a­tions rel­e­vant to tax­pay­ers’ vol­un­tary dis­clo­sures post-OVDP. This could be a start­ing point. Fur­ther IRS guid­ance is required to gain a bet­ter under­stand­ing of post-OVDP vol­un­tary dis­clo­sures and the use of IRS-Crim­i­nal Inves­ti­ga­tion Vol­un­tary Dis­clo­sure Pro­gram (“CIVDP”).

IRS Amnesty Programs Still Available

The IRS orig­i­nal­ly announced on March 13, 2018 (IR-2018–52) that it would close OVDP, while keep­ing the oth­er three pro­grams. The IRS also pro­vid­ed the fol­low­ing options for tax­pay­ers to become com­pli­ant:
  • CIVDP;
  • Stream­lined Fil­ing Com­pli­ance Pro­ce­dures;
  • Delin­quent FBAR sub­mis­sion pro­ce­dures; and
  • Delin­quent inter­na­tion­al infor­ma­tion return sub­mis­sion pro­ce­dures.
The CIVDP is not new. It was co-exis­tent with OVDP, but OVDP had a much clear­er struc­ture and reduced penal­ties. Unfor­tu­nate­ly, as of today, there is not much guid­ance on CIVDP. In its cur­rent state, as per the IRS Inter­nal Rev­enue Man­u­al (“IRM”), CIVDP lacks clear pro­ce­dur­al struc­ture and does not pro­vide for reduced penal­ties. At the same time, the IRS is work­ing on respec­tive guid­ance and some fea­tures of CIVDP can be dis­tilled from the IRS IRM.

CIVDP – New Sheriff in Town!

CIVDP Guid­ance Upcom­ing. Daniel L. Price, an attor­ney in the IRS’s Office of Chief Coun­sel is quot­ed in Bloomberg Law Dai­ly Tax Report as say­ing, “the door is still open.” Tax­pay­ers with a risk of crim­i­nal pros­e­cu­tion and will­ful con­duct can use CIVDP. Notably, the use of CIVDP will not auto­mat­i­cal­ly guar­an­tee immu­ni­ty from pros­e­cu­tion but may result in pros­e­cu­tion not being rec­om­mend­ed (IRM 9.5.11.9.2). CIVDP Require­ments. The require­ments for CIVDP include the fol­low­ing (IRM 9.5.11.9):
  • Tax­pay­ers can­not use CIVDP if their income is derived from ille­gal sources;
  • Taxpayer’s com­mu­ni­ca­tion must be truth­ful and time­ly;
  • Tax­pay­er must show will­ing­ness to coop­er­ate (and in fact coop­er­ate) with the IRS in deter­min­ing their tax lia­bil­i­ty;
  • The tax­pay­er must make good faith arrange­ments with the IRS to make a pay­ment of their tax lia­bil­i­ty, includ­ing any applic­a­ble penal­ties and inter­est.
CIVDP Vol­un­tary Dis­clo­sure For­mat. As long as the above require­ments are met, the tax­pay­ers can use any sub­mis­sion for­mat, includ­ing pro­vid­ing the infor­ma­tion to the IRS in writ­ing or ver­bal­ly. There is no spe­cial for­mat pro­vid­ed. Tax Years Sub­ject to CIVDP. There is no clar­i­ty on how many tax years CIVDP cov­ers. This will like­ly be clar­i­fied as part of the upcom­ing IRS guid­ance. How­ev­er, at this time, tax­pay­ers may con­sid­er fil­ing 8 years of their delin­quent tax returns and forms and 8 years of FBARs. An alter­na­tive could fol­low the cur­rent Stream­lined Fil­ing Sub­mis­sion Pro­ce­dures for­mat and file 3 years of delin­quent tax returns and forms and 6 years of FBARs. Tax­pay­ers should con­tact their qual­i­fied U.S. tax advi­sor and deter­mine the best course of action under their cir­cum­stances. When Vol­un­tary Dis­clo­sure Under CIVDP is Con­sid­ered Time­ly? To be con­sid­ered time­ly, the tax­pay­er must apply for CIVDP (the IRS must receive the vol­un­tary dis­clo­sure sub­mis­sion) before:
  • The IRS has ini­ti­at­ed a civ­il exam­i­na­tion or crim­i­nal inves­ti­ga­tion of the tax­pay­er (or if the IRS has noti­fied the tax­pay­er about the same);
  • The IRS obtained the infor­ma­tion about the taxpayer’s non­com­pli­ance from third par­ties (the IRM states that such infor­ma­tion must relate to “spe­cif­ic taxpayer’s non­com­pli­ance”);
  • The IRS has ini­ti­at­ed a civ­il exam­i­na­tion or crim­i­nal inves­ti­ga­tion direct­ly relat­ed to the spe­cif­ic lia­bil­i­ty of the tax­pay­er;
  • The IRS obtained the infor­ma­tion direct­ly relat­ed to the spe­cif­ic taxpayer’s lia­bil­i­ty from a crim­i­nal enforce­ment action. (IRM 9.5.11.9.4).
What Con­sti­tutes Vol­un­tary Dis­clo­sure under CIVDP? Although there is not enough infor­ma­tion on how one may make vol­un­tary dis­clo­sure under CIVDP in the IRM, the IRM con­tains help­ful exam­ples of what con­sti­tutes vol­un­tary dis­clo­sure and what does not. The fol­low­ing chart sum­ma­rizes those exam­ples that can be used as pre­lim­i­nary guid­ance for those tax­pay­ers who want to become tax-com­pli­ant under CIVDP. Note that the deter­mi­na­tion is based on all facts and cir­cum­stances of the taxpayer’s sit­u­a­tion – as such, this is a high­ly fac­tu­al deter­mi­na­tion.

[table id=2 /]

The IRS may sug­gest a meet­ing with the tax­pay­er and/or their rep­re­sen­ta­tive. (IRM 9.5.11.9.6.1). The IRS strives to com­plete the eval­u­a­tion of made vol­un­tary dis­clo­sure as soon as pos­si­ble, ide­al­ly with­in 10 work­ing days or less from the date the com­plete vol­un­tary dis­clo­sure sub­mis­sion has been received. (IRM 9.5.11.9.7.2). Cas­es may be esca­lat­ed if no progress is made with­in 30 days. If the IRS deter­mined that the vol­un­tary dis­clo­sure sub­mit­ted by the tax­pay­er does not meet the eli­gi­bil­i­ty require­ments, the IRS will send a let­ter to the tax­pay­er inform­ing them about the rea­sons of why they are inel­i­gi­ble to par­tic­i­pate in CIVDP. How­ev­er, there is no require­ment to cite spe­cif­ic rea­sons if they may com­pro­mise an ongo­ing inves­ti­ga­tion. (IRM 9.5.11.9.9.1). In that instance, Crim­i­nal Inves­ti­ga­tion will eval­u­ate the crim­i­nal poten­tial of all neg­a­tive eval­u­a­tions. (IRM 9.5.11.9.9.2). Pur­suant to the IRM, the vol­un­tary dis­clo­sure made by the tax­pay­er would be con­sid­ered as com­plete if the fol­low­ing tax­pay­er iden­ti­fy­ing infor­ma­tion is pro­vid­ed as part of the vol­un­tary dis­clo­sure sub­mis­sion: 1. Tax­pay­er iden­ti­fi­ca­tion infor­ma­tion (includ­ing spouse):
  1. Name(s);
  2. Tax­pay­er iden­ti­fi­ca­tion num­ber (such as Social Secu­ri­ty Num­ber);
  3. Address(es).
2. If the tax­pay­er is a busi­ness:
  1. Busi­ness Name;
  2. Address; and
  3. Employ­er Iden­ti­fi­ca­tion Num­ber (EIN).
The vol­un­tary dis­clo­sure must also include:
  • Infor­ma­tion on the tax peri­ods includ­ing types of return (Form 1040, 1120, 941 as exam­ple) and the types of tax­es involved such as income, employ­ment, excise to name a few.
  • Com­mu­ni­ca­tion must include a brief descrip­tion of all omit­ted income, the tax scheme used by the tax­pay­er and an esti­mat­ed amount of the total tax­es owed.
  • A ver­bal or writ­ten state­ment made by the tax­pay­er that they are will­ing to coop­er­ate with the IRS to deter­mine the cor­rect tax lia­bil­i­ty.
  • Good faith arrange­ments made by the tax­pay­er to pay all tax, inter­est and penal­ties in full as deter­mined by the IRS .
  • Tax­pay­er can sub­mit their amend­ed returns with their vol­un­tary dis­clo­sure com­mu­ni­ca­tion or wait to sub­mit until Crim­i­nal Inves­ti­ga­tion (CI) eval­u­ates their com­mu­ni­ca­tion and makes a rec­om­men­da­tion.
  • Taxpayer’s reason(s) they are mak­ing a dis­clo­sure.
  • Any and all infor­ma­tion to be pro­vid­ed by the tax­pay­er as request­ed to assess the com­plete­ness, time­li­ness and truth­ful­ness of the com­mu­ni­ca­tion.
Why Should You Care Even More Now – “Not OVDP Mate­r­i­al”? Some delin­quent tax­pay­ers with non-will­ful con­duct who may qual­i­fy for oth­er IRS Amnesty Pro­grams may still be in hid­ing hop­ing that Uncle Sam will for­get about them. They also may won­der why is it bet­ter to become com­pli­ant now and why wait­ing may no longer be an option. They will be well advised to take imme­di­ate action and address their non­com­pli­ance. With the enact­ment of the For­eign Account Tax Com­pli­ance Act (“FATCA”) in 2010, the uni­verse dra­mat­i­cal­ly changed for any U.S. per­son (be it a U.S. cit­i­zen or a Green card hold­er), wher­ev­er they live or wher­ev­er they have their bank accounts and finan­cial assets (out­side the Unit­ed States). For­eign gov­ern­ments now do the “dirty” work for the IRS. Under Mod­el I Inter­gov­ern­men­tal Agree­ment (“IGA”) (Cana­da has con­clud­ed such an agree­ment with the Unit­ed States), finan­cial insti­tu­tions of the respec­tive for­eign juris­dic­tion are required to report on cer­tain U.S. account hold­ers to the respec­tive for­eign tax author­i­ty that in turn reports that infor­ma­tion to the IRS. Under Mod­el II IGA, for­eign finan­cial insti­tu­tions are report­ing such infor­ma­tion direct­ly to the IRS. In Cana­da, the first year of report­ing the infor­ma­tion by the CRA to the IRS was 2015. The CRA sub­mits that infor­ma­tion to the IRS in Sep­tem­ber each year and 2018 is the fourth year that the CRA has done so. And how does the CRA know this infor­ma­tion you might ask? You may have been asked by your finan­cial insti­tu­tion if you are a U.S. cit­i­zen, you may be asked by a cor­po­ra­tion, a cor­po­rate reg­istry, or a gov­ern­ment body you rep­re­sent whether you are a U.S. cit­i­zen. This is all for report­ing pur­pos­es. Any time a bank account is open now, cit­i­zen­ship is asked and doc­u­ment­ed for all own­ers and per­sons with the sig­na­to­ry author­i­ty on the account. As report­ed by CBC in Jan­u­ary 2017, in 2015 the CRA trans­mit­ted 154,667 bank­ing records to the IRS. That num­ber more than dou­bled in 2016 – 315,160 records. One can only guess what those num­bers were in 2017 and 2018, but the trend is quite telling. The IRS receives cer­tain infor­ma­tion direct­ly from for­eign finan­cial insti­tu­tions as well. In addi­tion, under the U.S. Depart­ment of Trea­sury and U.S. Depart­ment of Home­land Secu­ri­ty Trea­sury Enforce­ment Com­mu­ni­ca­tion Sys­tem (“TECS”), addi­tion­al infor­ma­tion on U.S. tax­pay­ers is being exchanged between the two gov­ern­men­tal agen­cies. Pass­port revo­ca­tion under IRC Sec­tion 7345 is anoth­er sig­nif­i­cant con­cern for U.S. cit­i­zens with more than US $51,000 in out­stand­ing tax lia­bil­i­ty (that thresh­old includes inter­est and penal­ties). You do not want to be with­out your pass­port, espe­cial­ly if you do not have anoth­er cit­i­zen­ship! With the above infor­ma­tion now in the IRS files and its abil­i­ty to share the infor­ma­tion with all depart­ments with­in the gov­ern­ment, bor­der offi­cers have access to this infor­ma­tion. The scan­ning of pass­ports makes the sys­tem check so much eas­i­er. And it bears repeat­ing that U.S. cit­i­zens are always required to cross the bor­der under their U.S. pass­port, no mat­ter where they live and no mat­ter which oth­er pass­port they may hold (that is true even if one is a dual Canadian/U.S. cit­i­zen). U.S. bor­der agents ask more often:
  • Are you com­pli­ant with your U.S. tax­es?
  • Please pro­vide a copy of your U.S. tax return (that ques­tion is usu­al­ly asked of for­eign nation­als with U.S. work visas).
You do not want to lie when being asked if you are com­pli­ant. The con­se­quences may be dire. Pres­sure Points — Risks and Uncer­tain­ty Fail­ure to address one’s non­com­pli­ance is like a tick­ing bomb. You can pos­si­bly avoid it if you do not trav­el and do not bank (keep­ing your cash under a mat­tress). The fact is, the IRS may already have your infor­ma­tion and it may be only a mat­ter of time when they get to it – or audit lot­tery luck. The IRS Stream­lined Fil­ing Com­pli­ance Pro­ce­dures are still avail­able, and they pro­vide the best pos­si­ble penal­ty pro­tec­tion for non-will­ful tax­pay­ers who want to become com­pli­ant. How­ev­er, the pro­gram may be closed any time or, and this could be more rel­e­vant, the terms of the pro­gram may change any time. When decid­ing as to whether to become com­pli­ant, con­sid­er the fol­low­ing fac­tors (remem­ber, you should do this before the IRS con­tacts you first):
  • No one yet knows if the Stream­lined Fil­ing Com­pli­ance Pro­ce­dures or oth­er IRS Amnesty Pro­grams will be changed or closed (OVDP was also an open end­ed pro­gram until it closed on Sep­tem­ber 28, 2018; notably and to the IRS cred­it, the IRS gave suf­fi­cient advance notice to tax­pay­ers, which is rare and does not mean that an ade­quate advance notice would be pro­vid­ed with respect to oth­er IRS Amnesty Pro­grams);
  • There is so much infor­ma­tion already turned over to the IRS that it may only be a mat­ter of time when the IRS gets to you;
  • Stream­lined Fil­ing Com­pli­ance Pro­ce­dures pro­vide great penal­ty pro­tec­tion, but more and more sub­mis­sions under that IRS Amnesty Pro­gram are now being scru­ti­nized by the IRS and audits are more fre­quent. Tax­pay­ers should care­ful­ly review their non-will­ful cer­ti­fi­ca­tion and be pre­pared to be fur­ther ques­tioned about the rea­sons for their pri­or non­com­pli­ance.
For those at risk of crim­i­nal pros­e­cu­tion due to will­ful con­duct in not fil­ing U.S. tax returns or FBARs, CIVDP can now be used, but lim­it­ed guid­ance is avail­able about the process and penal­ty struc­ture of the pro­gram.

Taxpayers Be Aware

With the IRS, when one door clos­es anoth­er may not open. If you con­tact the IRS your­self to ask about dis­clo­sure pro­grams or com­pli­ance require­ments be sure to get the title, name, employ­ee ID num­ber and tele­phone num­ber of the agent you speak with for future ref­er­ence. Your best move for­ward is to become com­pli­ant now. Con­tact a qual­i­fied U.S. tax advi­sor to dis­cuss your per­son­al sit­u­a­tion. Also con­sid­er the impor­tance of attor­ney-client priv­i­lege, if a con­cern.

Whether you got your­self into a sit­u­a­tion of U.S. tax non-com­pli­ance know­ing­ly or not, we can assist you in resolv­ing it so that you can rest easy into the future.

 

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