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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.

 Voluntary Disclosure See 9.5.11.9.6Not Considered as Voluntary Disclosure See 9.5.11.9.7
1• Letter from an attorney;
• Amended client returns reporting;
• Legal source income omitted from
original returns;
• Complete and accurate submission
• An offer to pay all tax, interest and
penalties. (must meet the timeliness
standard );
• Meeting timely submission standard
• Letter from an attorney presenting an anonymous client.
• Taxpayer’s identity must be disclosed.
2• Taxpayer disclosure of previously omitted income facilitated through a barter exchange.
• IRS started a civil compliance project targeting barter exchange, but not a specific taxpayer exchange.
• Compliance project does not yet directly relate to the specific liability of the taxpayer.
A disclosure made by a taxpayer under grand jury investigation. Taxpayer is already under criminal investigation whether they are aware of the investigation or not.
3• Taxpayer files complete and accurate returns;
• Taxpayer makes arrangements with IRS to pay tax, interest and penalties; and
• Income was omitted due to a widely promoted scheme, already subject to IRS civil compliance project. Although the IRS obtained information, it did not notify taxpayer and did not start an examination or investigation.
If one partner of a partnership is under investigation, another partner cannot make a voluntary disclosure. IRS already initiated an examination directly related to the specific liability of the taxpayer whether the taxpayer is aware of the investigation or not.
4• Taxpayer files a complete and accurate delinquent return
• Taxpayer makes arrangements to pay in full all taxes, interest and penalties after the IRS has contacted them regarding the delinquent return but prior to commencement of an examination or investigation of the taxpayer or notification of intention to do so.
A taxpayer who received constructive dividends from a corporation that is already under an examination. The taxpayer is not under the examination but will not qualify as voluntary disclosure because the IRS is already examining specific taxpayer liability. The taxpayer’s lack of knowledge about the IRS examination is irrelevant.
5A taxpayer who has been reported to the IRS by an employee regarding the taxpayer’s double set of books. IRS has already been informed by the third party of the specific taxpayer’s noncompliance.

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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