TAXLITIGATOR – Tax Controversy (Civil & Criminal) Report

The pending 2014 Offshore Voluntary Disclosure Program (OVDP) is set to close on September 28, 2018.  According to FAQs most recently updated by the IRS on July 26, 2018, pre-clearance requests take a minimum of 30 days and should be submited by August 24, 2018 to allow sufficient lead time for processing. (see OVDP FAQs)   The 2014 OVDP is the last in a series of offshore voluntary disclosure programs administered by the IRS since 2009.  The current OVDP began in 2014 and is a modified version of the OVDP launched in 2012, which followed similar programs offered in 2011 and 2009. These 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.

SIGNIFICANCE OF CLOSING OVDP

So how does this impact the non-compliant taxpayer?  The answer depends on the culpability and prior actions of the taxpayer, and whether that person needs the protection and certainty afforded by OVDP.

OVDP is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and to pay all tax due in respect of those assets.  OVDP is designed to provide taxpayers with such exposure with protection from criminal liability and terms for resolving their civil tax and penalty obligations.

Taxpayers participating in the OVDP generally agree to file amended returns and file FINCEN Form 114 (formerly Form TD 90-22.1, Report of Foreign Bank and Financial Accounts “FBARs”), for eight tax years, pay the appropriate taxes and interest together with a 20% accuracy related penalty and an “FBAR-related” penalty (in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) of 27.5% of the highest account value that existed at any time during the prior eight tax years (or 50% for those foreign banks or facilitators on the IRS list) (see list of foreign financial institutions or facilitators).  The OVDP did not have a stated expiration date, until recently when the IRS announced its intention to close OVDP on September 28^th in a IRS Notice issued on March 13, 2018 (see IR-2018-52).

There are various considerations before a taxpayer should determine whether to pursue a voluntary disclosure of prior tax indiscretions through the OVDP or through some other manner. When considering OVDP, many look to whether the taxpayer might be considered a realistic candidate for a criminal prosecution referral by the IRS or prosecution by the Department of Justice?  If so, the determination to participate may be relatively quick and easy.   Other factors may include: (1) Is there a possibility of reducing penalty exposure by filing amended or delinquent returns and FBARs in lieu of a direct participation in the OVDP: (2) What would be the potentially applicable penalties upon an examination of such returns and FBARs; and (3) Would the government be able to carry their burden to demonstrate the taxpayer “willfully” violated the FBAR filing requirements.  Because OVDP asserts an offshore penalty based on foreign financial accounts and asset valuations, for many with smaller financial account values, the aggregate offshore penalty determination, even for multiple years, may actually less outside the OVDP.

Taxpayers with criminal exposure or those wishing to resolve their civil tax and penalty obligation should quickly act to meet the deadline. The first step is to confirm eligibility through the IRS pre-clearance process.  While a preclearance request is not required to participate in OVDP, it assists the taxpayer in learning whether the IRS has received information that can disqualify one from participation in OVDP before one reveals to the IRS additional information required by OVDP.

The deadline to make a pre-clearance request is August 24, 2018.  We suggest pre-clearance requests in all cases where there is an intent to participate in OVDP.  Those who further wait may not benefit from a pre-clearance check, potentially exposing themselves to the risk that the IRS obtains information about that person even though that person may not be accepted into OVDP which is something that should be avoided, if possible.

Any client presently not in compliance should seriously consider availing themselves of the OVDP prior to its expiration. One should anticipate that the IRS may treat those failing to take timely, voluntary corrective action in a more severe manner. There may still be mechanisms for those who take corrective action post OVDP, but the civil penalty regime will be uncertain and taxpayers will be left without the benefits of an informed approach to resolution.

There has definitely been an increased interest by clients in the program since the sunset of the program has been announced.   We have seen this before with each successive closure of the 2009, 2011 and 2012 program.  This time, however, it appears that most clients have been better informed about the benefits and burdens involved.  Practitioners have been educating the public about these issues for more than a decade now, and the IRS has been hugely successful in publicizing the existence of the programs.

TAX ENFORCEMENT

Since 2009, more than 56,000 taxpayers have used one of the OVDP programs to comply voluntarily. All told, these taxpayers paid approximately $11.1 billion in back taxes, interest and penalties.  The number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward and has steadily declined thereafter, falling to only 600 disclosures in 2017.  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, according to the IRS.  The IRS will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution.

The Streamlined and Delinquent filing procedures will continue to remain open for the non-willful taxpayer.  There presently is no sunset date for these procedures.  The IRS resources dedicated to these filing procedures appear well worth it, given the number of taxpayers who have voluntarily corrected under these procedures.

Programs come and programs go, including “last chance” programs and programs following those. We do not know what will happen after the expiration of the current program on September 28, but what we do know is that this could be the last best chance for taxpayers and their advisors to take a hard look at this option before it becomes history.

MICHEL R. STEIN – For more information please contact Michel Stein – Stein@taxlitigator.com  Mr. Stein is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Mr. Stein has significant experience in matters involving previously undeclared interests in foreign financial accounts and assets, the IRS Offshore Voluntary Compliance Program (OVDP) and the IRS Streamlined Filing Compliance Procedures. Additional information is available at www.taxlitigator.com