FAQ offshore tax reporting: OVDP is over. Now what?
Federal law requires taxpayers report certain foreign assets. The Internal Revenue Service (IRS) has offered some form of voluntary disclosure program to help taxpayers meet this requirement for over a decade. One of the agency’s primary programs began in 2009 and morphed into what we know as the Offshore Voluntary Disclosure Program (OVDP) in 2012. With its many modifications, the program essentially allowed taxpayers with foreign accounts to come forward and make sure their assets complied with United States tax law. In exchange for voluntarily stepping forward, the IRS was less likely to move forward with some of the more serious criminal penalties that can come with failing to report these assets.
From the Taxpayers who took advantage of this program, the IRS reports that during its run over 58,000 taxpayers partook in the program and that the over $11 billion in back taxes was collected.
Why did the government end OVDP?
The IRS Commissioner at the time, David Kautter, stated that the program had provided taxpayers with years to come into compliance. He went on to point out that the program met its goals, which included increased taxpayer awareness and compliance as well as advances in third-party reporting efforts. The IRS also explained that the end of the program was supported by the fact that participation had started to diminish, dropping from 18,000 disclosures in 2011 to 600 in 2017. To the IRS, the signal was that information about foreign reporting was widely known to the public.
How will the IRS know that I have foreign assets?
Taxpayers may wonder if the IRS would even know about foreign assets. Afterall, if they are in a foreign country, held by foreign authorities, how would an agency in the U.S. even know that they exist? Sometimes it is as easy as the form your foreign bank asks you to file or your neighbor calling it in.
Voluntary disclosure is just one tool used by the government to monitor foreign assets. Another key tool used by the IRS to gather information about foreign assets is the Foreign Account Tax Compliance Act (FATCA). The FATCA has two requirements. First, U.S. taxpayers must report certain foreign assets. Second, certain foreign financial institutions must report the presence of financial accounts held by U.S. taxpayers directly to the IRS.
Other tools that the government utilizes to find these assets include:
- Whistleblowers. The government receives tips from individuals about violations by work colleagues as well as the company itself. If investigated and substantiated, the IRS could move forward with charges based off these tips.
- Computer analytics. The IRS uses various pieces of software to ensure compliance; while somewhat antiquated, there is money being poured in to update analytics and tracking. It is always trying to stay on top of the latest methods being used to hide or otherwise not disclose overseas activities and interests.
- Social media. Even the IRS can check your updates. There are cases when the IRS has used evidence from social media and other online platforms to help build a case against taxpayers for tax evasion.
There are multiple agencies keeping track of taxpayers’ obligations, and any one of them may uncover a violation and report it to the IRS. It is wise to take steps to ensure that your reporting is in compliance with applicable tax laws.
What happens if I do not report these assets?
The penalties that come with a failure to disclose foreign assets are serious and vary depending on the details of the case. These cases are often broken down into two categories. The first, best case scenario, involves an honest mistake. A negligent violation generally does not come with criminal penalties but can still come with hefty financial penalties.
The second, much less desirable category involves intentional acts to hide assets. The taxpayer’s case becomes much more complicated if the government believes the failure was willful. In these situations, including the wait-and-see if the IRS finds me, the taxpayer may face criminal charges like tax evasion which can come with hefty fines as well as the imprisonment.
What are my options for compliance? Does the government still offer immunity or reduced penalties?
Other compliance programs are available that can result in reduced penalties or possible immunity, but successful participation requires the taxpayer come forward before the IRS or DOJ begin an investigation. Some alternatives for compliance are discussed in more detail below.
One common option is the present version of the Voluntary Disclosure. One is to file Form 14457 which has two parts. The first pre-clearing the taxpayer for participation in voluntary disclosure programs and the second the disclosure of detailed information to explain noncompliance as well as list previously undisclosed assets. The IRS recently announced an update to this form, noting that it was expanded to account for the potential need of taxpayers to voluntarily disclose information about virtual currency. This option can work well for taxpayers who could face allegations of willfully, or intentionally, failing to report taxable assets.
The Voluntary Disclosure Practice option involves providing the IRS Criminal Investigation (CI) group with timely and accurate disclosures. Although participation in this option does not automatically shelter the taxpayer from prosecution, it increases the chances that the IRS CI will not recommend prosecution. This is another option for those who could face allegations of a willful avoidance of tax obligations in the past but now choose to cooperate with the IRS to determine the correct tax liability and make good faith arrangements to pay their tax obligations as well as any interest and penalties.
The streamlined filing compliance procedures is an option for those who unintentionally neglected to report their foreign assets to the IRS. This option requires the taxpayer certify that the failure to report the foreign assets, including the failure to file an FBAR, was non-willful. Instead, the failure was the result of neglect, inadvertence, mistake, or a good faith misunderstanding. This option is available for individual taxpayers or the estate of an individual taxpayer.
For those concerned about the filing of an FBAR, the delinquent FBAR submission procedures option may be a good fit. This form of voluntary compliance also requires that the taxpayer not be under investigation or contacted by the IRS about delinquent FBARs. If these qualifications are met, the taxpayer would put together a statement about why they failed to file their FBAR on time and file the form electronically. The IRS generally does not impose a penalty for those who qualify for this option if they pay the taxes on the assets and have not had previous contact by the government about delinquent returns.
There is also the Delinquent International Information Return Submission Procedures (“DIISRP”) for those who realize a need to file international informational returns that did not timely accompany their tax returns. This option also includes a reasonable cause statement. Here, the idea is to reduce the risk of penalties.
This area of law is ever evolving and complicated. The above is just a brief review of some of the more common questions that come with foreign accounts and a need to come into compliance with U.S. tax law. It is important to note that the application of these laws is impacted by many factors, such as case law and administrative guidance. As such, those who are trying to come into compliance are wise to reach out to a tax professional who is familiar with this area of law and can provide legal counsel on how the law would work in your specific situation.