The IRS has announced it’ll be closing the offshore voluntary disclosure program (OVDP) on September 28, 2018.
Background
The Foreign Account Tax Compliance Act (FATCA) requires US taxpayers, individuals, and certain domestic entities that hold foreign financial assets with an aggregate value of more than the reporting threshold—at least $50,000—to disclose those assets on Form 8938, Statement of Specified Foreign Financial Assets. This form must be attached to a taxpayer’s annual income tax return.
In addition to Form 8938 reporting, US taxpayers may have to complete and file reports for their foreign assets, such as Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
Reportable assets include the following:
- Deposit and custodial accounts held at foreign financial institutions
- Certain foreign stock and securities
- Foreign mutual funds
- Foreign-issued life insurance or annuity contracts with a cash value
- Other types of offshore assets
Offshore Voluntary Disclosure Program
The OVDP began in 2009, and the current version was launched in 2014. It serves as a pathway for taxpayers with undisclosed foreign bank accounts and assets to become compliant with US reporting requirements.
It’s often referred to as an amnesty program because it enables delinquent US taxpayers who file the necessary forms voluntarily, prior to the IRS detecting the deficiency and sending notice, to accomplish the following:
- Resolve tax liabilities
- Lower the chance of criminal prosecution
- Pay reduced civil penalties
The termination of the OVDP closes the window of opportunity for certain taxpayers to become compliant without risking criminal liability.
Voluntary Disclosure Programs for Willful Conduct
Taxpayers who don’t adequately report their offshore financial assets face significant noncompliance penalty exposure, which isn’t reduced by filing an amended return without making a voluntary disclosure—a process commonly referred to as a quiet disclosure. All quiet disclosures are generally reviewed by the IRS and subject to civil or criminal penalties as determined under existing law.
Until its sunset date on September 28, 2018, the OVDP remains the appropriate procedure for taxpayers whose underreporting of foreign financial assets is due to willful conduct. Willfulness is generally assumed if a taxpayer knows or should know that disclosure is required but intentionally doesn’t report the accounts. Lack of awareness around what FBAR and FATCA reporting are doesn’t necessarily negate the existence of willfulness.
Voluntary Disclosure Programs for Nonwillful Conduct
Taxpayers who were unaware of their filing obligations can continue to use one of the other disclosure programs—as long as they haven’t already been contacted by the IRS about the missed filings. These procedures include the following:
- Streamlined filing compliance procedures
- Delinquent international information return submission procedures
- Delinquent FBAR submission procedures
These filing compliance procedures are designed only for taxpayers whose conduct was nonwillful.
Streamlined Filing Compliance Procedures
The streamlined filing procedures are designed only for individual taxpayers—including estates of individual taxpayers—who may have failed to file an FBAR or one or more international information returns, such as Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621.
These taxpayers must certify under penalty of perjury that the failure to report the foreign financial assets was caused by nonwillful conduct on their part. Nonwillful conduct is conduct that falls within one of two categories:
- Conduct due to negligence, inadvertence, or mistake
- Conduct resulting from a good faith misunderstanding of the requirements of the law
Streamlined Domestic Offshore Procedure
US individual taxpayers residing in the United States should use the streamlined domestic offshore procedure. To qualify, they must have previously filed a US tax return—if required—for each of the most recent three years for which the following holds true:
- US tax return due date or extended due date has passed
- Taxpayer has failed to report gross income from a foreign financial asset
- Taxpayer hasn’t paid tax as required by US law
Participation in this program requires taxpayers pay a miscellaneous offshore penalty equal to 5% of the highest aggregate balance or value of the taxpayer’s foreign financial assets subject to the miscellaneous offshore penalty.
Streamlined Foreign Offshore Disclosure
Qualifying US individual taxpayers residing outside of the United States should use the streamlined foreign offshore disclosure. The 5% offshore penalty doesn’t apply in this case.
Delinquent International Information Return
Delinquent taxpayers who don’t need to use the OVDP or the streamlined domestic offshore disclosure procedure may avail themselves of the delinquent international information return submission procedure.
This procedure requires a statement of facts establishing reasonable cause for failure to timely filing certain international returns, which the taxpayer must sign under penalty of perjury. There are certain risks associated with this procedure because reasonable cause can often be a very difficult standard to meet.
Reasonable cause relief is generally granted only when the taxpayer exercised ordinary business care and prudence in determining tax obligations but was unable to comply. Reasonable cause is typically denied in cases of ignorance of the law, mistake, reliance on a CPA, or forgetfulness.
Delinquent FBAR Submission
The FBAR submission procedure is designed for delinquent FBARs. Taxpayers may use this procedure—and the IRS won’t impose a penalty for noncompliance—as long as the following requirements are met:
- Income was properly reported on the US tax return
- All taxes were paid on the income from the foreign financial accounts reported on the delinquent FBARs
Implications for Noncompliant Taxpayers
According to the IRS, more than 56,000 taxpayers have used a voluntary disclosure program since 2009, paying a total of $11.1 billion in back taxes, interest, and penalties. However, there’s been a significant decline in the number of recent OVDP submissions, from a peak of 18,000 people coming forward in 2011 to only 600 in 2017.
With the OVDP set to sunset later this year, taxpayers with undisclosed offshore accounts who want to participate have to act now to take advantage of the program. They can benefit from carefully reviewing the accuracy and completeness of their offshore financial-accounts disclosures as well as considering their options in case of noncompliance.
In cases where willful conduct can’t be ruled out, the OVDP filing must be submitted before September 28, 2018, to avoid criminal liability. But even nonwillful taxpayers who wish to be compliant shouldn’t delay action as other alternative disclosure programs may also soon be discontinued by the IRS.
It’s important to note that although the OVDP is being discontinued, the IRS will continue to enforce offshore-asset reporting compliance through various methods, such as:
- Information received under FATCA
- Intergovernmental agreements between the United States and partner jurisdictions
- Automatic account reporting required by financial institutions and other third parties
- John Doe summonses
We’re Here to Help
For more information about the OVDP and other voluntary disclosure programs, contact your Moss Adams professional or email internationaltax@mossadams.com.