On March 13, 2018, the Internal Revenue Service (IRS) announced that the Offshore Voluntary Disclosure Program (OVDP) will close effective September 28, 2018. Any U.S. individuals with undisclosed foreign financial assets or beneficial owners of businesses with financial assets held offshore are urged to come forward to participate in the OVDP, and present their supporting documentation prior to September 28, 2018.
Historically, the IRS provided an internal voluntary disclosure practice that encouraged taxpayers to come forward and disclose previously unreported income and unfiled returns, provided the taxpayer had not been contacted at the time of the voluntary disclosure. This required a truthful, timely, and complete disclosure that included a "willingness to cooperate," and required the taxpayer to make good faith arrangements with the IRS to pay in full the tax, interest, and any penalties determined by the IRS to be applicable.
The Offshore Voluntary Compliance Initiative (OVDI) was the first of the offshore voluntary disclosure initiatives designed to allow taxpayers to voluntarily amend their tax returns to include offshore income in return for a waiver of certain civil penalties and assurance of no criminal prosecution. In addition, civil penalties were not imposed for failure to file a Report of Foreign Bank and Financial Accounts (FBAR) against eligible taxpayers.
To accommodate taxpayer demand, the 2009 OVDP, 2011 OVDI and 2014 OVDP ensued, each version of the program containing different rules and requirements with heavy penalties. The increasing financial burden (cost of legal representation and penalties associated with the underlying tax liability) deterred many ill-informed but non-willful taxpayers from coming forward. To encourage and motivate taxpayer compliance, the IRS announced the Streamlined Filing Compliance Procedures (Streamlined Program) in 2014 – which is separate from the 2014 OVDP – for taxpayers whose failure to report income in foreign accounts, and pay tax on foreign income, was non-willful. The IRS expanded its streamlined compliance to two categories of taxpayers, those residing abroad with no penalties and those residing in the United States with a miscellaneous penalty of 5 percent.
The 2014 OVDP was designed to encourage individuals and businesses with undisclosed offshore financial accounts and foreign assets to come forward voluntarily and report their previously undisclosed foreign holdings, subject to a uniform penalty. While the IRS has not officially announced an end date for the Streamlined Program, the IRS has expressly stated that it may end the Streamlined Program at some point.
According to the IRS, termination of the OVDP does not signal a change in IRS priorities towards offshore tax noncompliance. To the contrary, offshore tax noncompliance and evasion remain a top priority for the IRS. In that regard, the IRS uses data it receives under the Foreign Account Tax Compliance Act (FATCA) – a network of intergovernmental agreements between the U.S. and treaty partner jurisdictions – as well as automatic third-party account reporting and other bilateral treaty agreements. Given that one of the requirements to participate in the OVDP is for the taxpayer not to have been contacted by the IRS, it behooves any U.S. taxpayer who has failed to be compliant to come forward with any noncompliance issues prior to the closure of this program.
Nonetheless, even after the closure of the OVDP, there are still viable options to cure offshore tax and reporting noncompliance issues. These include:
- IRS Criminal Investigation Voluntary Disclosure Program
- Streamlined Program
- Delinquent FBAR submission procedures
- Delinquent international information return submission procedures
If a taxpayer simply submits amended returns reporting income from previously undisclosed foreign holdings without participating in any IRS designated programs (i.e., a quiet disclosure), depending on the facts and circumstances, the IRS may negatively view the taxpayer’s quiet disclosure submissions and subject him or her to civil and criminal penalties. In light of the IRS’s announcement to close the 2014 OVDP, U.S. taxpayers are strongly encouraged to review their undisclosed global financial holdings with counsel to carefully assess their compliance options prior to September 28, 2018.