In March 2018, the IRS announced that it would end its Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018. Since the OVDP's initial launch in 2009, more than 56,000 taxpayers have used one of the programs to comply voluntarily. All told, those taxpayers paid a total of $11.1 billion in back taxes, interest and penalties.
What are taxpayers' options now?
OVDP was 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 pay all tax due in respect of those assets. The program had extensive requirements. The most significant requirement was the payment of a penalty of the account balance equal to 27.5%. OVDP was not for every taxpayer with undisclosed foreign financial assets. The IRS's Streamlined Filing Compliance Procedures and its Delinquent International Information Return Submission Procedures remain options for taxpayers with little exposure to potential criminal liabilities. Those programs are detailed here.
Taxpayers with exposure to potential criminal liability have three options: (1) no disclosure, (2) quiet disclosure, and (3) voluntary disclosure
You may choose not to disclose your foreign financial accounts, but this option is not recommended.
In 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA), requiring foreign financial institutions and certain other non-financial foreign entities to report on the foreign financial assets held by their U.S. account holders or be subject to withholding on withholdable payments. There are more than 110 countries that have entered into Intergovernmental Agreements implementing FATCA. (https://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx)
It used to be a safe bet that the IRS would not learn of your foreign bank account unless you disclosed it or the IRS traced funds to it, but that is no longer the case. The question is no longer whether the IRS will learn of your foreign bank account, but when it will do so
You may choose to simply file original or amended returns, Forms 8938, and FBARs and pay the related tax and interest without otherwise notifying the IRS. This option depends on a careful evaluation of your criminal exposure. Taxpayers with a high degree of criminal exposure should consider the IRS's voluntary disclosure program.
Now that OVDP has ended, taxpayers with a high degree of criminal exposure should consider the IRS's long-standing criminal voluntary disclosure procedures.
The IRS currently considers voluntary disclosure along with other factors in determining whether criminal prosecution will be recommended. This voluntary disclosure practice creates no substantive or procedural rights for taxpayers as it is simply a matter of internal IRS practice, provided solely for guidance to IRS personnel. A voluntary disclosure will not automatically guarantee immunity from prosecution; however, a voluntary disclosure may result in prosecution not being recommended.
Are you eligible for voluntary disclosure?
Ask yourself the following questions:
- Are you currently the subject of a criminal investigation or civil examination?
- Has the IRS notified you that it intends to commence an examination or investigation?
- Are you under investigation by any law enforcement agency?
- Is the source of any of your income from illegal activity?
- Do you have any reason to believe that the IRS has obtained information concerning your tax liability?
If you answer yes to any of the above questions, the facts and circumstances of each investigation must be clarified to determine if it is a disqualifying factor.
What should your voluntary disclosure contain?
The IRS's Criminal Investigation Division will evaluate each voluntary disclosure for completeness. The following information should be provided:
The following taxpayer identifying information should be considered in ascertaining the completeness of the disclosure communication:
- Taxpayer identifying information (including spouse) · name(s) · social security number(s) · address(es)
- If a business entity is involved provide the business name, address, and employer identification number, if available.
- Provide information on the tax periods:
- Type(s) of return(s) (Form 1040, 1120, 941 etc.)
- Type of tax(es) involved (income, employment, excise, etc.)
- The communication must include a brief description of all omitted income, the tax scheme used by the taxpayer, and a dollar estimate of the total taxes owed.
- A statement must be made by the taxpayer (either verbally or in writing) that he/she is willing to cooperate with the IRS in determining the correct tax liability and make good faith arrangements to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable in full. This is critical.
- The taxpayer should provide the reason(s) why they are making the disclosure.
The taxpayer can prepare amended returns for submission with her voluntary disclosure communication or wait to submit amended returns until after the IRS's Criminal Investigation Division evaluates her communication and makes a recommendation to SB/SE Planning and Special Programs (PSP) Area Manager or Large Business and International (LB & I) Offshore Identification Unit Manager (POIU).
Why A Tax Controversy Attorney is Critical in Voluntary Disclosure
Many taxpayers attempt to handle their foreign reporting obligations on their own or use their tax preparer or a tax resolution service to help guide them through the process. A tax controversy attorney—a tax attorney that specializes in disputes with the IRS—is recommended because they frequently deal with foreign reporting obligation issues, and leveraging that experience is the best way for a taxpayer to protect themselves from civil and criminal exposure. The attorney-client privilege is important when a taxpayer has potential criminal exposure. The privilege is only available with attorneys. The accountant privilege does not apply in criminal proceedings. If an accountant assists you with disclosure or signs a return, and the IRS rejects your disclosure and opens a criminal investigation, your accountant, return preparer, or enrolled agent will be interviewed, and they will be asked to tell all—and there is nothing that you can do about it.