What is the Offshore Voluntary Disclosure Program?
The OVDP (Offshore Voluntary Disclosure Program)
As many Government initiatives have demonstrated, one size does not fit all. Accordingly, any taxpayer considering participating in the Offshore Voluntary Disclosure Program (“OVDP”) must:
Conduct a comparative financial analysis of the penalties under the OVDP with the potential penalties assessed by the IRS during the examination process.
Consider various other factors including the statute of limitations and potential exposure to criminal prosecution.
Be aware that he or she does not have any appeal rights under the OVDP.
The discussion that follows makes clear that advice from competent tax counsel is an essential component in developing a successful disclosure strategy.
In 2012 the Government introduced its third Offshore Voluntary Disclosure initiative, modeled after the 2009 and 2011 programs. This initiative provides U.S. taxpayers with the opportunity to come into compliance by participating in the Offshore Voluntary Disclosure Program (“OVDP”). Unlike the two predecessor programs, the OVDP does not have an expiration date, but the Government may terminate the Program at any time.
Tax Payers Response to this initiative
In response to this latest initiative, some U.S taxpayers have participated in the Program with mixed results. Others have decided to not enter the Program and have simply filed amended returns and delinquent FBAR reports (“quiet disclosure.”) In some cases, taxpayers have decided to forego coming into compliance and instead, have elected to begin filing accurate returns and FBAR reports in the current tax year with the hope of going undetected. Finally, there are those who are aware of the problem and simply take no action.
The Government Accountability Office (GAO) issued a report based upon its study of FBAR compliance under the 2009 OVDP. The report concludes: “The IRS has collected billions of dollars, but may be missing continued evasion,” (GAO-13-318, March 27, 2013). In its report, the GAO recommended that the IRS explore different methodologies to evaluate filed amended returns outside the OVDP that have the potential to include reporting of interests in foreign financial accounts. The GAO Report also cautions that a failure by the IRS to identify and pursue “quiet disclosures” will undermine the integrity of the OVDP and the incentive of others to participate in the IRS offshore programs.
Participation in the Offshore Voluntary Disclosure Program
To participate in this program, the taxpayer is required to:
File amended returns and Form TDF-90-22.1 (FBAR) for each of the 8 preceding tax year.
Pay any additional tax, interest and the 20% accuracy related penalty.
Pay the “FBAR-related” penalty equal to 27.5% of the highest account value that existed at any time during the prior eight tax years. These penalties are in lieu of the penalty regimen provided for under the Bank Secrecy Act.
Other penalties, including the 75% civil fraud penalty, provided for under Title 26.
As an alternative to the OVDP and subject to the specific facts of each case, certain taxpayers should consider the voluntary disclosure protocol provided for in the Internal Revenue Manual 220.127.116.11 [see Example 6(A)], Section 4.01 of the Criminal Tax Manual for the U.S. Department of Justice, and Section 3, Policy Directives and Memoranda, Tax Division of the U.S. Department of Justice.
The FBAR penalty regimen under the Bank Secrecy Act can include imprisonment and civil penalties equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account, per year, for up to six tax years in the case of a willful failure to file. In the case of a non-willful failure to file, the penalty is $10,000 per violation.
Deciding whether to participate in the OVDP or proceeding under an alternative voluntary disclosure protocol requires careful evaluation of the specific facts in each case and should not be undertaken without the assistance of a competent tax attorney. Due to the potential for criminal prosecution, a taxpayer should consult with an attorney first, and if possible, avoid using the services of an accounting or tax resolution firm, where the benefit of the attorney client privilege is absent.
Factors to consider before participating in Offshore Voluntary Disclosure Program
When considering the OVDP, the following should be considered:
A determination needs should be made to see whether the taxpayer is at risk for criminal prosecution, either through a referral by the IRS or by the Department of Justice. If the taxpayer is at risk, the OVDP may provide the only safe haven from prosecution.
Knowledge of whether the taxpayer is under examination or is a candidate for examination in the immediate future (based upon; a large financial transaction, refund claim or required tax return disclosure due to reporting an item of income by a third party that was inadvertently omitted by the taxpayer on his return) is critical.
Whether the tax return was prepared by the taxpayer or a third party paid preparer may be probative on the issue of willfulness.
Whether a “reasonable cause” argument can be successfully asserted.
Answering “no” in response to question 7 (a), part three of Schedule B, coupled with signing the return under penalty of perjury, may create an insurmountable obstacle to avoiding the willful failure to file penalty.
The potential for imposition of civil penalties in the event an amended or delinquent return or FBAR is submitted as part of a “quiet disclosure.” Undertaking a “quiet disclosure” and the subsequent discovery and examination by the IRS could have catastrophic consequences to the taxpayer. This is because a “quiet disclosure” may be perceived as an independent act of attempting to evade taxes, more than likely subjecting the taxpayer to the “willful” failure to file FBAR penalty, as well as the 75% Civil Tax Fraud Penalty and potential referral to the Criminal Investigation Division for prosecution.
Before settling on any course of action, taxpayers and practitioners alike should carefully read two recent court decisions: United States v. Williams, No. 10-2230 (4th Cir. 2012) and United States v. McBride, No. 2:09-cv-00378 (D. Utah 2012) which address the issue of “willfulness” in the context of the application of the willful failure to file an FBAR report.
Tax payer’s aggregate financial account high water mark for each tax for each year to determine whether the FBAR penalty regimen is less than under the OVDP. Where a taxpayer has historically maintained smaller financial accounts, it may make sense, even where there are multiple years of unfiled FBAR reports, to avoid participating in the OVDP, and instead, pursuing an alternative disclosure practice, that may result in a lower penalty than under the OVDP, and in some cases, conclude in the IRS issuing just a warning letter.
In summary, any strategic plan designed to address income omitted on a taxpayer’s return, which was derived from offshore activities as well as the taxpayer’s failure to report his foreign financial accounts must include; an analysis of all materially relevant facts and circumstances and the possibility that the IRS may expand its probe and elect to examine a period beyond the eight tax years covered by the OVDP.
Dealing with delinquent foreign financial accounts or unreported income from offshore activity is not a matter that should be handled by the taxpayer without the assistance of competent tax counsel. To those taxpayers who insist on conducting their own research and representing themselves in FBAR matters, I offer this: “Stop digging and use the shovel to figure a way out of the hole.”
If you have not filed your FBAR recently, it may be time to take advantage of the Offshore Voluntary Disclosure Program, and catch up. Depending upon your particular circumstances, you may be able to:
Disclose your previously undisclosed offshore accounts and income from foreign sources to the Internal Revenue Service.
Get current with your taxes.
Minimize penalties and issues with the IRS.
Why should I disclose?
There are several benefits to disclosing your foreign accounts:
Minimize or avoid civil penalties.
Become compliant with U.S. Tax law.
Protect your family and the people you love.
Protect the your wealth.
We can help you
The Law Office of Anthony N. Verni will guide you through the disclosure process and calculate your tax liabilities and FBAR penalties. In addition, given the potential penalty under the Offshore Voluntary Disclosure Program, it may be ill-advised to enter the Program and make more sense to consider an alternative method of disclosure, which does not include a “quiet disclosure.” Depending upon your particular circumstances, you may want to take advantage of the Program sooner than later, because the IRS can terminate it or redefine its eligibility requirements at any time.
Don’t wait any longer. It is just a matter of time before your accounts are discovered. Contact us.