Service Announces Pending Closure of Offshore Voluntary Disclosure Program
IR-2018-53
On March 13, 2018, the Service issued IR-2018-52, announcing its intention to close the Offshore Voluntary Disclosure Program (“OVDP”) effective September 28, 2018. The Service’s stated intention for the issuance of IR-2018-52 is to allow United States taxpayers with undisclosed foreign accounts to use the OVDP before the program closes. Full text of IR-2018-52 can be found at the following link: https://www.irs.gov/newsroom/irs-to-end-offshore-voluntary-disclosure-program-taxpayers-with-undisclosed-foreign-assets-urged-to-come-forward-now.
The Service indicated part of the reasoning for the cessation of the OVDP is advances in third-party reporting of foreign assets. Associated therewith, the Service noted that whistleblower leads, civil examination, and criminal prosecution would continue to be utilized to combat offshore tax avoidance.
Importantly, the closure of the OVDP does not immediately affect the Streamlined Filing Compliance Procedures (the “Streamlined Program”), the program most often utilized for offshore disclosures other than the OVDP. IR-2018-52 notes that the Streamlined Program will remain in place, but could be closed “at some point” in the future.
The Service lists four options for retroactive foreign reporting which will be available after September 2018: the Streamlined Program, the Delinquent FBAR Submission Procedures (utilized primarily by taxpayers who failed to file FBARs but owed no additional tax as a result of the failures – i.e. those with signature authority over foreign accounts), the Delinquent International Information Return Submission Procedures (ostensibly a version of the Delinquent FBAR Program for non-FBAR foreign reporting requirements), and Criminal Investigation’s Voluntary Disclosure Program (“VDP”).
Analysis
The Service notes in IR-2018-52 that the number of taxpayers using the OVDP has steadily decreased since 2011, with only 600 disclosures made in 2017. A confluence of factors caused this decline – the most noteworthy factors are general diminishing returns as a voluntary program matures (i.e. the majority of those willing to come forward will have done so soon after launch of the program) and the availability of alternate disclosure options (such as the Streamlined Program, which had its scope significantly expanded in 2014).
The closure of the OVDP does not mean the end to voluntary disclosure options; however, choosing the route for disclosure will become more complex under certain circumstances. The OVDP, as many are aware, requires a significant penalty payment (the standard rate is 27.5% of income-producing foreign assets, though this penalty can be increased to 50% under delineated circumstances) and compliance with relatively arduous program requirements. However, all taxpayers who are not currently under examination are permitted to participate. This can be juxtaposed with the Streamlined Program, which offers a greatly reduced penalty (5% of specified foreign financial assets for United States residents) but is explicitly restricted to taxpayers who can demonstrate their tax failures were “non-willful”.
Once the OVDP closes, a taxpayer who has concerns regarding their level of willfulness now loses their safest disclosure route. The most likely route for taxpayers unwilling to risk a negative willfulness determination under the Streamlined Program will be CI’s VDP; however, this program is much less formal than the OVDP, and also offers much less in terms of assurances to taxpayers. IRM 9.5.11.9 states a VDP submission “will be considered along with all other factors in the investigation 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. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution.” This can be compared to the Service’s statements on the OVDP; the Service has stated in FAQs to the OVDP that a submission would “generally eliminate the risk of criminal prosecution for all issues relating to [associated] tax noncompliance and failing to file the FBARs.”
As the Service references in IR-2018-52, advances in third-party reporting have occurred since the OVDP’s commencement, mainly through the ongoing implementation of the Foreign Account Tax Compliance Act. The closure of the OVDP thus appears to coincide with an increase in examinations of taxpayers related to foreign reporting failures. This development has long been an eventual expectation amongst practitioners, as information on offshore accounts has increasingly become available outside of reliance on proactive disclosures by taxpayers.
From an overarching perspective, IR-2018-52 creates an impetus for taxpayers for whom the OVDP is the best approach to make a disclosure immediately; failure to act will limit the options available in short order. Taxpayers who have yet to appropriately disclose foreign holdings should also be cognizant of the potential shift to examinations in the offshore context, as it could create drastic ramifications for those who are noncompliant.