For those unfamiliar with the OVDP, it’s a voluntary program within the IRS that permits taxpayers to disclose foreign financial assets and offshore activities without exposure to criminal prosecution and subject to reduced penalties.
Under the OVDP, taxpayers can disclose foreign accounts or offshore income without the risk of criminal prosecution.
Although the OVDP may be ending, the IRS will not be terminating any program designed to catch taxpayers that fail to disclose foreign activities. Quite the opposite may be true.
As Don Fort, chief of the IRS Criminal Investigation Unit, said earlier this year, “The IRS remains actively engaged in ferreting out the identities of those undisclosed foreign accounts with the use of information resources and increased data analytics.”
Fort also reiterated that “Stopping offshore tax noncompliance remains a top priority for the IRS.”
Accordingly, we can expect the IRS to increase their pursuit of individuals that fail to disclosure foreign accounts and offshore activities once the OVDP comes to an end. The IRS will likely have little sympathy for a taxpayer that has failed to come forward during the nine years that the IRS’ voluntary program existed.
The reason for termination of the OVDP is twofold. First, the IRS has seen a steady decline of participants in the program (with the majority of taxpayers coming forward when the program was first introduced) and, second, the IRS likely feels its advanced methods can catch individuals that hide assets or activities overseas.
The second point is the worrisome point for those taxpayers that fail to come forward under the OVDP. When the OVDP was introduced in 2009, the program was introduced due to the IRS having difficulty locating and tracking offshore activity. Accordingly, it was prudent for the IRS to offer immunity to taxpayers to come forward and pay the taxes owed on accounts and activities that the IRS may have otherwise never located.
Indeed, the IRS saw significant numbers of voluntary disclosures in the early years of the OVDP, with 18,000 people coming forward in 2011 alone, a number that dropped to only 600 disclosures in 2017.
However, the planned termination of the OVDP reflects the IRS’ new abilities to locate and track foreign accounts and activities. Through increased technology and analytics and stronger international relations with foreign banks, most notably recent success in disclosures by Swiss banks to the Department of Justice, the IRS has likely determined that it can locate offshore accounts and activities without the need for voluntary disclosure.
Once the OVDP ends, it is likely the IRS will strengthen its prosecution of taxpayers that willfully fail to disclose offshore accounts and activities. As a reminder, taxpayers are required to disclose any income earned in another country and are required to disclose any foreign accounts if the aggregate value in the foreign accounts exceeds $10,000 (regardless of whether there is any income tax to be paid on the foreign accounts).
Civil and criminal penalties for failing to disclose, or even worse willful non-disclosure, are severe and often the civil penalties alone are enough to completely extinguish a foreign account that goes undisclosed.
For example, the civil penalty for the failure to disclose a foreign bank account over $10,000 is up to $10,000 if the disclosure is deemed non-willful and, if willful, then the greater of $100,000 or 50 percent of the total account balances. Additionally, criminal penalties of up to 10 years in jail can be charged for the willful non-disclosure of foreign bank accounts.
There is still time to disclose foreign activities under the OVDP and qualify for the IRS’ reduced penalties and abstention from criminal penalties. Additionally, the IRS’ Streamlined Filing Compliance program, for those taxpayers that did not willfully fail to disclose their foreign activities, will continue past September 2018.
If you are concerned whether you should report foreign activities, now is the time to visit competent counsel to discuss your tax circumstances. The options will certainly be limited once the OVDP expires in a couple of months.