Twitter LinkedIn
White Collar Posts

Time is Running Out to Disclose Hidden Foreign Assets and Receive Amnesty from Criminal Prosecution, IRS Says

March 15, 2018

By: Carolyn H. Kendall

The IRS has announced that it is ending its Offshore Voluntary Disclosure Program (“OVDP”) in September 2018. The OVDP currently is the only available mechanism for U.S. taxpayers with undisclosed foreign assets to come into compliance with U.S. tax and foreign asset reporting laws and eliminate the risk of related criminal exposure. Taxpayers who still have undisclosed offshore financial accounts and other assets have roughly six months to send a completed disclosure package to the IRS; the process of crafting and submitting a disclosure can be lengthy so taxpayers should not delay.      

The Offshore Voluntary Disclosure Program

Federal law requires U.S. taxpayers to report certain offshore assets, including their interests in or signatory authority over foreign financial accounts and securities. In addition to reporting on federal personal tax returns, taxpayers also must disclose these assets by filing a Report of Foreign Bank and Financial Accounts (called the “FBAR”) each year that the assets’ aggregate value reaches $10,000 or more. These reporting obligations apply even if the funds were earned or received outside of the U.S. and even if they never touch U.S. soil. Failure to report these assets subjects the taxpayer to steep civil penalties and, if the failure is deemed willful, criminal sanctions. Additional civil and criminal penalties can apply if assets generate income, such as interest, that is not included in the taxpayer’s taxable income and reported on the federal return.

The IRS first offered a voluntary disclosure program aimed at offshore assets in March, 2009, when the agency ramped up its offshore enforcement activities and began pursuing financial institutions in tax havens. After the first program’s expiration in October, 2009, successive programs have been promulgated in 2011, 2012, and most recently 2014. Through the current OVDP, eligible taxpayers make a full disclosure of their foreign assets, file amended tax returns and delinquent FBARs, and pay significant (but reduced) penalties. The IRS will not refer those taxpayers who “truthfully, timely, and completely compl[y] with all provisions of the [OVDP]” to the DOJ for criminal prosecution. Thus, successful OVDP participants generally receive assurance that they will not face criminal prosecution for any willful noncompliance.

Options After September 28, 2018

The IRS has announced that the OVDP no longer will be available after September 28, 2018. Although taxpayers still will be able to make voluntary disclosures of offshore assets to the IRS after the OVDP’s expiration, the same protections are not available.

Taxpayers with offshore assets who acted “non-willfully” will still have the option of participating in the current Streamlined Program, which is not affected by the IRS’s recent announcement (although the IRS has said that Streamlined eventually will also be terminated). The Streamlined Program involves a lesser penalty but offers no assurances regarding criminal liability, as it is designed for taxpayers who have little to no real-world risk of criminal exposure. Moreover, participation requires a certification of non-willfulness – which can be a murky concept – and a false certification itself creates criminal liability. Therefore, for taxpayers whose conduct could be deemed willful by the IRS, the Streamlined Program is inappropriate.

Taxpayers with offshore assets who acted “willfully” but seek to come into compliance will have to risk either engaging in a so-called “quiet disclosure,” where corrected returns and delinquent FBARs are simply filed, or participating in IRS Criminal Investigation Division’s voluntary disclosure program, which offers no penalty cap or other assurances. Neither is a particularly attractive option.

Those contemplating continuing to maintain undisclosed assets offshore do so at their peril. First, the IRS has been gathering information about U.S. taxpayers with accounts in foreign jurisdictions from foreign financial institutions (and individual bankers) who have entered into deals with the U.S. government or who have chosen to comply with the information-sharing requirements of the Foreign Account Tax Compliance Act (“FATCA”). With access to this data, it is becoming increasingly likely that the IRS will become aware of a taxpayer’s undisclosed foreign assets. Second, given the wide-spread publicity about the OVDP’s availability, taxpayers who attempt voluntary disclosures after the current program’s expiration will have a difficult time demonstrating that they were not willful and therefore deserve leniency with respect to penalties and potential criminal referrals.

Finally, although the IRS has hinted that some new offshore disclosure procedures will be announced after September, the contours and protections of this potential future program are far from certain. Indeed, the IRS currently is soliciting comments on what these procedures should be. One thing, however, is clear from the IRS’s announcement:  the OVDP’s termination does not signal an end to the agency’s civil and criminal enforcement related to undisclosed offshore assets.

Practical Tips

  • OVDP is the best option for taxpayers who still have undisclosed foreign assets and are at risk of being deemed to have acted willfully to come into compliance.
  • Taxpayers concerned about undisclosed foreign assets and their potential willfulness should contact counsel sooner rather than later. Completed submissions are required to be postmarked by September 28, 2018. The difficulties of obtaining required account information from financial institutions in foreign jurisdictions, language barriers, and other logistical issues dictate that taxpayers should act right away.
  • It is far from certain that the IRS will issue a replacement OVDP; after September, taxpayers may be forced to utilize IRS CI’s traditional voluntary disclosure program, which lacks OVDP’s protection from criminal liability.
  • Taxpayers who have maintained undisclosed foreign assets since the IRS began offering offshore voluntary disclosure programs in 2009 and do not utilize the OVDP before its expiration likely will face significant scrutiny from the IRS and the DOJ and have a difficult time establishing that harsher penalties tied to a culpable mental state are not warranted. 
     

Disclaimer: This post does not offer specific legal advice, nor does it create an attorney-client relationship. You should not reach any legal conclusions based on the information contained in this post without first seeking the advice of counsel.

About the Author:

Carolyn Kendall

Carolyn H. Kendall conducts internal investigations and defends corporations, officers and other individuals facing criminal and civil investigation. Her practice includes matters relating to potential criminal tax and money laundering violations, as well as allegations involving securities violations, mortgage and financial institution fraud, the Federal Anti-Kickback Statute and Stark Law, and other fraud and regulatory statutes. She also assists clients in offshore account disclosure and compliance via IRS disclosure programs (OVDP and Streamlined Procedures). Learn More.