Voluntary Disclosure options for taxpayers after the closing of the OVDP
By: Tiffany D. Bell
When the IRS closed the 2014 OVDP last fall, which had provided an avenue for taxpayers to come into compliance with any past offshore tax and information reporting, it left many taxpayers and tax practitioners wondering, what do we do now?
Since 2009, the IRS has offered taxpayers a variety of voluntary disclosure programs within which they could avoid potential criminal exposure and a reduced penalty structure for the non-reporting of foreign sourced income and/or failure to file certain information returns. Since that time, according to the IRS, over 45,000 taxpayers have come forward under one of the voluntary disclosure programs to disclose previously unreported foreign assets and income. These voluntary disclosures reportedly resulted in individuals paying over $6.5 billion in back taxes, interest and penalties. Seemingly, these programs were very successful.
During this time frame, the government passed the Foreign Account Tax Compliance Act (FATCA) as part of the HIRE Act in 2010. FATCA, not only imposed new, and sometimes duplicative, reporting obligations on taxpayers, it also required that foreign financial institutions themselves report to the IRS information about their U.S. account holders. By 2014, foreign financial institutions were providing information to IRS regularly.
With the IRS receiving information from the foreign financial institutions directly, it no longer needed to rely on taxpayers to come forward voluntarily. Eventually, the IRS, claiming a decline in program participants and an increase in offshore reporting awareness, decided to close one of its voluntary disclosure programs, specifically, the Offshore Voluntary Disclosure Program (OVDP), on September 28, 2018. The IRS continues to offer both the Foreign and Domestic Streamlined Offshore Procedures (“Foreign Streamlined” or “Domestic Streamlined”).
Taxpayers meeting the eligibility criteria for the Foreign Streamlined procedures are required to pay the applicable tax due and statutory interest but are not subject to any penalties for their prior non-compliance. However, taxpayers who meet the eligibility criteria for the Domestic Streamlined procedures are subject to not only the tax and interest but also a 5% penalty on the highest aggregate balance/value of the taxpayer’s foreign financial assets.
The Streamlined programs, however, do not offer any finality to taxpayers, as they will receive no closing agreement from IRS and returns submitted under this program may still be subject to IRS examination, civil penalties, and possibly criminal liability.
To date, the IRS has not offered a specific alternative to OVDP for taxpayers wishing to come into offshore tax compliance who do not qualify for the Streamlined Programs or who have reasonable cause for failing to file or late filing certain information returns. Generally, the same laws that require certain information reporting of foreign assets include a “reasonable cause” provision. Namely that if a taxpayer can establish that they have reasonable cause for their non-compliance with offshore reporting, penalties will not be assessed.
So, what happens if you don’t qualify for one of the Streamlined programs, were willful in your failure to report foreign income or assets, or have reasonable cause for failing to file information returns?
Before any of the offshore voluntary disclosure programs were instituted, a taxpayer had voluntary disclosure options under the Internal Revenue Manual (IRM) provisions, known as the traditional voluntary disclosure program (or the domestic voluntary disclosure program). A traditional voluntary disclosure under the IRM (IRM 22.214.171.124) still provides an avenue within which a taxpayer can come into compliance with their offshore reporting. There are certain requirements that must be met, including, that the disclosure must be truthful, timely and complete; the taxpayer needs to cooperate with the IRS in determining their tax liability; and they need to make good faith arrangements to full pay the tax, interest and any applicable penalties.
Because there is no specific format for voluntary disclosures under the IRM, and there are many traps for the unwary, it is important to get professional advice before making any voluntary disclosures to the IRS.
The professionals at Andreozzi Bluestein have been advising and representing clients before the IRS and in the courts on matters involving offshore voluntary disclosures since the inception of the first offshore voluntary disclosure program in 2009. We are currently working with many clients utilizing each of the various voluntary disclosure programs. If you think you or someone you know has a potential need for making an offshore voluntary disclosure and are unsure how to proceed, please contact the professionals at Andreozzi Bluestein, without obligation.
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