August 23, 2017

IRS Voluntary Disclosure Program is Significantly Revised

The IRS initiated a new voluntary disclosure program for US taxpayers with foreign accounts on June 18, 2014. The IRS also noted some interesting statistics regarding its previous two foreign account voluntary disclosure programs as well as its audit programs. Among the more notable statistics, the U.S:

  1. Has currently collected more than $6.5 billion dollars from US taxpayers who participated in the previous two programs; and,
  2. More than 45,000 taxpayers have participated in the programs.

There are a few important items to note regarding the accounts covered by these programs. First, the definition of what constitutes a foreign account is quite broad, and includes all accounts over which an individual or business has signature authority. More than a few of the 45,000 participating taxpayers did not realize their financial instrument qualified as a financial account for purposes of the requirement to disclose foreign financial accounts. Second, the definition of who is required to file on behalf of such accounts is quite broad as well, often causing the beneficial owners of accounts legally owned by another (trusts, business entities, etc.) to be reportable by those beneficial owners. Analysis of both of these terms is critical and oftentimes subject to some level of uncertainty. DUGGAN BERTSCH can assist you in determining whether you might have a reportable foreign account.

The IRS formally announced a third foreign voluntary disclosure initiative to enable U.S. persons to remedy any prior noncompliance without criminal prosecution after netting approximately 33,000 nonfilers in its first and second initiatives over the last few years in 2012. Specifically with respect to the 2012 voluntary disclosure initiative, it imposed slightly higher penalties than the prior voluntary disclosure initiatives, but still allows qualifying participants to obtain certainty about avoiding criminal prosecution and the imposition of penalties by the IRS.

The Offshore Voluntary Disclosure Program (“OVDP”) is time-sensitive because taxpayers are ineligible for the program if the government already is investigating the name or account information of a prospective participant. Furthermore, the 2012 initiative did not have a specific expiration date and continues until the IRS decides to terminate it. The IRS retained authority to change the terms at anytime and encouraged taxpayers to act early before the penalty rates are inevitability increased. The IRS did change its penalty structure on June 18, 2014, the details of which are discussed below.

Now that July 1 has rolled around banks from all over the world will start sending the required records to the IRS under FATCA. A large number of Americans with undeclared overseas assets could immediately become ineligible for the program and face the full amount of prison time due to these FATCA disclosures. As previously mentioned the OVDP is time-sensitive because taxpayers are ineligible for the program if the government already is investigating the name or account information of a prospective participant, which could now happen since the July 1st FATCA deadline has passed and automatic reporting has begun.

For Taxpayers participating in the 2012 OVDP, the IRS required the participant to agree with the following terms if the participant otherwise qualifies (i.e., was not currently under an IRS investigation or audit and income is from legal sources):

  1. Payment of a 27.5% penalty on the highest aggregate annual balance for the unreported foreign account during the prior eight full tax years
  2. Payment of any U.S. income tax due on unreported income for an unreported account during the prior eight full tax years and,
  3. Payment of a 20% penalty on any U.S. income tax due under number two.

Participants accepted into the OVDP had to file amended returns and make an arrangement for payment of all taxes, interest, and penalties. Participants had the option of foregoing the standard penalty rates after being accepted into the voluntary disclosure program and request a full examination of their returns. The examination division would then recommend any resulting penalties, which could be higher or lower than the standard penalties.