Originally published on Forbes.com.
One of the highlights for me of the Paul Manafort and Richard Gates indictment was their failure to file proper FBARs. Talk about shooting fish in a barrel for prosecutors. It is not something very hard to prove. Makes you wonder how many other people might be guilty of the same “crime”. Shannon Retzke Smith of Withers Bergman thinks it may run into the millions.
Just over 1 million FBARs are filed each year and that is for everyone (American citizens, green card holders and resident). The sheer magnitude of the noncompliance is staggering. With FATCA, CRS and IGAs, the IRS now has the tools to find people, but it can’t find everyone – it just does not have the resources. A robust set of reasonable penalty options lets people address their noncompliance in a manner properly tailored to their situation.
Estimates of the number of Americans living abroad run as high as nine million. That’s an indication that there might be a few more FBARs outstanding unless they are really good at keeping their bank accounts below $10.000.
The IRS has offered a variety of programs to help people get compliant. One of them. the Offshore Voluntary Disclosure Program (OVDP), is not taking new applications after September 28, 2018 (I’m writing this on the 25th). Don’t complain about the last-minute warning. I told you about this back in April and reminded you in June and Kelly Erb reminded you a couple of weeks ago. I was going to let it go, but Ms. Smith indicates that a just before the whistle “hail mary” might make sense for some people. She wrote me:
Would a practitioner still request preliminary clearance between now and September 28, 2018, even though the IRS has said that criminal investigations needs a minimum of 30 days to consider all preclearance requests? Yes, I believe they should in that the cost to the client is minimal, and the benefit (should the client’s request for preclearance in advance of the deadline be rejected) is significant.I had someone ask me today what would her options be after the September 28, 2018 deadline. The IRS has indicated that (for now) the streamlined and delinquent programs will remain open, although they could close at any time. The latest version of the OVDP sunset FAQs references that additional information on the Voluntary Disclosure Process after September 28, 2018 is forthcoming – although they provide no guidance as to when it will come or what it might look like. Until a new process is announced, it may be that a taxpayer who does not fit into either the streamlined or delinquent program may choose between 1) doing nothing to correct historic noncompliance, (just starting to report correctly on a going forward basis), 2) entering into a program without knowing what the terms will be or 3) filing “quietly” by simply amending returns and providing FBARs and incurring significant risks without any cap on the penalties.
Is OVDP For You?
We don’t have a lot of time so I am going to make this simple at the risk of oversimplifying. You are required to make disclosure about foreign accounts that you have. The penalties for not making the disclosures are extremely nasty including even criminal charges as we noted above for Manafort and Gates.
It is possible that you have failed to make those disclosures and not avoided any income tax. That’s really a piece of cake. Check out Delinquent FBAR Submission Procedures. Pretty much no harm no foul. That program remains open after this week, but stop your lollygagging and take care of it.
Well maybe you didn’t make the disclosures and, inadvertently avoided some income tax. The technical term is that you were not willful. Then the Streamlined Filing Compliance Procedures are for you. You have to pay the taxes and interest of course, but they go easy on the penalties. You need to be careful though, because willfulness is a tricky concept, so you might want to get counsel before the OVDP window closes.
OVDP is the opportunity that is closing. And it is for people who have been, well, bad. You didn’t report your accounts and you avoided income tax and you knew what you were doing. You were willful. The financial penalties that you might be subject to are staggering and you could end up forfeiting your liberty. OVDP will be more reasonable. Eight years of back taxes with penalties and interest. A reduced FBAR penalty – 27.5% of highest balance over eight years (50% if you used the wrong bank). No criminal charge. No prison time. The window closes on OVDP on September 28th. You have to have your submission postmarked by then. There are other options but follow Reilly’s Seventeenth Law of Tax Planning – Don’t cut your deadlines close and use the US Mail with proof of mailing. Really. Go to the counter and get it stamped.
The downside to an OVDP submission is that it is “an admission against interest”. If IRS CI already has you on its radar, you are shooting yourself in the foot. If you hadn’t waited till the last minute you could have checked that out, but now there is not enough time.
Don’t Try This At Home – Unless You Have No Choice
You apply for the program by submitting Form 14457 – Offshore Voluntary Disclosure Letter. Then you have to do an attachment From 14454 for each account. IRS has indicated that incomplete submissions might be rejected, so try to be as thorough as possible.
Surprisingly, it is still possible to get help. Shannon Retzke Smith told me that they are still taking people. They are not charging a last-minute premium, except that you will probably end up needing to spend more time with a higher-level person. Her rate is $730 per hour and they expect a $5,000 retainer. Ms. Smith is in New Haven with Withers Bergman. She told me they also are working on OVDP in their New York office. I asked her for other firms that you might try she mentioned Caplin&Drysdale and Steven Toscher. Jack Townsend who, literally wrote the book about federal criminal matters, provides a list of OVDP attorneys here.
Will It Get Worse?
Ms. Smith believes that after the dust has settled, IRS CI will regroup and decide that it is important that things be worse for the people who did not come forward when they had the chance. You also might want to reflect that if you ever run afoul of authorities for some other reason, prosecutors will have your FBAR sins exposed pretty quickly and you will be in a very weak position as happened with Manafort and Gates. So if you are eligible for OVDP, I think you should probably act before the window closes, but of course, if you took advice from somebody like me you wouldn’t have unreported offshore accounts. Just saying.
Update
Jack Townsend has commented on this piece pretty much confirming my advice –OVDP Closes Friday; So What? (9/26/2018). Mr. Townsend wrote:
The OVDP program is for the bad actor — the taxpayer who was willful in filing or failing to file income tax returns and FBARs. The willful bad actor is at risk of criminal prosecution and civil monetary costs (income tax, income tax penalties, interest and FBAR willful penalties). The bad actor can square up with the IRS via OVDP and get substantial peace of mind.
And
For those who are not bad actors, the Streamlined Programs are still available. The key to the Streamlined Programs is the nonwillful certification and narrative supporting the nonwillful certification. The risk in entering the Streamlined Programs is that a taxpayer’s certification and supporting narrative may be false or perceived by the IRS to be false or even suspect. This could lead to an audit in which the IRS can test the validity of the certification and supporting narrative.
“ Bad actor” sounds pretty harsh and you and I both know that you are really not a “bad actor”. You are probably actually a mensch. But fifteen years ago, somebody talked you into stashing some money in the Cook Islands just in case and who’s gonna know. And it dawned on you some time ago that that was wrong and you have been agonizing about it. That could make you a “bad actor” in the eyes of the IRS. So don’t let this window close on you without getting some good advice.