Originally published on Forbes.com.
The IRS closing of the Offshore Voluntary Disclosure Program is one of those things, I am tempted to lie about. The drop dead date for participating in the program is September 28, 2018. No lie. I would tell you however that the due date is, say, July 31. Here is why:
Complete offshore voluntary disclosures conforming to the requirements of 2014 OVDP FAQ 24 must be received or postmarked by September 28, 2018 and may not be partial, incomplete, or placeholder submissions. Practitioners and taxpayers must ensure complete submissions by the deadline to request to participate in the 2014 OVDP.
The other thing is that OVDP is not the type of thing that you want to do yourself or have somebody do who has not already done a few of them. So if your situation is one that requires OVDP, you really should be lining somebody up right now, because getting together a “complete submission” is no small matter.
How Did It Begin?
Frankly, I have always been a little mystified and intimidated by what I, in my parochial style, refer to as “foreign stuff”. I dread having to deal with it, because the penalties for informational return failures are so severe and trying to do the disclosures correctly sometimes borders on the impossible. I spoke with Erin Fraser of HansonBridgett, a 150 attorney West Coast law firm. He has been working on OVDP cases for the last several years.
I asked Mr. Fraser to remind me what brought the issue of compliance with foreign reporting requirements to the forefront. He pointed me to the stories about Swiss bank UBS exposing to the IRS details of accounts that the holders thought would remain secret. Right, I remember that now.
The people that get the rude wake-up call of the threat of stepped-up enforcement can be divided into three very broad classes.
The Clueless And The Born On The Fourth Of July
There were people who never underpaid their income taxes but failed in reporting obligations that they were not aware of. One of those obligations was reporting foreign accounts in which a taxpayer had either an interest or signature authority. There there is Form 5471 – Information Return of U.S. Persons With Respect To Certain Foreign Corporations, Form 8938 – Statement of Specified Foreign Financial Assets and Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gift.
There were people who besides failing to do information reports, failed to pay income taxes, but did so in an innocent manner. Among this class would be the “accidental American”. The United States taxes its citizens on their worldwide income. And it is possible to be a citizen of the United States without realizing it and without having much connection with the United States. If Mom, just happened to be in the United States when the time came, you’re a Yankee Doodle Dandy , even if she took you back to the old country while you were still a wee one.
Whatcha Gonna Do When They Come For You?
Finally, there are the people who knew or should have known that they were doing something wrong and thinking that by keeping the money offshore and undisclosed, they would get away with it.
There were a couple of iterations of OVDP, but as it finally evolved, it became clear that OVDP was meant just for the bad boys and girls.
The Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.
Costs And Benefits And Process
When it comes to financial penalties, the nastiest is probably the one for not filing FBARs. At $10,000 a pop for ordinary failures, it is pretty nasty, but if your violation was willful, it is awful – the greater of $100,000 or 50% of the account. Since that is for each year, the penalties can go beyond confiscatory. And then there is the possibility of forfeiting your liberty for some period of time.
The first step in OVDP is pre-clearance. It is a pretty extensive package that is faxed to the IRS Criminal Investigation Lead Development Center. That is to check whether you are already on their radar, which can make you ineligible for the program. Then it is all the delinquent forms and eight years of amended income tax returns with full payment or the required information for an installment arrangement and supporting documents.
Mr. Fraser told me that his experience was that the packages would end up being assigned to IRS agents all over the country, who would comb through them sometimes requesting additional information. I picture the program as if it had been supervised by my first managing partner Herb Cohan, who was loath to turn down business, since everybody was on salary. If Herb was in charge of OVDP he would have been racing around the country dropping one more package on the desk of every agent in the country telling each one to get it done without interfering with any of their other work. They have a union, so it was probably not like that, but it is a nice image.
The final deal was not so bad compared to the worst case scenario. The FBAR penalty was 27.5% of the highest balance during the eight years. It could be 50% if certain banks were used. Most significantly there would be no criminal prosecution. And then there are all the fees, since you really don’t want to do this yourself even though as, say an engineer or a trial attorney, you are much smarter than tax lawyers and CPAs and Enrolled Agents. Mr. Fraser indicated twenty grand or so would not be unusual
Coming To An End
The reason that OVDP is shutting down is probably because it is running out of steam. Over 50,000 taxpayers have participated yielding over $10 billion in revenue, but the flood has slowed to a trickle of late. I think what has happened is that the program has gotten a lot of low hanging fruit. Something tells me that there were a lot of people who thought it was a really cool thing to stash some unreported income in a Swiss bank account twenty years ago and after about ten years started losing sleep over it, but couldn’t think of how to fix it. OVDP would have been a great relief to someone like that. The more hardcore evaders probably scorn such cowards.
What To Do?
Programs for the less nefarious are not closing down. There are streamlined procedures which will give you a significant break on the reporting penalties – 5% compared to the 27.5% under OVDP. You don’t get any guarantees under the streamlined procedures. And if the only thing you did wrong was not file the FBARs, you can clean that up penalty-free. Stephen Duncan wrote a piece on the “just file the FBARs” solution a few years ago. I remember being greatly relieved when I learned about it
OVDP versus streamlined seems like it might be a really tough decision, but of course, it is only a decision for the next few months, since OVDP will be shutting down.
Another option is “quiet disclosure”, which is simply amending returns without making a big fuss about it. Here is an article on what a bad idea that is for whatever that is worth. And then there is just not doing anything. You are betting on continued deterioration of the IRS enforcement capability and feeling lucky. I don’t recommend it, but of course, if you had been listening to somebody like me to begin with you wouldn’t be in the situation now.
Other Coverage
This topic is so well covered that I was thinking of passing, but I always have a hard time foregoing a good interview opportunity, which is how I came onto it. I also interviewed Erin Fraser back in January and we discussed my 199A plotting, which has been torpedoed by the fix to the so-called grain glitch.
The Q&A on the IRS website is actually a pretty good resource.
In terms of commentary, I don’t think you can do better than Jack Townsend, who has written the book, literally, on Tax Crimes. He wrote about the ramp down last month. Here is his advice for the bad boys and girls.
Since the OVDP program started in 2009 (going through several iterations until the current iteration), those taxpayers who were willful almost certainly knew early of the program and, if they have not resolved their delinquencies either by joining OVDP or otherwise, have made a deliberate choice not to join. Some have undoubtedly attempted either a “quiet disclosure” (coupled with compliance going forward) or just go-forward compliance with no resolution of the past. Under either of these approaches, if adopted soon after the first version of OVDP was announced in 2009, they almost certainly have no continuing criminal risk (6-year statute for income tax, but subject to statute suspensions that should be considered)and 5-year statute for FBAR), no FBAR civil penalty risks (6-year statute), and their practical risks on the income tax side would only be if the IRS really wanted to devote the investigative civil only resources to pre-2009 or pre-2010 income tax years. Those who did not move promptly after the original OVDP announcement and continued their past delinquencies after that almost certainly have a risk and should seriously consider joining OVDP promptly.
There are a host of other articles including one by Kelly Phillips Erb.
If you like video though, this one by IRS Medic is pretty good.