In 2009, the IRS introduced the Offshore Voluntary Disclosure Program (OVDP), which enabled taxpayers to receive reduced penalties – notably, protection from criminal liability – for voluntarily reporting previously hidden offshore bank accounts, income producing foreign assets and businesses. In September 2018, the IRS permanently ended the OVDP, citing, among other factors, dropping rates of taxpayer participation. The Service has preserved several existing disclosure programs and guidelines – for instance, international delinquent information return submission procedures – that are designed for taxpayers who need to resolve non-criminal disclosure matters. For those taxpayers who do have concerns about criminal exposure, the Internal Revenue Service recently introduced new IRS voluntary disclosure guidelines, which were announced in a November 2018 memo. Unfortunately for taxpayers, the “new OVPD” is in some ways a sharp departure from its predecessor, featuring several substantial penalty increases. In light of the enhanced penalties taxpayers now face and the IRS’s incredible amount of discretion available to them, it is of the utmost importance to work with a highly experienced criminal tax defense lawyer who possesses a strong background in the areas of willful FBAR and FATCA noncompliance.
Note: In this article, we refer to the now-defunct OVDP as the “original program” simply to differentiate from the new voluntary disclosure procedures. Technically speaking, the “original” OVDP would be the version introduced in 2009, which was later followed by several iterations, such as the 2011 OVDI and 2012 OVDP, before the program’s ultimate termination in 2018.
In case you missed our previous article outlining the new IRS guidelines (which are linked above), allow our voluntary disclosure attorneys to provide a quick summary. Under the new procedures, program applicants must obtain preauthorization from the IRS’ Criminal Investigation unit, or IRS-CI – a hurdle that was optional under the original OVDP. Moreover, the form used to apply, Form 14457 (Offshore Voluntary Disclosure Letter), has become more detailed, requiring taxpayers to share more information from the outset of the process.
Even if the taxpayer is cleared to proceed by IRS-CI – an outcome which is unlikely for any taxpayers who were denied entry into the original program – he or she will face heightened penalties and potentially, longer disclosure periods as compared to the original OVDP.
Under the original program, for example, the disclosure period was typically eight years. While the new guidelines might seem to reduce this period, shortening it to just six years, taxpayers must also remember that the IRS can extend the six-year period to cover all years in which noncompliance occurred, as necessary. Depending on the circumstances, that means the disclosure period could be potentially extended to eight years, just as in the original program – or even longer.
Among various penalties within the updated guidelines, one of the most noticeable is the civil penalty for underpayments of tax, which can equal up to 75% of the underpayment. While this penalty may only be applied to the year where the taxpayer’s liabilities were highest, there is also a risk that the IRS could apply the 75% penalty to two years, three years, four years, or more. This depends largely on whether or not the taxpayer “fails to cooperate and resolve the examination,” making legal representation and professional tax guidance essential – particularly because the IRS has indicated that, in the event of a dispute between the taxpayer and the IRS, the Service may increase penalties protectively. For example, if a taxpayer appeals, the IRS may seek to impose the fraud penalty for multiple years and increase the FBAR penalty from 50% t0 100%.
Unfortunately for taxpayers, it seems likely that more civil tax audits and foreign account audits will ultimately result in these outcomes. An experienced tax attorney – in addition to affording you the attorney-client privilege – can help to ensure that you navigate these processes cautiously, correctly, and thoroughly, decreasing the level of danger involved.
Finally, it bears mentioning that the new program has also altered various regulations which formerly governed passive foreign investment companies (PFIC) – yet again, to the detriment of taxpayers. Under the original OVDP, if a taxpayer had a PFIC with excess distributions, he or she could potentially avoid certain penalties and utilize a simplified version of the PFIC regulations, which is not possible under the new guidelines.
There may be one positive change for taxpayers: under the new IRS guidelines, the original 27.5% offshore penalty on the fair market value (FMV) of undisclosed unreported income generating assets will no longer be assessed. However, considering the other changes to the updated reporting guidelines, there is still a heightened level of danger in the form of debilitating penalties, which makes skilled representation imperative.
At the Tax Law Office of David W. Klasing, we are award-winning international tax lawyers with over 20 years of combined experience, including more than a decade of public auditing experience, helping taxpayers in and outside the United States safely make voluntary disclosures with the minimum penalties possible. We work with expats, multinational business owners, military servicemembers, dual citizens, non-citizens, and many other U.S. taxpayers who may have foreign reporting obligations. To learn more about the new IRS disclosure guidelines and discuss how our FBAR tax attorneys may be of assistance to you or your business, contact the Tax Law Office of David W. Klasing online, or call (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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