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The Offshore Voluntary Disclosure Program (OVDP) and Streamlined Disclosure Program are two programs that taxpayers can utilize to correct mistakes related to the disclosure of offshore accounts. Absent OVDP and Streamline Disclosure, penalties for noncompliance with informational reporting obligations like FBAR can be particularly harsh. For instance, even accidental noncompliance with FBAR can subject a taxpayer to penalties of up to $10,000 for each year noncompliance existed. Penalties are even harsher when the agent investigating the matter believes that the taxpayer intentionally or voluntarily failed to file ann FBAR.
Through an OVDP or Streamlined Disclosure filing, the penalties that can be imposed for failure to file an FBAR can be mitigated or eliminated. Furthermore, through OVDP only, protection from prosecution can be achieved. However, a botched or inappropriate filing for either of the disclosure programs can result in handing over evidence of one’s noncompliance without receiving the benefits of the programs. Thus, ensuring that one’s application is appropriate and legally sufficient is essential. While a Treasury Inspector General of Tax Administration report indicates that the IRS has been lenient in the past, taxpayer should not expect this approach to continue following the criticisms contained in the report. If anything, taxpayers should expect IRS enforcement of botched voluntary disclosure filings to increase in the wake of this public scrutiny.
While participating in the OVDP or Streamlined Disclosure programs can allow a taxpayer to correct past mistakes made regarding offshore disclosures, a botched or otherwise inappropriate disclosure can create serious consequences. If a taxpayer files for Streamlined Disclosure when he or she should have filed for the standard OVDP program, the taxpayer may have just handed over evidence to the U.S. government without the presumption of non-prosecution typically provided by standard OVDP. Likewise foiling for OVDP with including the requited tax filings and disclosures can also result in complications.
However, a recent report by TIGTA indicates that in at least some instances the IRS failed to bring penalties for offshore account disclosure problems despite having the evidence to do so. For the report, TIGTA analyzed a cohort of 100 cases randomly selected from a set of 3,182 OVDP requests that the IRS denied or were withdrawn by the taxpayer. Out of the 100 randomly selected cases, TIGTA found 29 cases where the taxpayer could have potentially been subject to offshore penalties. However, the IRS did not take any action against these taxpayers. Extrapolating the data from this report to a larger sample, TIGTA estimated that the IRS failed to collect roughly $21.6 million in FBAR penalties.
In light of these failures, TIGTA issued a number of recommendations to increase the likelihood of a more even enforcement of the law. TIGTA recommended for the IRS to review all denied or withdrawn OVDP requests. The report also recommended central tracking of all OVDP correspondence along with a single mailing address.
Despite agreeing in full with each of the 6 recommendations issued by TIGTA, the IRS declined to implement the recommendation of establishing a single mailbox for taxpayer correspondence. The IRS stated that it was placing this recommendation on hold while it makes a decision regarding the future status of OVDP. The commissioner of the IRS’s Large Business and International Division stated, “While we agree with the potential value in this recommendation, at this time and in light of the non-permanent status of the OVDP program, we cannot commit the resources needed for this change. While OVDP initiatives have been successful in improving compliance with offshore accounts, OVDP was not intended to be a permanent program that would exist into perpetuity.”
The commissioner followed b indicating that the IRS expects to use the data gathered through FATCA to “open new approaches for the identification and assessment of compliance risks.” Clearly, the government intends to use the data garnered from both individual and institutional FATCA disclosures to better identify and prosecute those who fail to file offshore disclosures. For individuals still holding undisclosed accounts, it is further evidence regarding the increased difficulty of maintaining a secret account.
However, the language used also seems to suggest that the continued availability of OVDP should not be taken for granted. The IRS may feel that taxpayers have had ample time to adjust to the new system of disclosure or that the increased amount of international data at its disposal no longer requires taxpayer cooperation. In any case, taxpayers who have yet to correct offshore disclosure issues should do so before the IRS changes the terms of OVDP or Streamlined Disclosure to be less favorable or unavailable.