By: Michael Fejes, Manager, International Tax Services
On March 13, 2018, the IRS announced that it will be ending the Offshore Voluntary Disclosure Program (“OVDP”) effective September 28, 2018, for U.S. Persons (U.S. citizens and U.S. tax residents) that failed to file various foreign reporting forms to report foreign financial accounts and/or foreign income. As has been heavily publicized in recent years, U.S. Persons are required to report their offshore account information (i.e. bank accounts, securities accounts, foreign retirement accounts, annuities, life insurance policies with cash value, etc.) on various foreign account forms that are submitted to the IRS or FinCEN. Some of the more well-known forms are the FBAR and Form 8938, Statement of Specified Foreign Financial Assets.
A U.S. Person that failed to file the required foreign reporting forms may be subject to severe civil and even criminal penalties for their failure to file. For example, a willful failure to file an FBAR can result in civil penalties up to the greater of $100,000 or 50% of the value of the account in question, and could include criminal penalties. It should be noted that even if you do not report a foreign account on the applicable form, it is likely that the institution holding your offshore account will report you to the IRS due to Foreign Account Tax Compliance Act (FATCA), which requires all foreign financial institutions to disclose any account holders who are U.S. Persons to the IRS.
In 2012, in an effort to encourage offshore accounts reporting compliance, the IRS instituted the OVDP. The OVDP is designed to protect taxpayers subject to willful nondisclosure penalties by minimizing the potential for criminal liability and reducing the maximum offshore penalty to 27.5% of total account value (down from 50%). In order to be eligible for this program the taxpayer’s source of funds needs to be legal. Additionally, the taxpayer’s disclosure must come before the IRS has initiated a civil or criminal investigation, civil examination, acquired information, or received information from a third party about the taxpayer’s noncompliance regarding the specific liability of the taxpayer that they are attempting to disclose.
However, as stated above, the IRS is winding down the OVDP, which will prevent noncompliant U.S. Persons from utilizing a program that provides comfort in knowing exactly what the potential civil liability will be. Further, while some of the other programs instituted by the IRS to alleviate noncompliant taxpayers such as the Delinquent FBAR Submission Procedures and Delinquent International Information Return Submission Procedures will continue to exist, meeting the requirements for them could prove difficult. For example, they will not all be available for those who willfully failed to report income, whereas the OVDP is. The bottom line is that for taxpayers who have been noncompliant in reporting offshore accounts and income until now, the amount of time to disclose those accounts and income with criminal immunity is coming to a close.
If you are concerned that you may have unreported foreign accounts or income, Squar Milner has professionals that can look into your situation and advise you on the best possible solution. For any questions or advice related to the above please contact Michael Fejes at 310.826.4474.