Reporting Undisclosed Foreign Assets: The Clock Is Ticking
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COLUMNS I Tax Practice & Procedure
Reporting Undisclosed Foreign Assets
The Clock Is Ticking
By Michael Sardar
On March 13, the IRS announced that it will close the Offshore Voluntary Disclosure Program (OVDP), effec- tive September 28, 2018. In the announcement, the IRS encouraged taxpayers who need to disclose noncompliant and unreported foreign accounts and assets to come forward before the September deadline. Qualifying taxpayers who have unre- ported foreign accounts can still use the OVDP to come into compliance while avoiding the risk of criminal prosecution and minimizing otherwise applicable civil penalties, but only until that date. As of this writing, it not yet known whether the IRS will announce a new program or initiative to replace the OVDP.
ments for the payment of such). Finally, the disclosure must not relate to illegal-source funds; however, untaxed monies are not deemed illegal.
For decades, the IRS has had a voluntary disclosure policy, under which it would not refer for criminal prosecution tax- payers who voluntarily confessed their tax sins. Under the policy contained within the Internal Revenue Manual (IRM), a tax- payer must make a disclosure to the IRS prior to the IRS learn- ing of the taxpayer’s noncompliance. To effect a successful voluntary disclosure, the taxpayer must provide a complete and truthful disclosure; cooperate with the IRS; and pay any tax, interest, and penalties that are due (or make good-faith arrange-
Background
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This longstanding policy is merely a criminal policy and has no impact on the IRS’s ability to seek civil penalties that would apply to a taxpayer’s noncompliance. Such civil penalties can include the familiar tax penalties, including the 75% fraud penalty, as well as penalties for failing to file a report of foreign bank and financial accounts (FBAR) or other International Information Returns, such as IRS Forms 5471, 3520, 3520-A, and others. Taxpayers who made disclosures pursuant to this policy did not know in advance which penalties would be applied by the IRS and what, if any, penalty mitigation they would receive.
As part of the IRS’s efforts to combat offshore tax evasion, the IRS announced its first OVDP in 2009. The 2009 OVDP built upon the IRS’s voluntary disclosure policy by adding a fixed civil penalty regime that would be applicable to those who came forward under the program. Thus, taxpayers could now avoid criminal prosecution by making a voluntary disclo- sure while also having certainty as to the financial price they would pay as part of the disclosure. This fixed and predictable penalty structure likely contributed to the OVDP’s success; as of March 2018, more than 56,000 taxpayers have come forward under the OVDP and have paid $11.1 billion in back taxes, interest, and penalties.
While the 2009 OVDP has since been replaced with the cur- rently applicable 2014 OVDP, the overall structure has remained the same, albeit with an uptick in the penalty rate with each sub- sequent iteration. In its current form, the program generally requires taxpayers to file eight years of accurate amended (or original) tax returns reflecting any omitted income from the off- shore assets and pay the tax due, plus an accuracy-related penalty equal to 20% of the additional tax due. In addition, in lieu of the FBAR penalty and all other information return penalties, partic- ipating taxpayers must pay a miscellaneous penalty equal to 27.5% or 50% of the highest aggregate balance of the previously unreported foreign assets during the eight-year look-back period. This penalty, referred to as the miscellaneous offshore penalty,
The Current Offshore Voluntary Disclosure Program


































































































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