Page 2 - Reporting Undisclosed Foreign Assets: The Clock Is Ticking

applies to any offshore asset that is related to tax noncompliance, not just to foreign bank accounts.
taxpayers, no penalty is imposed. A tax- payer utilizing this program must certify under penalties of perjury that the non- compliance was not willful.
manner will need to satisfy all of the requirements of making a voluntary dis- closure noted above and should be mindful of two things in particular.
For purposes of the OVDP, a foreign asset is related to tax noncompliance if the asset either generated unreported gross income or was funded or acquired with unreported income. The miscellaneous off- shore penalty is increased from 27.5% to 50% for those taxpayers who held accounts at any foreign bank that has pub- licly been identified as either being under investigation, cooperating with the IRS, or the subject of a court-approved summons seeking information about U.S. taxpayers. A taxpayer who maintains even a single account at such a bank will be subject to the 50% penalty rate on all OVDP assets.
n Delinquent FBAR procedures. Taxpayers who are fully tax compliant, but who have not filed required FBARs, can use these procedures to come into compliance without the imposition of any penalties.
First, such taxpayers must make sure that they win the race by getting to the IRS before the IRS learns of their non- compliance. A taxpayer who comes for- ward after the IRS has learned of his con- duct is not deemed to have made a timely voluntary disclosure. While the issuance of a summons to a third party seeking information about a class of people will not disqualify such taxpayers from making a voluntary disclosure under the IRS’s gen- eral voluntary disclosure policy, once the IRS has obtained the information from the third party that evidences a taxpayer’s non- compliance, that taxpayer is disqualified from making a voluntary disclosure; this is so even if the taxpayer is not aware that her information has been turned over to the IRS. As the IRS moves forward with its many sources of information, including its recent focus on unreported cryptocur- rency-related income, taxpayers should come forward before their noncompliance comes to light.
In explaining its reasoning for closing the OVDP, the IRS noted that at the pro- gram’s peak in 2011 it attracted 18,000 taxpayers, while in 2017 only 600 tax- payers came forward. The IRS stressed, however, its continued focus on offshore enforcement and noted it would turn to other enforcement tools such as the Foreign Account Tax Compliance Act (FATCA), intergovernmental agreements between the United States and other countries, automatic third-party account reporting, John Doe summonses, and other “data-rich sources” to ensure com- pliance. The announcement also clarified that the IRS’s other offshore compliance programs would remain available after September 28, 2018, to those taxpayers who qualify under their terms. These include the following:
n Streamlined filing compliance proce- dures. Taxpayers whose tax and report- ing noncompliance is not willful may be able to utilize this program to come into compliance by filing accurate tax returns for the past three tax years and FBARs for the past six years. For resident tax- payers, a penalty equal to 5% of the value of the noncompliant foreign finan- cial assets is imposed; for nonresident
While a full review of these programs is beyond the scope of this article, it is important to note that these programs are narrowly tailored and are generally only available to those taxpayers whose conduct was not willful or nefarious. These pro- grams do not provide any protection from criminal prosecution because the conduct they are intended to cure is not criminal. Taxpayers whose conduct was willful and who thus face the possibility of criminal prosecution are best served by making a voluntary disclosure.
Closing the OVDP
AUGUST 2018 / THE CPA JOURNAL
61
n Delinquent international information return procedures. Taxpayers who are fully tax compliant, but who have not filed required International Information Returns (such as Form 5471, 3520, or 3520-A), and who have reasonable cause for such failure, can use these procedures to come into compliance without the imposition of any penalties.
Taxpayers have until September 28, 2018, to submit the OVDP Letter and Attachments and thus qualify for the terms of the current OVDP. Taxpayers who need to make a voluntary disclosure of offshore assets would therefore be best served to act quickly. Any subsequent program offered by the IRS is likely to come with even stiffer penalties, as evidenced by the increase in penalty rates between the orig- inal 2009 OVDP and the current OVDP.
after the
The Future
For those taxpayers who need to make a voluntary disclosure of offshore matters after the deadline, the IRS’s general vol- untary disclosure policy will continue to be available. Taxpayers proceeding in that
Michael Sardar, JD, is a tax controversy attorney at Kostelanetz & Fink LLP, New York, N.Y.
Second, taxpayers and their advisors will need to grapple with the difficulty of making a voluntary disclosure without any certainty as to the financial cost of making such a voluntary disclosure.
V oluntary disclosures made
deadline will not be subject to any fixed penalty regime and will likely result in penalties that are even higher than the already steep 2014 OVDP penalty struc- ture. This may lead some taxpayers to try to shoehorn their situation into one of the non-OVDP programs discussed above. Taxpayers struggling with this dilemma will need to be guided by competent pro- fessionals who can analyze the facts of their case and objectively determine whether their conduct was willful. q