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IRS’s Offshore Voluntary Disclosure Program and its Implications for Individuals

The IRS to end Offshore Voluntary Disclosure Program – Taxpayers with undisclosed foreign financial assets urged to enter program before it closes in September 2018.

What is happening?

The Internal Revenue Service (“IRS”) has announced that it will begin to ramp down the 2014 Offshore Voluntary Disclosure Program (“OVDP”) and close the program later this year.  The IRS is urging taxpayers with undisclosed foreign financial assets to enter the OVDP now, before the program closes to new applications on September 28, 2018.

Why is this important to me?

In general, United States citizens, resident aliens, trusts, estates, domestic entities and certain non-resident aliens are required to report the existence of, and any income associated with, interests in foreign financial accounts and foreign financial assets under general income tax laws, regulations, and the Foreign Account Tax Compliance Act (“FATCA”).  Taxpayers with foreign information and FATCA reporting obligations may be required to file certain foreign information reporting forms (for example, Forms 8938, 5471, or 3520) with their income tax return and FinCEN Form 114 with the Department of the Treasury’s Financial Crimes Enforcement Network.  Taxpayers who have foreign information and FATCA reporting obligations and who fail to comply with their obligations may be subject to substantial penalties, including potential criminal penalties.  For example, in the case of non-willful failure to file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), a penalty of up to $10,000, per account, per year may be imposed.  Taxpayers who willfully fail to file an FBAR may be subject to penalties up to the greater of $100,000 or 50 percent of the account balance.

The OVDP provides non-compliant taxpayers with the opportunity to come forward regarding the existence of their foreign financial accounts / foreign financial assets and to avoid imposition of the draconian penalties associated with non-compliance.  The IRS has offered the OVDP, in various forms, since its initial launch in 2009, and more than 56,000 taxpayers have used one of the programs to voluntarily come into compliance with their reporting obligations.  A total of $11.1 billion in back taxes, interest and penalties have been collected over the course of the OVDP’s existence.

Taxpayers are often unaware that they may be subject to foreign information and FATCA reporting.  For example, some taxpayers mistakenly assume that they do not need to report their foreign accounts to the United States if they are paying tax on the income associated with those accounts in a foreign jurisdiction, or if there is no income associated with their foreign accounts.   Similarly, taxpayers often mistakenly assume that foreign accounts which are excluded from taxation in foreign jurisdictions do not need to be reported for United States tax purposes (for example, foreign tax-deferred retirement accounts, or foreign government-sponsored or mandated pension plans).  The definitions of foreign financial accounts and foreign financial assets are specially defined terms, are purposefully broad, and can be a trap for the unaware.

Takeaway

The OVDP provides taxpayers who are not presently in compliance with their foreign information and FATCA reporting obligations with the opportunity to become compliant.  Furthermore, the ramp down of the OVDP does not mean that the IRS is no longer interested in finding non-compliant taxpayers.  The IRS is receiving more information every year from foreign financial institutions regarding account holders with ties to the United States, making it increasingly difficult for non-compliant taxpayers to assume that the existence of their foreign accounts will continue to remain unknown to the United States government.  The IRS has noted that it will continue to use tools besides voluntary disclosure to combat offshore tax avoidance, including taxpayer education, Whistleblower leads, civil examination and criminal prosecution.

A separate program, the Streamlined Filing Compliance Procedures program, will remain in place and available to eligible taxpayers; however, the IRS has previously noted that it may end the Streamlined Filing Compliance Procedures program at some point as well.

If you are concerned that you may have compliance issues arising from the non-disclosure of foreign financial accounts / foreign financial assets, you are encouraged to contact Aaron Valenti as soon as possible, as your opportunity to utilize the OVDP will end soon.

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