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History and Success of the Main Voluntary Disclosure Programs

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In order to bring back into the system the non-compliant taxpayers with undisclosed foreign assets, the IRS created various offshore voluntary disclosure programs. The voluntary disclosure programs have been part of a wider effort to stop offshore tax evasion, which includes enhanced enforcement, criminal prosecutions and implementation of third-party reporting via the Foreign Account Tax Compliance Act (FATCA). Recently, the IRS shared the statistics regarding the success of its three latest and most voluntary disclosure programs: 2009 OVDP, 2011 OVDI and 2012 OVDP (recently updated to become the 2014 OVDP).

Results for All Three Programs

The outcome of the three voluntary disclosure programs is indeed impressive. Overall, the three voluntary programs have resulted in more than 45,000 voluntary disclosures from individuals who have paid about $6.5 billion in back taxes, interest and penalties.

Let’s take a closer look at each program.

2009 OVDP

This was the first of the “troika” of the latest voluntary disclosure programs. The IRS announced the 2009 Offshore Voluntary Disclosure Program (OVDP) in March 2009. It offered taxpayers an opportunity to avoid criminal prosecution and a settlement of a variety of civil and criminal penalties in the form of single miscellaneous offshore penalty. It was based on existing voluntary disclosure practices used by IRS Criminal Investigation.

Generally, the miscellaneous offshore penalty for the 2009 program was 20 percent of the highest aggregate value of the unreported offshore accounts from 2003 to 2008. Participants were also required to file amended or late returns and FBARs for those years.

In the 2009 OVDP the IRS received 15,000 disclosures prior to the October 15, 2009 closing date. It resulted in the collection of $3.4 billion in back taxes, interest and penalties. It also led to another 3,000 disclosures after the closing date.

No doubt that the success of the 2009 OVDP was made possible by the IRS victory in the UBS case in August of 2008 and the action it started to take to follow-up on this victory. The UBS case became the turning point in the offshore compliance for U.S. taxpayers because the victory was achieved over one of the largest banks in the world in the country which was considered to be the most formidable fortress of bank secrecy for centuries.

2011 OVDI

While the 2009 program was the first of the post-UBS voluntary disclosure programs, the 2011 Offshore Voluntary Disclosure Initiative (OVDI) was the program that established the offshore voluntary disclosure programs as one of the main pillars of U.S. voluntary tax compliance. The 2011 OVDI was announced in February of 2011 and lasted until September 9 of that year (originally, it was supposed to close on August 31, 2011, but the IRS extended the deadline to September 9).

Generally, participants of this program paid a 25% miscellaneous offshore penalty on the highest aggregate value of unreported offshore accounts from 2003 to 2010. In addition, some participants were eligible for special 5% or 12.5% penalties, but there were very strict requirements to qualify for this treatment.

The 2011 OVDI was extremely popular. It drew 15,000 disclosures and resulted in the collection of $1.6 billion in back taxes, interest and penalties for the 70 percent of cases that were closed that year.

2012 OVDP

After analyzing the results from the two prior voluntary disclosure programs and reflecting on the best way to induce tax compliance (while intensifying international tax enforcement and looking forward to the implementation of FATCA), the IRS created a new 2012 Offshore Voluntary Disclosure Program (2012 OVDP) in January of 2012 and 2014 OVDP now closed.

In constructing the 2012 OVDP rules, the IRS drew on its experience from the experience from the prior voluntary disclosure programs, revised the terms of the 2011 OVDI program and made the 2012 OVDP permanent until further notice. Under the 2012 OVDP, participants paid a penalty of 27.5 percent of the highest aggregate balance or value of offshore assets during the prior eight years. The 5% or 12.5% penalties remained in effect for certain taxpayers. This 2012 program has drawn 12,000 disclosures since its inception.

2012 Streamlined Option

In June of 2012, the IRS expanded its voluntary disclosure programs beyond 2012 OVDP and added an option to the existing disclosure program that enabled some U.S. citizens and others residing abroad to catch up on their filing requirements and avoid large penalties if they owed little or no back taxes. This option took effect in September of that year.

2014 Changes to Offshore Voluntary Disclosure Programs

In June of 2014, the IRS announced major changes in the 2012 offshore account compliance programs. As a result of these changes, the taxpayers now currently have to analyze up to five different voluntary disclosure paths. The more prominent changes to the voluntary disclosure programs include: new 2014 OVDP with the double-penalty structure of 27.5% and 50%, major enhancement of the Streamlined Foreign Offshore Procedures, introduction of the brand-new Streamlined Domestic Offshore Procedures with its new 5% penalty structure, slightly modified Delinquent FBAR Submission rules, and slightly modified Delinquent Information Return Submission rules (which partially incorporates now the statutory Reasonable Cause exception).

The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations.

Contact Sherayzen Law Office for Professional Advice Regarding Your Offshore Voluntary Disclosure Options

If you have undisclosed foreign accounts and other foreign assets, you are likely to face very steep penalties if the IRS discovers your non-compliance. This is why it is prudent to consider your voluntary disclosure options as soon as possible.

Sherayzen Law Office is a firm that specializes in international tax compliance and offshore voluntary disclosures. Our experienced international tax law firm can offer professional advice with respect to your voluntary disclosure options and conduct the entire offshore voluntary disclosure for you. Contact Us to Schedule Your Confidential Consultation Now!

2014 OVDP Lawyers: August 4 2014 Deadline and New 50% OVDP Penalty

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2014 OVDP Lawyers identified August 4, 2014, as an important filing deadline to any U.S. taxpayers who intend to enter into the IRS Offshore Voluntary Disclosure Program (“OVDP”). This new deadline stems directly from the recent 2014 update to the OVDP. In this article, I want to briefly describe the deadline and its background, and why so many 2014 OVDP Lawyers are concerned about it.

2014 OVDP Lawyers: 2014 OVDP Background

The 2014 OVDP (really just an update to 2012 OVDP), like its predecessors, is a voluntary disclosure program created by the IRS to allow U.S. taxpayers with undisclosed foreign accounts to come forward under specific terms. The biggest advantage to participating in the OVDP is the reduction of civil penalties (especially in a willful situation) and avoidance of criminal liability.

Over the years, the offshore voluntary disclosure programs have gotten tougher and tougher, which, in the context of the 2012 OVDP, was considered by many 2014 OVDP Lawyers as unfair to taxpayers who were non-willful in their inability to comply with the U.S. tax requirements, especially FBARs (the Report of Foreign Bank and Financial Accounts).

Drawing on its own prior OVDP experience, the IRS finally agreed with the 2014 OVDP Lawyers and has made tremendous change to the OVDP on June 18, 2014. This new change is now known as the 2014 OVDP.

2014 OVDP Lawyers: The Resurrection of Willfulness vs. Non-Willfulness

One the biggest changes to the OVDP program is the resurrection of the distinction between willful and non-willful failure to comply with U.S .tax laws – a distinction that has always existed in the statutory framework of U.S. tax laws, but has been ignored by the designers of the OVDP until June 18, 2014.

As a result of this new approach to OVDP, many 2014 OVDP Lawyers now argue that 2014 OVDP is strictly reserved to U.S. taxpayers who were willful in their non-compliance with the FBAR deadlines and other U.S. international tax reporting requirements. The non-willful U.S. taxpayers now have the option of entering a Streamlined Procedure to do their voluntary disclosure.

2014 OVDP Lawyers: August 4 Increase in Offshore Penalty to 50%

Due to this re-discovered distinction between willful and non-willful conduct, the IRS now appears to have assumed that anyone entering OVDP has willfully violated U.S. tax laws. Hence, as of August 4, 2014, the IRS intends to toughen the OVDP penalties.

Under the prior 2012 OVDP, the 2014 OVDP Lawyers were familiar with a three-tier penalty structure with the penalty rates of 5%, 12.5% and 27.5%. The 2014 OVDP completely replaced this structure with a new two-tier penalty structure. Until August 4, 2014, everyone in the OVDP or submitting the preclearance letter to the IRS Criminal Investigation Unit will be subject to a 27.5% penalty.

However, beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50% Offshore Penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation, an event has already occurred that constitutes a “public disclosure”.

2014 OVDP Lawyers: Definition of “Public Disclosure”

Many 2014 OVDP Lawyers are now becoming familiar with a new definition of what constitutes a “public disclosure” under the new 2014 OVDP rules. There are three events specifically listed by the IRS as constituting “public disclosure”.

First, there is a public disclosure of a foreign account if “the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person.” FAQ 7.2 for 2014 OVDP. In other words, if the your foreign bank is under the investigation from the IRS or the Department of Justice, your account is deemed to have been publicly disclosed by the IRS.

In essence, this means that U.S.-held accounts in any banks designated as Category One banks (contact 2014 OVDP Lawyers for further clarification of this definition) by the DOJ Program for Swiss Banks are deemed to have been publicly disclosed. Moreover, other banks can be easily added by the IRS to the list and any accounts held in these banks will also be subject to the 50% penalty.

Second, there is a public disclosure of a foreign account if “the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person.” Id.

Finally, there is a public disclosure of a foreign account if “the foreign financial institution or other facilitator has been identified in a court- approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a ‘John Doe summons’) at the foreign financial institution or have accounts established or maintained by the facilitator.” Id. The IRS further states that examples of a public disclosure include, among others, a public filing in a judicial proceeding by any party or judicial officer, or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.

2014 OVDP Lawyers: June 18, 2014 List of Banks Included in the Definition of “Public Disclosure”

Here is the IRS list of these financial institutions current as of June 18, 2014 (as stated above, the IRS can expand this list at any moment):

1. UBS AG
2. Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
3. Wegelin & Co.
4. Liechtensteinische Landesbank AG
5. Zurcher Kantonalbank
6. swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
7. CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
8. Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
9. The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
10. The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates

2014 OVDP lawyers should be aware of this list when talking with their clients.

2014 OVDP Lawyers: Scope of 50% Penalty

Understanding the scope of the 50% penalty is very important for the 2014 OVDP lawyers and their clients. The crucial feature of the 50% penalty is that, once it is applied to one account or asset, the IRS will apply it to all of the taxpayer’s assets subject to the Offshore Penalty. This even includes accounts which are held at another bank and which have not been “publicly disclosed”.

Contact Sherayzen Law Office for Help With YourVoluntary Disclosure of Foreign Accounts

If you have undisclosed foreign accounts and any other foreign assets, you should contact Sherayzen Law Office for professional legal help with your offshore voluntary disclosure. The new 2014 OVDP contains many crucial deadlines and new options. Our experienced international tax law firm has helped hundreds of U.S. taxpayers throughout the world and we can help you.

Contact Us to Schedule Your Confidential Consultation.