The Offshore Voluntary Disclosure Program, which offers US taxpayers the chance to pay substantially less in back taxes, interest, and penalties on unreported offshore accounts and assets, will close come September 28. The Internal Revenue Service aims to stay actively engaged in the international tax arena, so taxpayers with unreported offshore accounts and assets should consider whether to enter the program before it ends—doing so means reduced penalties and the opportunity to avoid criminal prosecution for failing to report foreign accounts and assets.
The Internal Revenue Service (IRS) announced on March 13 that it will close the Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018. The OVDP, which has been in effect since March 2009, has allowed US taxpayers with unreported foreign bank accounts and other foreign financial assets to pay reduced monetary penalties, tax, and interest owed, and, most importantly, to avoid criminal prosecution. Taxpayers with unreported offshore accounts and assets need to seriously evaluate whether to take advantage of the OVDP before the window to do so shuts permanently.
Over the last nine years, more than 56,000 taxpayers have entered the program and paid a total of $11.1 billion in back taxes, interest, and penalties. Notwithstanding this success, Acting IRS Commissioner David Kautter explained why the IRS was closing the OVDP: “Taxpayers have had several years to come into compliance with US tax laws under this program. All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.” The IRS pointed out that the number of taxpayer disclosures under the OVDP peaked in 2011, when about 18,000 people came forward, and fell through the years to just 600 disclosures in 2017.
For those who entered the OVDP and completed its requirements, it offered taxpayers a chance to pay substantially less than they otherwise would have owed for failing to report foreign bank accounts and assets and failing to pay the corresponding tax on any income generated by such offshore accounts and assets. For instance, if a taxpayer failed to file a Report of Foreign Bank and Financial Accounts, or FBAR, for a foreign bank account for the last 15 years and failed to report the income generated by that account every year, the OVDP only required the taxpayer to go back 8 years to file FBARs and amend tax returns; pay tax, interest, and only a 20% penalty on the tax owed for those 8 years; and pay an additional FBAR penalty for only the year with the highest balance during those 8 years. This reduced FBAR penalty could be 20%, 25%, or 27.5% of the highest amount of the account for just one year, depending on when one entered the OVDP. Had the taxpayer not entered the OVDP, then the taxpayer could have been facing a maximum of 50% FBAR penalties for each year the form was willfully not filed, plus tax, penalties, and interest going back 15 years if the IRS asserted the fraud penalty.
Even though the price of admission to the OVDP has been fairly steep, the program’s most important benefit has been taxpayers not facing criminal prosecution. Criminal penalties for FBAR violations top out at a maximum of five years’ imprisonment and a $250,000 fine per violation. Tax charges carry similar penalties. These offenses are all felonies that can deprive one of liberty as well as destroy one’s reputation, credit, livelihood, and prospects for the future.
To demonstrate that there have been real teeth behind the OVDP’s offer of criminal nonprosecution, since 2009, the US Department of Justice (DOJ) has brought charges and obtained convictions against more than 100 individuals who failed to report their foreign bank accounts but did not enter the OVDP. These felony convictions have occurred all over the country, involving taxpayers of all ages, and the sentences have spanned from probation to many years in prison. In addition, these taxpayers have paid 50% FBAR penalties (in some cases for multiple years) and all the tax, interest, and fraud penalties owed.
The importance of getting into the OVDP and obtaining criminal amnesty has only risen over the years as the IRS and DOJ have obtained huge amounts of data about US taxpayers’ overseas financial activity from various sources. This information has come in from the tens of thousands of taxpayers who entered the OVDP, the Swiss Bank Program that received information from more than 100 Swiss banks, whistleblowers who can receive up to 30% of the amounts recovered, foreign financial institutions complying with the Foreign Account Tax Compliance Act (FATCA), John Doe summonses, and cooperation among the international tax enforcement community.
Don Fort, chief of the IRS Criminal Investigation Division, has confirmed that the IRS will continue to stay very active in the international tax arena: “The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics. Stopping offshore tax noncompliance remains a top priority of the IRS.” IRS Large Business & International Division Commissioner Douglas O’Donnell previously detailed how the IRS intends to proceed in the offshore arena: “We are evaluating incoming information to detect accountholders who have evaded reporting overseas assets and income, and we are using this information to further untangle the web of financial institutions and intermediaries helping with this evasion. We have expanded our investigations to other regions of the world [outside of Switzerland], and we will continue to apply these techniques to help protect honest taxpayers.”
The IRS’s message is clear—the world in which a US taxpayer can hide his or her money in secret foreign bank accounts has grown increasingly smaller; the IRS knows where to look; and the IRS is committed to doing so.
The impending closure of the OVDP should sound a loud alarm to those US taxpayers with unreported foreign bank accounts and other unreported foreign financial assets who have been waiting to see which way the winds will blow and gambling with being detected. The odds of getting caught have increased, and the opening to avoid criminal prosecution—and higher penalties—is about to close.
If you would like advice on how to take advantage of the OVDP prior to its cessation on September 28, 2018, or advice on how to deal with a criminal or civil offshore tax investigation being conducted by the IRS or DOJ, please contact any of the following Morgan Lewis lawyers:
 US Dep’t of Justice, Justice Department Reaches Final Resolutions Under Swiss Bank Program (Dec. 29, 2016).