On June 3, 2014, IRS Commissioner Koskinen, speaking at an OECD conference, stated that the IRS is considering revising the current Offshore Voluntary Disclosure Program (OVDP) to reduce penalties on U.S. resident foreign account holders who were not willfully hiding their investments overseas. A copy of his statement can be found here. This is great news for many taxpayers who failed to timely file FBARs disclosing their foreign accounts, but have been hesitant to come forward under the current OVDP program. This program indiscriminately imposes a 27.5% penalty on the highest aggregate account balance of all participants (with very narrow exceptions). The current program treats the taxpayer who has purposefully hidden money in accounts overseas to evade taxes in the same as the taxpayer who has overseas accounts for benign purposes, such as holding gifts or inheritances from overseas relatives or holding funds while living overseas. Such non-willful account holders are typically unaware of their duties to file an FBAR, and upon learning of the heavy fines associated with the current program, are left with few options. Hopefully, we will see this change soon.
The original OVDP program was instituted in 2009, with revised programs coming into effect in 2011 and 2012. Since 2009, the IRS has collected more than $6 billion in back taxes, interest, and penalties under these programs
Under the current OVDP, willful and non-willful taxpayers are both subject to the 27.5% penalty, though any taxpayer may choose to “opt out” of the program. An “opt-out” taxpayer is subject to a full-blown examination during which he or she can argue that no penalty should be applied due to reasonable cause. The opt-out procedure is not attractive for many taxpayers because it is uncertain, time-consuming, and more expensive. Due to the uncertainty and expense of opting out, the typical non-willful taxpayer is faced with three less than ideal options: (1) stay in the program and pay the large penalties, (2) quietly disclose, which could lead to hefty fines if the return is picked up for audit, or (3) not disclosure at all with a similar audit risk. Nondisclosure is becoming more risky as foreign banks are eagerly disclosing extensive information about their U.S. account holders to the IRS under FATCA and to the Tax Division pursuant to Department of Justice investigations. Quiet disclosure will be under even greater scrutiny after the jury’s verdict in the recent Zwerner case where a taxpayer who quietly disclosed now faces penalties equal to 150% of the value of his foreign accounts. For more about the Zwerner case, click here.
Taxpayers who have previously decided not to disclose may want to come forward if the current OVDP program is modified to reduce penalties for non-willful taxpayers. Foreign account holders who are concerned about IRS penalties can contact any of the members of our group below, all of whom specialize in these issues.