On March 13, 2018, the Internal Revenue Service announced that the 2014 Offshore Voluntary Disclosure Program (OVDP) will terminate on Sept. 28, 2018. This has important implications for U.S. taxpayers that have willfully failed — or could be viewed by the IRS as having willfully failed — to disclose foreign accounts, assets and associated income.
The OVDP provides U.S. taxpayers the opportunity to correct tax noncompliance and disclose to the IRS previously undisclosed non-U.S. assets, accounts and associated income. The OVDP was specifically designed for taxpayers with potential exposure to criminal liability due to willful failure to report foreign financial assets and accounts and pay all resulting U.S. federal income taxes due. The OVDP process can be onerous and requires, among other things:
- filing U.S. federal income tax returns and foreign bank account reports (FBARs) for the preceding eight years;
- paying all outstanding U.S. federal income taxes shown as owed on those returns, with interest and potential penalties; and
- paying an additional one-time miscellaneous offshore penalty.
Upon successfully completing the OVDP process, the taxpayer enters into a closing agreement with the IRS that precludes IRS examination of the eight years covered in the OVDP submission. Additionally, and most importantly, the IRS will not recommend criminal prosecution to the Department of Justice for any issues related to the tax noncompliance.
While the OVDP is set to expire in September 2018, other programs will remain available to noncompliant taxpayers. For example, the Streamlined Filing Compliance Procedures, designed for taxpayers whose tax noncompliance was not willful, will continue to be available to eligible taxpayers. This streamlined process allows taxpayers who have unreported income to (a) file U.S. federal income tax returns for the preceding three years and FBARs for the preceding six years; and (b) pay all outstanding income taxes owed, along with interest and, for U.S. resident taxpayers only, a potential one-time miscellaneous offshore penalty. To be eligible for the streamlined process, taxpayers must certify that their failure to report foreign financial assets did not result from willful conduct. Because the streamlined process does not conclude with the taxpayer entering into a closing agreement with the IRS, potential exposure to later IRS audit and criminal charges remain. Taxpayers concerned with criminal exposure should consult with an adviser concerning the OVDP discussed above.
The appropriate avenue to come into compliance with the U.S. tax system must be evaluated on a case-by-case basis. However, for individuals who may be exposed to criminal liability for U.S. tax noncompliance due to willful concealment of non-U.S. assets or accounts, time is of the essence. These individuals should immediately consider their option to enter the OVDP prior to Sept. 28, 2018, to significantly minimize possible criminal prosecution.