7 Pages Posted: 12 Jun 2012
Date Written: March 1, 2012
On January 9, 2012, the IRS announced yet another offshore voluntary disclosure program (the 2012 OVDI) following on the success of the 2009 Offshore Voluntary Disclosure Program (the 2009 OVDP) and the 2011 Offshore Voluntary Disclosure Initiative (the 2011 OVDI), which were announced many years after the 2003 Offshore Voluntary Compliance Initiative (OVCI) and the 2003 Offshore Credit Card Program (OCCP). Voluntary disclosure initiatives typically offer reduced penalties in exchange for taxpayers voluntarily coming into compliance before the IRS is aware of their prior tax indiscretions.
The 2012 OVDI is patterned after the 2011 OVDI but increases the maximum “FBAR-related” penalty from 25% to 27.5% of the highest account value at any time between 2003 and 2010. The 2012 OVDI does not have a stated expiration date but can be terminated by the IRS at any time as to specific classes of taxpayers or as to all taxpayers. In all, the IRS has seen at least 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed in September 2011, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new 2012 OVDI.
Most individuals wrongly believe that prior tax indiscretions can somehow be routinely resolved in a purely civil manner, without a criminal investigation or prosecution. However, within the past few years, at least 40 U.S. taxpayers and another 20 advisors (bankers, lawyers, consultants, etc.) have been criminally indicted for activities associated with U.S. persons holding undeclared interests in foreign financial accounts. Untold others are targets or subjects of ongoing federal criminal investigations.
If the initial taxpayer contact is from the IRS, a purely civil tax resolution is no longer certain and the likelihood of substantial civil penalties is significant. If the initial taxpayer contact regarding an undisclosed interest in a foreign financial account is from the Department of Justice, a purely civil tax resolution is anything but certain and is perhaps unlikely. Actions designed to avoid detection by the government will surely increase the potential for criminal prosecution.
The government is to be highly commended for its ongoing enforcement efforts which are destroying the ability of a U.S. taxpayer to maintain an undisclosed, “secret” foreign financial account. Foreign account information is flowing into the government through the development of relationships with corresponding taxing agencies in other countries; treaty based information exchanges; use of the civil summons process seeking identification of account holders in foreign institutions operating within the jurisdiction of the United States; indictments of foreign institutions and their bankers operating within the jurisdiction of the United States; receipt of information from whistleblowers and informants; cooperation from taxpayers, advisors, foreign banks and bankers who have been criminally prosecuted; the threat of future disclosures pursuant to the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (Form 8938 and new IRC § 6038D); and data mining submissions received from participants in initiatives designed to encourage voluntary compliance.
Taxpayers having undisclosed interests in foreign financial accounts must consult competent tax professionals before deciding to participate in the 2012 OVDI. Many taxpayers will decide to submit a voluntary disclosure based on a personal desire to come into compliance now that they are aware of the FBAR and other foreign account reporting requirements. Others may simply want to move on with their lives. Some may decide to risk detection by the IRS and the imposition of substantial penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution. Although the 2012 OVDI penalty regime may seem overly harsh for many, the decision to participate should include an economic analysis of the taxpayers projected future earning power that could be generated from the funds held offshore. Participating taxpayers may well benefit by repatriating stagnant foreign funds into a recessionary domestic economy with a suffering real estate market and business opportunities lurking behind every corner.
Keywords: IRS, FBAR, OVDI, OVDP, voluntary disclosure, tax, foreign account, UBS, FATCA, offshore voluntary disclosure initiative, offshore voluntary disclosure program, foreign financial account, 5471, 3520, Shulman
Suggested Citation: Suggested Citation