The Offshore Voluntary Disclosure Program Ends September 28, 2018. What happens next?

By of MillarLaw A Professional Corporation On Sunday, September 2, 2018

The end of the Offshore Voluntary Disclosure Program (“OVDP”) may mean nothing at all to the hard core taxpayers who will never voluntarily come forward. For many of those individuals. who chose the “wrong” foreign financial institution or financial advisor the prospect of paying fifty percent (50%) of the highest account balance in the preceding eight (8) years has never been acceptable. During meeting s with several such potential clients the universal feeling was that they would rather risk being caught then paying a fifty percent FBAR penalty. For those individuals, I would like to point out that Paul Manafort never thought that he would get caught and prosecuted either. Not all OVDP cases are “fifty percent” cases, in fact the vast majority of the cases I have handled have not been. But after September 28, 2018 the method of coming forward and the attendant costs are murky.
The IRS has announced that the long standing Voluntary Disclosure process will be available to those taxpayers who wish to come forward. The process does not define the terms and conditions under which a taxpayer will avoid criminal prosecution exchange for disclosure of previously unreported foreign accounts except to require payment of all tax and interest on unreported income. Penalties are left open to be determined. The IRS needs to make the value proposition clear or it may face an unreasonable enforcement burden.
The IRS will continue to be responsible for enforcement of the disclosure laws under the Bank Secrecy Act (relating to FBARS) and under the Internal Revenue Code . The information about taxpayers with foreign financial accounts is being provided to the IRS by foreign financial institutions under the Foreign Account Tax Compliance Act (“FATCA”). The FATCA Reports disclose to the IRS the pertinent information about non-compliant U.S. taxpayers. Non-complaint taxpayers are those who are account holders , or beneficial owners of the account, who refuse to provide information requested by the institution about whether they are or are not U.S. persons. Many of these people are “dual nationals ” . It is widely believed that the IRS will match the list of “non-compliant” taxpayers with other databases to determine its future candidates for enforcement programs. Which brings me to the crux of the matter. What options will taxpayers have after September 28 ?

There is one thought that is popular among government officials that there is no need to do anything other than discover the procrastinators and enforce the law. That means rigorous audits of people on the “non-compliant” lists followed by imposition of the maximum FBAR penalties (the greater of $100,000 or 50% of the highest balance per year for up to 6 years) and assertion of all other applicable penalties under the Internal Revenue Code. Such penalties include the 75% Civil Fraud Penalty, and the Information Return Penalties. The Criminal Investigation Division will selectively recommend prosecution. The government has a 95% conviction rate in criminal tax cases. Often as in the Manafort case, Money Laundering charges are added which enhance sentencing.

The prospect for the future for taxpayers who “willfully” failed to disclose their foreign financial accounts and report the income are likely to be unpleasant. For those taxpayers who can certify under penalties of perjury that their conduct was non-willful, the Streamline Domestic and Streamline Non-resident Programs will continue. The future is no bleak for these taxpayers, if they act with reasonable speed. An example of such a person is a U.S. taxpayer living and working offshore who had a personal account in a foreign financial institution and who reported the interest and dividend income on the account on his/her income tax return, but who failed to file an FBAR. There are, of course, other facts and circumstance where a Streamline filing is appropriate.

The post September 28, 2018 environment promises to be challenging and loaded with enforcement initiatives. We will, of course be ready to provide professional assistance in dealing with the new challenges.