Offshore Voluntary Disclosure Program

Wrapping up July—and Looking Forward to August

Tax Controversy Activities in August:

August 7, 2017: Elizabeth Erickson and Kristen Hazel will be representing McDermott Will & Emery at the 2017 US Captive Awards in Burlington, Vermont. McDermott has been shortlisted in the Law Firm category.

August 8, 2017: Tom Jones is presenting an update on Captive Insurance Tax in Burlington, Vermont, at the Vermont Captive Insurance Association Annual Conference “Mission: Possible”— the largest captive insurance conference in the US by number of paid attendees.

August 18, 2017: Todd Welty is speaking at the Texas Society of Certified Public Accountants Advanced Estate Planning Conference about:

  • Current developments in federal transfer taxes
  • Current state of federal tax reform
  • Proposed changes to state death tax laws and the impact of those changes on estate
  • Gift and trust planning
  • Consistent basis regulations
  • The state of valuation discounts
  • Recent rulings on defined value clauses and charitable gifts

August 23, 2017: Tom Jones is presenting an update on Annual Federal & State Tax at the North Carolina Captive Insurance Association Annual Conference in Charlotte, North Carolina.

Wrapping up July:

Our July 2017 blog posts are available on taxcontroversy360.com, or read each article by clicking on the titles below. To receive the latest on state and local tax news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.

July 14, 2017: Tracking Tax Guidance and Court Cases

July 17, 2017: New IRS CbC Resource

July 18, 2017: Courts Rejects Challenge to OVDP Transition Rules

July 19, 2017: Tax Court Rejects IRS Reliance on “Cursory” Analysis in Revenue Ruling

July 21, 2017: John Doe Intervenes in Virtual Currency Summons Enforcement Case

July 24, 2017: BEWARE: Whistleblowers Can “Out” You to the IRS!

July 26, 2017: Virtual IRS Appeals – A New Frontier?

July 27, 2017: IRS Rules (Again) That Taxpayers Are Not Entitled to Claimed Refined Coal Credits

July 28, 2017: Tax Court Hands Eaton a Complete Victory on the Cancellation of its Advance Pricing Agreements

July 31, 2017: Senate Attempts to Repeal Chevron Deference

The Internal Revenue Service (IRS) currently offers non-compliant US taxpayers several different relief programs to report foreign assets and/or income to become compliant with US rules related to the disclosure of offshore income. See here for a link to the different options. The two main programs are the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Filing Compliance Procedures (SFCP). The IRS launched the OVDP in 2012 to enable a taxpayer with undisclosed foreign income or assets to settle most potential penalties he may be liable for through a lump sum payment of 27.5 percent of the highest aggregate value of the taxpayer’s undisclosed foreign assets for the voluntary disclosure period, which is the previous eight years. The OVDP replaced prior offshore voluntary disclosure programs and initiatives from 2009 and 2011. OVDP has a number of filing and payment requirements, including paying eight years’ worth of accuracy-based penalties. The IRS updated and revised the OVDP in 2014.

Continue Reading Courts Rejects Challenge to OVDP Transition Rules

On December 2, 2016, the US District Court for the Central District of California found that taxpayers who failed to file a Report of Foreign Bank and Financial Accounts (FBARs) for three foreign accounts, one of which, in the court’s view, was intentionally kept secret from all persons except their children, for over a decade were “at least recklessly indifferent to a statutory duty.” Read more about the case here. The court found that the taxpayers were “sophisticated,” pointing to evidence that they ran a successful camera shop, and that they lacked credibility having made several misrepresentations on their failed attempt to apply to the Offshore Voluntary Disclosure Program (OVDP) and for making unbelievable assertions at trial. The court did not apply the heightened standard of willfulness applicable to criminal trials, a violation of a known legal duty, finding that civil trials apply the lesser standard of reckless disregard of a statutory duty. Additionally, the court rejected the defendants’ argument that the government had to show willfulness under the clear and convincing standard of proof and applied the typical civil preponderance of the evidence standard of proof. The taxpayers’ lawyer has stated that they will appeal the decision.

Practice note: Ensuring that OVDP applications are complete and truthful is crucial to their acceptance and, as demonstrated here, can and will be used against the taxpayer in any later proceedings. The taxpayers in this case had a number of factors working against them, and, as shown here, offshore reporting cases will often turn on their own specific facts. As more and more FBAR enforcement cases are being docketed around the country, it will be interesting to see whether reviewing courts will apply a uniform standard for willfulness under the FBAR statute.

On October 21, 2016, the Internal Revenue Service announced the most current data on the success of its Offshore Voluntary Disclosure Program (OVDP) and Streamlined Filing Compliance Procedures (SFCP) programs. For our prior coverage on the OVDP and SFCP programs please see Offshore Voluntary Disclosure Update and Release of “Panama Papers” May Encourage New Wave of OVDP Submissions.

OVDP program has existed in several iterations off and on since 2009, and the SFCP was made available to non-willful taxpayers in 2014. The programs encourage taxpayers with undisclosed income from foreign financial accounts and assets to become compliant and current with their tax returns and information reporting obligations. The program allows taxpayers to voluntarily disclose foreign financial accounts and assets and pay lower penalties now, rather than risk detection and face more severe penalties and possible criminal prosecution later.

The programs have been successful by all accounts. As of October 21, 2016, 55,800 taxpayers have made disclosures under the OVDP program and have paid more than $9.9 billion in taxes, interest and penalties since 2009. Another 48,000 taxpayers have made disclosures under the SFCP program correcting non-willful omissions and have paid $450 million in taxes, interest and penalties.

The Internal Revenue Service (IRS) currently offers non-compliant US taxpayers several different relief programs in which to report foreign assets and/or income and become compliant with US rules related to the disclosure of foreign assets. One option is the Offshore Voluntary Disclosure Program (OVDP).  Another is the Streamlined Filing Compliance Procedures (SFCP).  SFCP is further bifurcated into two sub-programs—one for US residents (Streamlined Domestic Offshore Procedures or “SDOP”) and one for non-US residents (Streamlined Foreign Offshore Procedures or “SFOP”).  Each program has its own set of tailored procedures and eligibility requirements.

The critical differences between OVDP and SFCP are: (1) the non-willfulness requirement; (2) the look-back period; and (3) the amounts of penalties the US taxpayer must pay.  Specifically, OVDP does not require the US taxpayer to certify that his or her failure to disclose foreign assets was non-willful.  On the other hand, SFCP requires the US taxpayer to certify that his or her failure to disclose foreign assets was non-willful and to also include a narrative explaining such non-willful conduct.  The incentive to demonstrate non-willfulness can be significant.  In general, US taxpayers who enroll in OVDP must pay a 27.5 percent penalty (and in some cases a 50 percent penalty) of the highest aggregate value of undisclosed foreign assets for the OVDP disclosure period (eight years).  However, US taxpayers who enter SDOP must only pay a five percent penalty of undisclosed foreign assets during the disclosure period (three years), and US taxpayers who enter SFOP pay no penalty. Continue Reading Offshore Voluntary Disclosure Update

The Internal Revenue Service (IRS) recently modified the non-willfulness certification form that individual taxpayers must submit to enroll in the streamlined filing compliance procedures (SFCP).  One requirement under the SFCP is that that the taxpayer certify that his or her failure to disclose foreign assets was not due to willful conduct.  Before the recent change, the IRS only provided minimal direction, which caused it to receive non-willfulness narratives that did not provide adequate information.  This resulted in certifications that were either questioned or rejected.

On February 16, 2016, the IRS revised the certification forms to include more robust direction and instructed the taxpayer to draft his or her non-willfulness narrative to include the whole story including favorable and unfavorable facts.  A more detailed analysis of the recent changes can be found here.