On April 3, 2016, the International Consortium of Investigative Journalists (ICIJ) indicated that it acquired sensitive documents that belonged to the Panamanian law firm, Mossack Fonseca & Co., about the offshore holdings of some of the world’s most prominent and wealthy individuals. The leak has received substantial mainstream media coverage due to the identity of the individuals named.
To date, the ICIJ has not released the identities of all of the hundreds of thousands of offshore entities or the persons related to those entities, which were referenced in the leaked documents. The ICIJ indicated that it would wait until May 2016 to release the full list. By waiting to May, the ICIJ is putting certain US persons on notice that they should consider starting the process to disclose previously undisclosed foreign assets to the Internal Revenue Service (IRS).
The United States subjects US persons to worldwide income taxation. As part of this taxing system, the IRS requires US persons to fulfill certain information reporting obligations related to foreign assets. For example, US persons must report a financial interest or signature authority over a foreign financial account on FinCEN Form 114, Report of Foreign Bank and Financial Account (FBAR). Non-compliance may result in a penalty of up to 50 percent of the highest aggregate value of the foreign financial account as well as criminal sanctions if done so willfully.
The IRS has implemented programs to encourage previously non-compliant US persons to disclose foreign assets and become compliant. One such program is the Offshore Voluntary Disclosure Program (OVDP). OVDP is designed for taxpayers who may have willfully failed to disclose foreign assets to the IRS. The primary benefits of participating in the OVDP are that the IRS will not recommend criminal prosecution to the Department of Justice (DOJ) for non-compliance up to the date of the disclosure and the taxpayer will no longer be subject to civil examination for the years covered by the OVDP disclosure. (more…)