The Internal Revenue Service has achieved another milestone in its long-running campaign to crack down on offshore tax evasion, announcing that more than 100,000 taxpayers have voluntarily returned to compliance and paid more than $10 billion in back taxes, interest, and penalties. At the same time, the IRS warned non-compliant taxpayers that its international compliance efforts – both criminal and civil – will continue unabated.
In a press release touting its latest successes, the IRS announced that 55,800 taxpayers have utilized the Offshore Voluntary Disclosure Program (OVDP) to resolve their tax obligations. The IRS unveiled the OVDP in March 2009, following its landmark resolution with Swiss bank UBS AG, affording taxpayers with secret offshore bank accounts the opportunity to avoid criminal prosecution if they voluntarily filed amended tax returns and paid a hefty financial penalty. The current version of the OVDP requires participants to file eight years of amended tax returns and pay a penalty calculated at 27.5 percent (or 50 percent, in certain cases) of the highest aggregate value of their undisclosed offshore assets. Since 2009, taxpayers participating in the OVDP have paid the U.S. Treasury more than $9.9 billion in taxes, interest, and penalties, rendering the OVDP by far the most successful voluntary disclosure initiative ever offered by the IRS.
In June 2014, in response to widespread criticism that the OVDP’s “one size fits all” settlement terms did not adequately take into account the varying facts and circumstances of each individual case, the IRS announced an alternative voluntary disclosure option: the Streamlined Filing Compliance Procedures. Like the OVDP, this program was designed to provide a vehicle for taxpayers with undisclosed offshore assets to return to compliance. Unlike the OVDP, however, the streamlined program takes account of a taxpayer’s state of mind, and taxpayers who can demonstrate that their non-compliance was attributable to “non-willful” conduct – as opposed to intentional or deliberate behavior – can qualify for the streamlined program’s favorable settlement terms. Taxpayers eligible for the streamlined procedures need only file three years of amended tax returns, six years of foreign bank account reporting forms (commonly known as FBARs). Taxpayers residing in the U.S. are required to pay a financial penalty of five percent of the highest aggregate value of their undisclosed foreign assets. Taxpayers residing outside of the U.S. do not have to pay any financial penalty.
Since their unveiling in the summer of 2014, the streamlined procedures have been enormously popular, as the latest IRS statistics confirm. Approximately 48,000 taxpayers have utilized the streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest, and penalties. In its short two and one-half year existence so far, the streamlined program has had nearly as many participants as the OVDP, which has been in existence for nearly three times as long. These statistics illustrate what many practitioners have long suspected: many more non-compliant taxpayers are taking advantage of the streamlined procedures than the OVDP, even if they may not satisfy the “non-willful” criteria.
At the same time it was celebrating its latest voluntary disclosure benchmark achievement, the IRS warned non-compliant taxpayers that they should take immediate corrective action to avoid potentially harsh enforcement activity. “As we continue to receive more information on foreign accounts, people’s ability to avoid detection becomes harder and harder,” said IRS Commissioner John Koskinen. “The IRS continues to urge those people with international tax issues to come forward to meet their tax obligations.” The Justice Department’s Tax Division issued a similarly stern warning for taxpayers who falsely claimed their conduct was “non-willful” in order to qualify for the streamlined procedures. Caroline D. Ciraolo, Principal Deputy Assistant Attorney General, stated in a speech on October 28 that taxpayers who “lied their way through a streamlined narrative” will be criminally prosecuted. Ciraolo added that “[I]t’s our job to make sure that those people who chose the streamlined program chose appropriately.”
The risks for taxpayers with undisclosed offshore assets is at an all-time high now, as the IRS and the Justice Department now have access to an unprecedented amount of information and data regarding the offshore activities of U.S. taxpayers. As a result of the Foreign Account Tax Compliance Act (FATCA), and its network of bilateral treaties (known as inter-governmental agreements) between the U.S. and more than 100 partner countries, automatic annual reporting of foreign account data to the IRS has entered its second year. In addition, account information continues to pour into the U.S. government as a result of the Justice Department’s ground-breaking Swiss Bank Program, pursuant to which 80 banks in Switzerland entered into resolutions to avoid criminal prosecution in the U.S. and agreed to hand over details about their U.S. customers to the Justice Department.
For taxpayers who still have not voluntarily corrected past misdeeds with respect to offshore assets, the window of opportunity for voluntary disclosures remains open but time is of the essence. Both the OVDP and the streamlined procedures remain available to non-compliant taxpayers at this time, but only if the taxpayer initiates the voluntary disclosure process before the IRS receives information about a taxpayer’s non-compliance (such as through third-party disclosures mandated by FATCA or the Swiss Bank Program). Once the IRS learns of a taxpayer’s non-compliance, voluntary disclosure options are generally off the table. And, the IRS has said that it may terminate the OVDP and streamlined procedures at any time, without advance notice. Non-compliant taxpayers with offshore assets who fail to take immediate action now do so at their peril.