In 2009, the Service introduced its first Offshore Voluntary Disclosure Program (“OVDP”). As a result of this program, more than 50,000 taxpayers have come forward and disclosed offshore financial accounts. In a news release issued by the IRS on January 28, 2015 (IR-2015-09), it reported that the government has collected over $7 billion from this initiative. In addition, as we know from the Zwerner case (reported in my blog on June 16, 2014), the Service has conducted thousands of civil audits relating to offshore financial accounts, resulting in the collection of taxes and penalties in the “tens of millions of dollars.” Last, the IRS has not been shy about pursuing criminal charges against taxpayers who fail to disclose their offshore financial accounts. In fact, the IRS reports that it has collected “billions of dollars in criminal fines and restitutions” since the introduction of the OVDP.
One may wonder whether the government’s offshore compliance enforcement activity will slow down as a result of the recent slashing of the Service’s budget. Reading the statements made by the IRS in the January 28, 2015 news release, the answer appears to be no. In fact, the announcement proclaims:
The IRS remains committed to our priority efforts to stop offshore tax evasion wherever it occurs. Even though the IRS has faced several years of budget reductions, the IRS continues to pursue cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil.
IRS Commissioner John Koskinen recently stated that: “Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order.” Consequently, the Service announced that the OVDP “will be open for an indefinite period until otherwise announced (emphasis added).” While the OVDP may be a good means for taxpayers to get their houses in order, tax practitioners need to fully inform their clients about the program and its impact on their situation before placing them into the program, including:
- The reporting rules and the cost of compliance. Even under the OVDP, taxpayers routinely feel they are being overcharged/penalized by the government for doing nothing wrong. Clients need to be fully informed of the rules relating to foreign financial accounts and the costs of noncompliance.
- OVDP flaws. The OVDP is not without flaws. Its rules are not perfect. In fact, in many instances, the rules are unclear and/or incomplete, and application is blemished with subjectivity, potentially leading to unexpected results. Caution is advised!
- Penalties. If a taxpayer’s disclosure is incomplete or inaccurate, the taxpayer may be faced with hefty civil and/or criminal penalties.
- Closure Time. The OVDP, especially given continued IRS budget cuts, can be a lengthy process. From the time a complete submission is filed with the IRS, it can take months to close the matter. This can be unnerving to taxpayers, especially in light of the huge civil and/or criminal penalties that can result from noncompliance.
There are at least four (4) takeaways from IR-2015-09:
- The IRS, despite huge budget cuts, intends to remain focused on offshore financial accounts.
- The OVDP appears to be here to stay (or at least until the Service announces otherwise).
- The OVDP does not generate prompt results. Patience is required.
- While the OVDP may be a good mechanism to resolve offshore financial account noncompliance, it is not without flaws. Tax practitioners need to adequately advise clients about the program and the applicable law so that they are fully informed before submitting an OVDP application.
Continuation of the OVDP is generally good news for taxpayers. As stated, however, it is not the most taxpayer friendly voluntary tax compliance program. Consequently, tax practitioners need to: have a good understanding of the OVDP and the applicable law; they need to fully advise clients of their compliance obligations, including the costs and risks of noncompliance; and they need to fully inform clients about the OVDP, including the timing, risks, and liability, before making a submission to the program.
Larry J. Brant is a Shareholder in Garvey Schubert Barer, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; New York, New York; Washington, D.C.; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- "Evaluating the Built-in Gains Tax for C to S Conversions After TCJA," New York University Tax Conferences in July – Advanced Conference on Subchapter SNew York, NY, 7.26.18
- "S Corporation Distributions – The Ins and Outs," New York University 77th Institute on Federal TaxationNew York, NY, 10.21.18-10.26.18
- Portland, OR, 11.5.18
- "The Tax Cuts and Jobs Act – What It May Mean to Your Clients," Estate Planning Council of Portland Mini-SeminarPortland, OR, 11.7.18
- "S Corporation Distributions – The Ins and Outs," New York University 77th Institute on Federal TaxationSan Diego, CA, 11.11.18-11.16.18