The Shocking Truth About Offshore Tax Disclosures: Don’t Miss Part II!

In the hopes of embarking on a grand adventure to Machu Picchu in 2019, the Nadig household found themselves grappling with the complexities of coordinating the schedules of two college-bound kids. Alas, their plans had to be put on hold. As a result, the family is now navigating a quieter spring, with the added challenge of deciphering the new Offshore Voluntary Disclosure Program (OVDP) rules for entertainment.

A year has passed since the release of Part I of this post, coinciding with the end of the OVDP by the Internal Revenue Service on September 28th, 2018. This decision foreshadowed a series of significant changes within the IRS.

Shortly after, in November 2018, the IRS introduced updated procedures for voluntary disclosures, both domestic and foreign, submitted post-September 28th, 2019. Notably, the IRS retains the authority to apply these procedures to domestic voluntary disclosures dating back to September 28th, 2018.

Procedural Insights under the New OVDP:

1. Taxpayers, regardless of domestic or foreign status, are required to submit a preclearance request on Form 14457 for screening by the Criminal Investigation unit (CI). Upon receiving preclearance approval from CI, taxpayers must promptly disclose all non-compliant information to CI, accompanied by a comprehensive statement outlining past non-compliance.

2. Following preliminary preclearance, CI informs taxpayers through a letter and subsequently transfers the case to LB&I Austin without processing tax returns or payments.

3. LB&I Austin determines the most recent tax year applicable to the voluntary disclosure and transfers the case to the appropriate Business Division and Exam function for civil examination. Taxpayers are encouraged to remit payments to LB&I prior to case assignment, without necessitating additional document submissions.

4. Examiners assess tax liabilities and penalties, expecting prompt and collaborative action from taxpayers. Payment of all taxes, interest, and penalties for the disclosure period is mandatory, with the possibility of revoking preclearance in cases of non-cooperation.

5. The Disclosure Period spans six years but may be extended at the examiner’s discretion to encompass all non-compliant years.

6. In cases of underpayment of tax, a 75% penalty is now imposed, with potential extensions under specific conditions for fraud-related violations.

7. Willful FBAR penalties, typically set at a 50% rate of the highest sum of unreported balances, carry the potential for variance based on examiner recommendations.

8. Automatic penalties for filing other information returns are not obligatory but may be exercised at the examiner’s discretion.

9. Taxpayers have the right to appeal if agreements with the IRS cannot be reached, ensuring protection from criminal liability.

10. The conclusion of an examination typically involves a closing agreement, providing finality for the disclosing taxpayer regarding future prosecution.

With the termination of the old OVDP, professionals in the tax industry speculated on the implications of the new rules. While these procedures have somewhat allayed initial concerns, uncertainties remain, particularly regarding the unpredictability of final disclosure costs and penalties under the new program.

Consulting experienced tax professionals to assess exposure and determine program eligibility is advised. Despite its more stringent nature, the new OVDP remains the best avenue to mitigate criminal liability risks.