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IRS collects $10 Billion (yes, Billion with a “B”), in offshore voluntary compliance enforcement

On Oct 21, 2016, the IRS announced it has collected nearly $10 billion in taxes, interest, and penalties since 2009 via the Offshore Voluntary Disclosure Program (OVDP). That $10 billion was collected from nearly 56,000 tax payers. The OVDP allows tax payers with undisclosed offshore accounts to make disclosure to the IRS and get current on their filing obligations without concern for significant civil penalties or criminal prosecution. The key criteria to applying for and being accepted into the OVDP is that the application must be made before the IRS has started an investigation of the tax payer. If the IRS has already knocked on your door, then you just have to sit back and enjoy the ride.

History of OVDP

The modern OVDP was partly fueled by the 2008 FBI investigation of the Swiss bank UBS on tax evasion allegations. A former UBS employee turned whistleblower notified the FBI that the bank had been courting US tax payers by offering them offshore financial vehicles to hide assets and evade taxes. At the end of the investigation, the whistleblower spent almost four (4) years in prison and received over $100 million in a whistleblower reward while UBS paid a $780 million fine.

The IRS created the first iteration of the OVDP in 2009 to accompany the new Foreign Account Tax Compliance Act (FATCA) that became law in early 2010. During the midst of the financial recession at that time, the government was looking for more revenue. After seeing the trove of information on US tax payers with Swiss bank accounts, the government, wrote, passed, and enacted FATCA. Although in a nutshell FATCA requires all foreign financial institutions to divulge names of US tax payers to the IRS, this alone won’t generate more revenue. Thus, the OVDP was born.

Current OVDP

Through four (4) different programs in 2009, 2011, 2012, and 2014, the OVDP provided tax payers a process to disclose their previously undisclosed foreign accounts before the IRS came knocking on their door. Penalties have increased with each new program and look back periods have been extended. The IRS has not established a termination date for the current program and instead “may end it at any time in the future.” Most experts don’t see the program ending anytime soon thanks to the windfall the programs have created.

The penalties for failing to disclose but subsequently entering the OVDP are numerous and are largely dependent on which forms you failed to file or failed to file correctly and your level of naughtiness in the look back period. For example, one penalty states, if you were naughty and you failed to voluntarily disclose, a 50% offshore penalty is assessed if the foreign bank or a facilitator who helped you establish an offshore account has been publicly identified as being under investigation or is cooperating with a government investigation. To add insult to injury, this 50% penalty is required to be paid at the time of application to the OVDP. To add further insult to injury, the 50% penalty applies to ALL your foreign assets, not just those held at the publicly identified naughty bank. So, let’s presume you had $100,000 in a Swiss bank and $1,000,000 in a Russian bank and you did not disclose both accounts. The Swiss bank is being investigated by the IRS and publicly identified as such. After you catch wind of the Swiss bank’s investigation, you apply to the OVDP hoping to come clean and settle the dust with the IRS. As long as the IRS hasn’t already started an investigation into your tax matters and deems you qualified for the OVDP, you’ll have to pay up. Not only is the $100,000 at the Swiss bank subject to the 50% offshore penalty, the $1,000,000 at the Russian bank is too. Ouch! The value of all your OVDP assets are aggregated for each year and the 50% penalty is applied to the highest year’s aggregate value during the period of voluntary disclosure. For simplicity, let’s assume you only failed to disclose for one year and you earned no interest on either account. The aggregate value of your accounts is $1,100,000. You must fork over $550,000 to the IRS at the time of application to the OVDP. Cha Ching.

The various penalties and interest can quickly tally up and could result in you paying more to the IRS than you even had in your offshore accounts but you don’t have to worry about going to prison. An important caveat to the OVDP: there is no requirement that your failure to disclose your offshore accounts be non- willful. In other words: you commit crimes like tax fraud and tax evasion, admit to it, and the government says “If you pay us, we won’t prosecute.” Here is your “Get Out Of Jail Free” card.

However, if you have undisclosed offshore accounts and elect to roll the dice and not apply to the OVDP and the IRS comes knocking, the penalties are much more severe and you lose your “Get Out Of Jail Free” card.

Streamlined Process

The IRS implemented a streamlined process for tax payers who did not willfully fail to disclose. That is to say the failure was an accidental omission or an honest oversight. The streamlined process allows for significantly reduced penalties and in some cases, no penalties. However, there are significant risks associated with the streamlined process. They are:

· After applying, tax payer may not participate in the OVDP

· Tax payer must make a certification of non-willful failure to disclose. If the IRS determines failure to disclose was willful, this creates potential perjury consequences and additional penalties, as disclosed below.

· No protection from potential criminal prosecution

· No protection from civil fraud penalties if the IRS determines failure to disclose was willful

The US government’s tools are making it more difficult to conceal offshore assets. Tax treaties, FATCA, whistleblower rewards, and John Doe summons are just a few of the weapons used to tackle offshore non-compliance. Combining that with the multi-billion-dollar jackpot collected from the OVDP, the IRS will continue to make offshore compliance a priority.