The Internal Revenue Service (IRS) announced that it will close the Offshore Voluntary Disclosure Program (OVDP), effective Sept. 28, 2018. OVDP is one of several options that allow taxpayers with undisclosed foreign financial assets to come into compliance with their U.S. tax and information return obligations. Taxpayers who might benefit from using OVDP should speak with their tax advisors as soon as possible in advance of the September 28 deadline.
Taxpayers with foreign financial assets generally must report and pay tax on the income from those assets and file certain information returns, including a Report of Foreign Bank and Financial Accounts (FBAR). Noncompliance with these obligations can bring an array of civil and criminal penalties. By coming forward voluntarily to participate in OVDP, taxpayers have the opportunity to both limit their exposure to civil penalties and avoid criminal prosecution.
OVDP was first launched in 2009 and has been used by more than 56,000 taxpayers to come into compliance. Collectively, these taxpayers have paid more than $11 billion in back taxes, interest, and penalties. However, the number of taxpayers using OVDP has fallen in recent years, from a high of about 18,000 in 2011 to only 600 in 2017. FAQs published on the IRS website cite this decline in participation, along with increased awareness of offshore tax and reporting obligations, as reasons for closing the program.
Alternatives to OVDP
In addition to OVDP, other options that allow taxpayers to address past noncompliance include the IRS-criminal investigation voluntary disclosure program, streamlined filing compliance procedures, delinquent FBAR submission procedures, and delinquent international information return submission procedures. The IRS will continue to offer these options after OVDP closes, although it could decide to discontinue them in the future.
Whether OVDP or one of the other options is more appropriate for a particular taxpayer will depend on the taxpayer’s individual circumstances. Requirements for participation vary. For example, OVDP is available to taxpayers whose noncompliance was willful, meaning that they were aware of their obligations but chose not to comply. In contrast, taxpayers participating in the streamlined filing compliance procedures must certify that their failure to report all income, pay all tax, and submit all required information returns was not willful.
Importantly, a taxpayer cannot use any of these options to come into compliance if the IRS has initiated a civil examination of the taxpayer’s returns, or if the taxpayer is under criminal investigation by the IRS.
IRS enforcement after OVDP
The FAQs emphasize that the end of OVDP does not signal a change in IRS priorities concerning offshore tax noncompliance and evasion. The IRS will continue to enforce offshore compliance using information received under the Foreign Account Tax Compliance Act, the network of intergovernmental agreements between the U.S. and partner jurisdictions, automatic third-party account reporting, and other sources, such as the Department of Justice’s Swiss bank program and John Doe summonses. In addition, the IRS is using enhanced data analytics to leverage information it receives from these sources.
With OVDP ending, taxpayers with undisclosed foreign financial assets should carefully review their options for coming into compliance. OVDP will not be the most appropriate option for every taxpayer, but for taxpayers who might benefit from using it, the window of opportunity is closing.