The Internal Revenue Service recently announced that it is closing its Offshore Voluntary Disclosure Program, effective September 28, 2018.  This is a positive development.

Proceeding under the OVDP is extremely burdensome and costly for the taxpayer.  He must file eight years of delinquent FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, (“FBARs”); pay an FBAR penalty equal to 27.5% of the high balance of the taxpayer’s foreign accounts over the eight-year disclosure period; file eight years of amended U.S. income tax returns, including income from the taxpayer’s foreign accounts; and pay the tax due on the amended income tax returns, interest on the tax, and a penalty equal to 20 percent of the tax.  The taxpayer must also submit to review of his or her FBAR penalty computation and amended tax returns by a revenue agent.  A taxpayer incurs maximum legal and accounting fees in an OVDP case.

On June 18, 2014, the IRS announced its Streamlined Procedures as a less-costly and burdensome alternative to the OVDP.  Under the Streamlined Procedures, the taxpayer files FBARs due for the last six years; files amended income tax returns as needed for the last three years; pays income tax due on the amended tax returns, and interest on the tax; and pays a miscellaneous Title 26 offshore penalty equal to 5% of the high balance of the taxpayer’s foreign accounts as of the end of each of the preceding six years; provided, however, that there is no penalty if the taxpayer is a nonresident of the United States.  A taxpayer is a nonresident of the U.S. for this purpose if he does not have an “abode” in the U.S., and he was physically outside of the U.S. for at least 330 full days in any of the three most recent years for which the tax return filing deadline has passed.

A taxpayer qualifies for the Streamlined Procedures if his noncompliance was not “willful.”  Noncompliance was willful if the taxpayer’s purpose was the evasion of U.S. income tax.  The classic willfulness profile is a taxpayer who transfers funds to a foreign country, preferably one with banking secrecy laws, invests the funds there, and does not report income from the investments on a U.S. income tax return. 

Seldom do I see a client whose noncompliance was willful.  Most people who need to comply are immigrants to the U.S. who left financial accounts in their country of origin.  Some countries, notably India, restrict the repatriation of funds from their financial institutions.  The Streamlined Procedures, Delinquent FBAR Submission Procedures, and Delinquent International Information Return Filing Procedures were intended to ameliorate the harshness of the OVDP, and should be liberally construed to accomplish their purpose.

Willfulness is synonymous with fraud.  The government has the burden of proving civil fraud, by clear and convincing evidence—a higher standard than the preponderance of evidence standard that usually applies in civil cases.  I would be hard-pressed to file an OVDP case conceding my client’s willfulness.

The IRS acknowledges that few taxpayers are availing of the OVDP, and that taxpayers are generally more aware of their offshore tax and reporting obligations. Noncompliance with U.S. laws concerning foreign financial assets is perilous given the weapons now available to the IRS in discovering such assets. Those weapons include the Foreign Account Tax Compliance Act (FATCA), the network of intergovernmental agreements between the U.S. and partner jurisdictions, automatic third-party account reporting, treaty requests, and creative use of the John Doe summons power.

OVDP is a trap for unwary taxpayers.  Many people have come to me seeking to be extricated from an improvident OVDP filing.  In the worst such case, the client had paid a $250,000 miscellaneous Title 26 penalty in an OVDP case that should not have been filed (and a $20,000 retainer to the law firm the made the OVDP filing).  OVDP is a bad program that should be discontinued.   

A taxpayer who has not underreported tax for the preceding three years need not make a Streamlined Procedures submission.  Such a taxpayer should file any FBARs or amended FBARs needed for the preceding six years.  If the taxpayer has delinquent information returns concerning foreign financial assets, such as Form 8938, Statement of Specified Foreign Financial Assets, or Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, he can file them with a Form 1040X, Amended U.S. Individual Income Tax Return, explaining his non-willfulness.    The statute of limitations on assessment of the penalty for failure to file such information returns does not begin to run until the information return is filed.  Willfulness is not an issue under the Streamlined Procedures, the Delinquent FBAR Submission Procedures, or the Delinquent International Information Return Procedures.

If the IRS discovers a taxpayer’s noncompliance, he will no longer be able to make a “voluntary” disclosure under the OVDP, the Streamlined Procedures, the Delinquent FBAR Submission Procedures, or the Delinquent International Information Return Procedures.   Such a taxpayer will face the “draconian” FBAR penalty equal to the greater of $100,000 or 50% of the high aggregate balance of his foreign financial accounts.  Such a taxpayer is also subject to assessment of income tax, interest on the tax, and a negligence penalty equal to 20% of the tax or a civil fraud penalty equal to 75% of the tax.  There is no assessment statute of limitations with respect to a tax return not filed, or as to tax fraudulently omitted from a tax return.  Therefore, it behooves a taxpayer to become compliant as soon as possible.

The IRS is not closing the Streamlined Procedures, Delinquent FBAR Submission Procedures, or Delinquent International Information Return Filing Procedures.  It has requested comments on these programs.  I have some ideas for improving the programs, and will submit them to the IRS.

Stephen J. Dunn is a tax attorney in Troy, Michigan. He is the author of the treatise Foreign Accounts Compliance (Thomson Reuters 2017) and Foreign Accounts Compliance Blog.