Ferreting out people who want to hide their assets and income overseas is nothing new for the Internal Revenue Service. And for roughly nine years, the agency has sponsored programs tailored to those taxpayers who were prepared to come forward and disclose their unreported foreign assets and income in exchange for reduced penalties and the promise that they would not be prosecuted.
These programs have had a tremendously successful run. Since the initial launch of the first Offshore Voluntary Disclosure Program in March 2009, more than 56,000 taxpayers have come into compliance and paid more than $11 billion in tax, penalties, and interest, according to the IRS. Approximately 65,000 additional taxpayers have used streamlined offshore filing procedures to report their foreign holdings.
But as with many successful government programs, the effectiveness and appeal of the program has appeared to wane over time. The IRS reports that in 2011 nearly 18,000 taxpayers initiated an offshore voluntary disclosure, but that number dwindled to 600 in 2017.
By these numbers, one can understand why the IRS recently announced that it would end the current program’s nearly four-year run on September 28 of this year. So, the question remains: Will there be another program?
Tax practitioners and their clients grappled with this dilemma in 2009, when the OVDP ended, and again in 2011, after the expiration of the second initiative. However, since the launch of the 2012 program, which transitioned into the 2014 program, taxpayers may have become complacent.
The IRS announcement is a wake-up call, and if history teaches us anything, the terms offered to willful taxpayers seeking to come into compliance after September 28 will not improve.
Since the execution of a deferred prosecution agreement with Swiss bank UBS in February 2009, the IRS and the Department of Justice Tax Division have received an abundance of data and documents from foreign governments, financial institutions, cooperators, and whistleblowers identifying U.S. taxpayers with secret foreign accounts seeking to evade their tax and reporting obligations, as well as those individuals and entities who facilitated this conduct.
Much of this information came through the Swiss Bank Program, pursuant to which 80 Swiss financial institutions provided detailed information regarding their cross-border activities and U.S. account holder relationships. In addition, the IRS is issuing “John Doe” summonses for information regarding unidentified taxpayers where the IRS has a reasonable belief that the individuals failed to comply with the tax laws, such as the recent summons issued to Coinbase seeking data about U.S. taxpayers who conducted transactions in convertible virtual currency.
With this substantial database, and the increased awareness of foreign reporting obligations, the United States is less inclined to offer a sweet deal to non-compliant taxpayers. Having already used the velvet glove, we may see more of the iron fist—audits, substantial civil penalties, and criminal investigations. To date, 671 taxpayers have been charged with international criminal tax violations.
That said, the tremendous success of the program cannot be denied, something the IRS recognized with the second program in 2011, the third program in 2012, and the current program in 2014. In fact, the IRS requested comments on the current program just weeks before it announced the program would come to an end, suggesting that another path for offshore disclosures may be in the works.
Still, absence makes the heart grow fonder, and tax professionals and their clients may find that what comes next is not nearly as palatable as what we have now.
Willful taxpayers need to decide —will they come into compliance now, or try to stay in the shadows, hoping to avoid detection and enforcement down the road?
With international exchange of information at an all-time high, continuing non-compliance is a risky proposition indeed.
Taxpayers who willfully failed to disclose their foreign assets and report foreign income—and have yet to come into compliance—should give serious thought to taking advantage of the voluntary disclosure program before the deadline. And with the time and effort required under the program, waiting until the last minute is not an option.