TAX INSIDER

Offshore account holders should beware: The IRS is still coming

The recent end of the OVDP is not the end of IRS enforcement of undisclosed offshore accounts.
By Christopher M. Ferguson, J.D.

For most of the past decade, the IRS has maintained a safe harbor for taxpayers who want to disclose offshore account holdings that may otherwise expose them to criminal penalties, and over the years, tens of thousands of taxpayers have availed themselves of the program. But on Sept. 28, the world changed for those who have not yet revealed their foreign accounts to law enforcement.

Citing waning taxpayer participation, the IRS ended the Offshore Voluntary Disclosure Program (OVDP) at the end of September. Yet taxpayers would be wrong if they think the program's closure will dampen the agency's resolve to go after those it believes are hiding taxable income overseas.

In fact, the IRS last year bragged about its enhanced digital tools for sniffing out those it believes are skirting tax laws (see Cohn, "IRS Criminal Investigation Chief Plans New Enforcement Programs," Accounting Today (Aug. 2, 2017), and the Department of Justice's Tax Division boasts a 91.5% conviction rate for tax crimes (IRS, Criminal Investigation 2017 Annual Report, p.7). Since 2009, more than 1,500 people have been indicted for crimes related to international activities, according to the IRS (IR-2018-52 (3/13/18)).

The benefit of the OVDP was that, even though participating taxpayers had to pay fines, those fines were reduced and the threat of criminal prosecution was largely taken off the table (as long as taxpayers provided a timely and complete disclosure of their assets and the years those assets were kept hidden).

Though time has run out for taxpayers to make a complete disclosure and avail themselves of those program benefits, they can still voluntarily reveal their offshore assets.

Indeed, even without the OVDP, taxpayers with undisclosed offshore accounts would be wise to take advantage of the lesser known voluntary disclosure process. Long before the offshore program came into existence, the IRS followed a less formal voluntary disclosure policy. That policy will endure even now that the offshore program has terminated. While the civil penalties will be higher than with the offshore program, removing the threat of criminal prosecution remains a key benefit.

Those who bet on their accounts being well hidden are taking a big gamble. The penalty for a willful failure to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), is the greater of $100,000 or 50% of the highest total balance of the offshore accounts for each year someone fails to file a report. In other words, if a taxpayer has not filed a required FBAR for four years, the penalty could be as much as 200% of the total value of the accounts (though some courts have pushed back on those draconian sanctions).

Meanwhile, if taxpayers have knowingly hidden their assets for the purpose of tax evasion, they face steep fraud penalties of as much as 75% of the tax underpayment. Worse, there is no statute of limitation for fraudulently filed returns, meaning that the IRS can go back as many years as it can to prove fraud.

International cooperation

The monetary costs involved may make some taxpayers blanch at the thought of coming forward. But not doing so risks detection and criminal prosecution. After all, the IRS's ability to unearth unreported accounts has improved dramatically since the first iteration of the program was announced in 2009.

Back then, the IRS and Department of Justice often struggled to get cooperation from foreign countries and international banks who were bound by bank secrecy laws in their home countries. But in the last nine years, international cooperation has increased as the United States has put more and more pressure on other countries and as some nations have sought to go after their own citizens for hidden offshore bank accounts. Because of these collaborations, the number of jurisdictions still available for concealing assets has shrunk and the likelihood of offshore accounts being detected has intensified.

Indeed, the U.S. government just secured its first conviction of a foreign bank executive for violating the Foreign Accounts Tax Compliance Act (FATCA, part of the Hiring Incentives to Restore Employment Act of 2010, P.L 111-147), one of the more recent and powerful laws in the government's offshore detection arsenal, which requires foreign financial institutions to identify their U.S. customers and report information on their account holders. More such cases are expected to follow, sending a clear signal to foreign institutions that they shield their tax-dodging U.S. customers at their peril.

The IRS also warned, in its announcement about ending the OVDP, that the closure was in part due to enhanced reporting through international partners and whistleblowers. And Don Fort, chief of IRS Criminal Investigation, advised, "The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics. Stopping offshore tax noncompliance remains a top priority of the IRS."

Streamlined procedures

For those whose offshore noncompliance was nonwillful, there is good news. The IRS's Streamlined Filing Compliance Procedures will continue to remain in effect. The IRS's streamlined procedures allow taxpayers, both those residing in the United States and abroad who meet certain eligibility criteria, to get into compliance without paying substantial penalties. Indeed, for nonresident taxpayers, there are no penalties. Resident taxpayers pay only a 5% miscellaneous offshore penalty.

However, the key criteria for eligibility to the streamlined procedures is that the taxpayer's noncompliance must have been nonwillful. To reduce false submissions, the IRS requires that the taxpayer certify, in detail, the facts concerning his or her nonwillfulness. 

With the termination of the OVDP, more taxpayers may be tempted to submit false nonwillful certifications to qualify for the more lenient streamlined procedures. They do so at great risk, as a false certification exposes a taxpayer to criminal prosecution. 

Nevertheless, for the taxpayer whose noncompliance truly was nonwillful (an ever-shrinking set given the growing publicity accorded to offshore tax compliance), the streamlined procedures provide an excellent opportunity to get into compliance going forward. Taxpayers who qualify need to act, however. The IRS has stated that it may end the streamlined procedures at some point as well. And once taxpayers learn of their offshore filing obligations, they no longer will qualify as nonwillful for future noncompliance.

Given the IRS's improved detection techniques, taxpayers with undisclosed foreign accounts should not roll the dice and hope they will go undetected. Even though the reduced civil penalties of the OVDP have ended, disclosing accounts voluntarily, just like disclosing any other tax noncompliance, is still an option and one that is far superior to the alternative. Avoiding a criminal prosecution can and should be a powerful incentive.

Christopher M. Ferguson is of counsel at Kostelanetz & Fink and focuses his practice on civil and criminal tax litigation, complex commercial litigation, and other white-collar criminal and regulatory enforcement matters. To comment about this article or to suggest an idea for another article, please contact Sally Schreiber, senior editor, at Sally.Schreiber@aicpa-cima.com.

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