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Since its inception in 2009 (and through the 2012 revised rules), the IRS Offshore Voluntary Disclosure Program (OVDP) has been available to provide taxpayers with unreported income and assets in “offshore accounts,” an opportunity to come into compliance with the Internal Revenue Service, before facing serious consequences (up to, and including, criminal prosecution).

Despite the success of the OVDP, the program was shut down by the IRS on Sept. 28, 2018. Just before the close of 2018, the IRS issued a memorandum that contains a new “civil resolution framework” for making offshore voluntary disclosures received or postmarked after the Sept. 28, 2018.

In recent years, it has been increasingly more difficult for taxpayers to “misplace” assets. Under new Foreign Account Tax Compliance Act (FATCA) rules and a growing network of inter-governmental agreements (IGAs) between the U.S. and partner jurisdictions, more foreign banks have been willing to provide information on potential non-compliance by U.S. taxpayers.

In this environment, the new guidelines — much as the original OVDP — have been designed to provide U.S. taxpayers with unreported, or underreported, foreign income or assets, with the means to voluntarily “come clean.”

According to the memorandum, “the objective of the voluntary disclosure practice is to provide taxpayers concerned that their conduct is willful or fraudulent, and that may rise to the level of tax and tax-related criminal acts, with a means to come into compliance with the law and potentially avoid criminal prosecution.”

While the new program still offers taxpayers that opportunity, there are, however, many changes from the former OVDP that make this program somewhat less appealing than its predecessor.

Changes Reflected in the New Voluntary Discloser Guidelines

The updated voluntary disclosure program draws on the success of the earlier Offshore Voluntary Disclosure Programs announced in 2009, 2011, 2012 and 2014. The main differences are the actual procedures to disclose, and the penalties taxpayers could be subject to in making such disclosures have risen over previous incarnations of the OVDP, making this successor even more stringent.

Under the new program, unpaid taxes on undisclosed assets will be considered “civil fraud,” and as such, penalties for underpayments of taxes have increased to 75 percent in this new program.

According to the new guidelines, taxpayers wishing to make a voluntary disclosure must do so “timely” and be willing to “fully cooperate with the Service.” All requests to participate in the program must be made through IRS Criminal Investigation (CI). CI will screen all voluntary disclosure requests whether domestic, offshore, or other, to determine if a taxpayer is eligible to make a voluntary disclosure.

To accomplish this, “CI will require all taxpayers wishing to make a voluntary disclosure to submit a preclearance request on a forthcoming revision of Form 14457. IRM 9.5.11.9 will continue to serve as the basis for determining taxpayer eligibility.”

Taxpayers must request preclearance from CI via fax or mail.

For all cases where CI grants preclearance, “taxpayers must then promptly submit to CI all required voluntary disclosure documents using a forthcoming revision of Form 14457. This form will require information related to taxpayer noncompliance, including a narrative providing the facts and circumstances, assets, entities, related parties and any professional advisors involved in the noncompliance.”

U.S Criminal Penalties for Non-Compliance

If the IRS contacts a taxpayer who has failed to file the required forms, the taxpayer may face possible criminal charges which include, but are not limited to, tax evasion (IRC §7201), filing a false return (IRC §7206) and failure to file an income tax return (IRC §7203). A person convicted of tax evasion is subject to a prison terms of up to five years and a fine of up to $250,000. In addition, willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. §5322.

How MBAF Can Help

If you have offshore assets, understand that in the current environment it will be harder and harder to keep those from the IRS. The information is out there, and is getting reported by the foreign banks with increasing regularity.

With the end of the OVDP and the announcement of these new procedures, you may be facing more severe penalties and possibly even criminal charges, for failing to come into compliance. Under the new guidelines, if you are granted a preclearance from CI, the proper preparation Form 14457 is essential to the successful outcome of your case. If you feel you need to take advantage of the new procedures for voluntary disclosure, you are urged to discuss your situation with the international tax experts at MBAF.

Compliance with the successor to the Offshore Voluntary Disclosure Program (OVDP), can be complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our International Tax specialists, or call us at 1-800-239-1474.