Taxpayers likely face less favourable options after U.S. OVDP closes

By Staff

The U.S. Internal Revenue Service (IRS) is closing a program later this year that allowed certain taxpayers to come forward to report undisclosed offshore income — which will likely leave those who wish to become compliant with less advantageous options, Oakville-based U.S. tax attorney Alexey Manasuev tells

Earlier this year, the IRS announced that it is ramping down it’s Offshore Voluntary Disclosure Program (OVDP), and will close it on Sept. 28.

The OVDP provides an opportunity for delinquent taxpayers with undisclosed income from offshore accounts to become compliant and to avoid criminal prosecution. However, applicants must agree to pay a miscellaneous offshore penalty and other applicable fines — such as accuracy-related, failure-to-file and failure-to-pay penalties, says Manasuev, principal of U.S. Tax IQ.

The miscellaneous offshore penalty may equal 27.5 per cent, or 50 per cent of the highest aggregate value of undisclosed assets during the years covered by the OVDP.

“The OVDP usually supposes that a candidate and applicant may have some exposure to criminal prosecution or may potentially have wilful conduct in not complying with U.S. tax filing and reporting requirements. So, the OVDP historically, and as it exists now, has been the option for those taxpayers who have to worry about potential criminal prosecution,” says Manasuev.

As he explains, more than 56,000 taxpayers have used the OVDP to come into compliance since 2009, and the IRS has collected more than $11 billion from those participating in the program.

Although the IRS hasn’t stated specific reasons for closing the OVDP, Manasuev says generally, “They believe there has been enough time for taxpayers to come forward voluntarily.”

Indeed, the IRS has noted that the implementation of the Foreign Account Tax Compliance Act (FATCA), and the ongoing efforts of authorities to ensure compliance by those with U.S. tax obligations, “have raised awareness of U.S. tax and information reporting obligations with respect to undisclosed foreign financial assets."

The OVDP initially launched in 2009, although the current version began in 2014. That year, the IRS also announced a simplified, separate program — Streamlined Filing Compliance Procedures — for the domestic taxpayers and taxpayers residing outside of the United States who may not have been aware of their filing requirements — to file undisclosed offshore account information.

The IRS says it will continue offering a number of options for those looking to comply with U.S. tax and information return obligations, including the Streamlined Filing Compliance Procedures, IRS – Criminal Investigation Voluntary Disclosure Program, delinquent FBAR submission procedures and delinquent international information return submission procedures.

“The Streamlined Filing Compliance Procedures both domestic and offshore delinquent FBAR submission procedures and delinquent international information return submission procedures will continue to apply — at least for now,” says Manasuev.

He says it is also possible the IRS may change the terms of the other programs so that they become less beneficial.

“The IRS did point out that even though it does not have an intention at this particular moment to close Streamlined Filing Compliance Procedures, for example, it is possible that it will at some point,” Manasuev says.

“It is open-ended at this point, but it can be closed any time,” he adds.

As Manasuev notes, it is uncertain as to what will happen to those taxpayers who would have ordinarily come into compliance under the OVDP.

“It's almost guaranteed that whatever program the IRS will be using after Sept. 28, 2018 to deal with taxpayers with some potential criminal prosecution challenges, it won't be as advantageous as the current program.”

“The IRS did announce that it will continue its IRS – Criminal Investigation Voluntary Disclosure Program which has been in existence under the Internal Revenue Manual, but that program is not a structure. There's no certainty as to the penalty thresholds and amount. There is quite a bit of uncertainty as to how exactly the IRS is going to accept applications under that general program,” he says.

Many of the previous changes to the OVDP, as well as modifications to the simplified programs outside of the OVDP between 2009 and 2014, were not as favourable for taxpayers as the pre-existing regime, says Manasuev.

“There is uncertainty in terms of what's going to happen and likely harsher results in terms of the dollar amount and some criminal prosecution for the taxpayers who are going to apply after Sept. 28. Or, if they don’t apply and the IRS finds them before they have an option to apply under that criminal investigation voluntary disclosure program, they would get criminal prosecution, but there's so much uncertainty as to how many years it will cover, how much the penalties would be and whether the IRS will just use the general guidelines on application of penalties.”

In addition, says Manasuev, as the program has been quite successful in terms of tax, penalties and interest paid by taxpayers, he says the IRS may try to use this as a last push for those who are in hiding.

“That’s why the Sept. 28 deadline is kind of a window for anybody who has been non-compliant to come forward voluntarily as opposed to being subject to either changed terms or harsher penalties when the program closes.”

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