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The IRS recently announced they will be closing the Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018. The IRS encourages taxpayers with undisclosed foreign accounts to act so that they may take advantage of the program. While the program can be extremely beneficial for taxpayers who have neglected to disclose their foreign assets or pay tax on their foreign income, recent court decisions may require rethinking tax strategies for coming into compliance.
Taxpayers who were unaware of their filing obligations can continue to use the Streamlined Filing Compliance Procedures, although the IRS said it may end this program as well sometime in the future.
Since the OVDP's inception 2009 56,000 taxpayers have participated, paying $11.1 billion in back taxes, penalties and interest. However, the number of taxpayers using the OVDP has declined from a peak of 18,000 people coming forward in 2011 to only 600 in 2017.
The foreign bank account report (FBAR) requirements introduced in the Bank Secrecy Act of 1970 requires a person having an interest in or signature authority over a bank, securities or other financial account in a foreign country to disclose their foreign accounts if the aggregate value of the accounts is greater than $10,000 at any time during the year.
While there is a reasonable-cause exception for non-willful violations, the penalty for willful violations can be staggering. In 2013, Ty Warner, the inventor of Beanie Babies, paid more than $53 million in FBAR penalties. Penalties in the original statute set a maximum penalty of $100,000 per account. The statute was amended in 2004 increasing the maximum penalty to 50% of each account per year of non-reporting.
OVDP offers the taxpayer a way out of these draconian penalties by hitting the taxpayer with a one-time penalty of 27.5% of the balance on the overseas account, and no criminal prosecution.
In U.S. v. Colliot the judge granted the taxpayer's motion for summary judgement on the basis that the regulation's maximum penalty of $100,000 was valid despite the government's argument that the regulation was overridden by the change in the statute in 2004. With the Collier decision, the 27.5% penalty charged in OVDP may well exceed the amount the regs would indicate as appropriate. On July 18th the second district court in U.S. v. Wadhan also ruled consistnt with Colliot, ruling that the IRS couldn't impose penalties in excess of the amounts provided for in the regs.
While the OVDP allows the taxpayer avoidance of criminal prosecution, a criminal trial requires a unanimous verdict, where the average juror may not be able to discern the difference between "clear and convincing' evidence or evidence "beyond a reasonable doubt" that a taxpayer willfully failed to file.
In Bedriosian v. U.S. the court found in favor of Bedrosian and that his failure to report $2 million of foreign assets was not willful. The court pointed out that Bedrosian was a credible witness at trial, fully cooperative and honest with the IRS, and he had engaged a lawyer and accounting firm to bring him into compliance prior to learning that the government was investigating him.
Bedrosian was able to avoid significant penalties and jail time largely due to his diligence in coming into compliance. Exposure to these penalty regimes can have significant consequences. With the expiration of the OVDP it's now time to ask how to come into compliance rather than when.