On June 18, 2014, the IRS made the following modifications to the Offshore Voluntary Disclosure Program. I find two of the requirements particularly interesting.
The first is that the taxpayers are required to pay the offshore penalty at the time of the OVDP application. As I recall, this was an existing requirement, but my sense was that it was not rigorously enforced. Adding it here as a new “modification” makes me wonder if this will be more strictly monitored. Compliance can many times be onerous or impossible. A 27.5% penalty on a $400,000 balance from 2009 can be assessed, but the balance of the account in 2014 may be nil for any number of reasons. Strict enforcement of pre-payment may force more taxpayers into hiding, which is the opposite of the goal of the program.
Additionally, forcing pre-payment would force the taxpayer to pay funds to the service that may not ever be imposed. Say a taxpayer were to receive the closing letter and opt out of the program, later obtaining a much better result with civil audit. It is not very often that I come across clients who are excited by the idea of having the IRS hold a substantial sum of their money while the process works itself out. It will be interesting to see whether the modification results in any discernible change in the IRS’s acceptance of taxpayers into the program.
The second item of interest is the new possible 50% penalty that will be imposed if the OVDP pre-clearance does not occur before a public announcement that a financial institution is under investigation. This should be a big motivator for taxpayers to reevaluate their decision to keep their fingers crossed that they will never be discovered.
If you are wondering whether you might end up in the cross-hairs of the IRS, there’s no better time to contact a tax professional.
Offshore Voluntary Disclosure Program (OVDP) Modified
The changes announced today also make important modifications to the OVDP. The changes include:
- Requiring additional information from taxpayers applying to the program;
- Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
- Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
- Enabling taxpayers to submit voluminous records electronically rather than on paper;
- Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.