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Voluntary Disclosure of Previously Unreported Offshore Assets Just Got More Expensive by Andrew Leonard, CPA

Posted on January 04, 2019 by Andrew Leonard

Sept. 28, 2018, marked the end of the IRS’s Voluntary Offshore Disclosure Program (OVDP), which provided reticent taxpayers with protection from criminal prosecution and an opportunity to pay reduced penalties when they came forward to report and pay taxes on unreported foreign income and assets. As a result, the IRS has put into place new, more expensive processes and procedures for taxpayers to come clean with the caveat that amnesty from criminal investigations and civil penalties will now be assessed by the IRS on a case-by-case basis.

Background

U.S. tax law requires U.S. citizens, resident aliens, trusts, estates and domestic entities to annually report to the IRS information about any and all foreign bank and financial accounts (FBAR) with an aggregate value of more than $10,000 in which they have an ownership interest.

Taxpayers who unwillingly forget to file an FBAR by the April 15 federal income tax filing deadline have an opportunity to correct the mistake by filing amended or delinquent tax returns or availing themselves of the IRS’s Streamlined Compliance Filing Procedures. Conversely, those taxpayers who willingly fail to file an FBAR will be exposed to criminal prosecutions and significant penalties of up to $100,000 or half of the highest account balance during the unreported year.

Current Options for Voluntary Disclosure

Despite the elimination of the OVDP, taxpayers still have an opportunity to voluntarily disclose those assets that they willingly failed to report avoid criminal prosecution and potentially minimize fraud and FBAR penalties.

Under the IRS’s new framework, taxpayers wishing to make a voluntary disclosure must first submit a timely pre-clearance request to the agency’s criminal investigation unit (CI), which, in turn, will determine if the taxpayer is eligible for the program. If CI grants clearance, taxpayers must submit all required voluntary disclosure documents and a narrative describing the facts and circumstances of their previous noncompliance, including details about assets, entities and related parties involved in the failure to report.

CI examiners will then gather information and build a case to determine the appropriate tax liabilities and applicable penalties, much in the same way that the IRS will audit taxpayers’ prior year returns. It is important for taxpayers to recognize that this new investigation and resolution framework involves many

  • The IRS has the discretion to expand the scope of their investigation to taxpayer’s domestic assets and income.
  • The disclosure period will now require examinations of the taxpayer’s returns for the most recent six years
  • Fraud and FBAR penalties, which are now referred to as civil fraud penalties, will be applied to the one tax year over the six-year disclosure period in which the taxpayer would have incurred the highest tax liability. However, based on the facts and circumstances of each individual case, examiners have the ability to apply these penalties to each of the six years, or more when taxpayers do not cooperate with investigations.
  • Taxpayers retain the right to appeal the IRS’s findings after an examination, but they also carry the burden of proof to present convincing evidence to justify an appeal.

While there is little doubt that the new framework for voluntary disclosure will result in higher penalties, taxpayers should discuss this option with their tax advisors in order to avoid criminal prosecution and related penalties.

About the Author: Andrew Leonard, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on pre- and post-immigration tax planning for individuals from South America, Asia and Europe and helps U.S. residents with foreign interests meet their filing disclosure requirements. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.

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