Offshore Voluntary Disclosure – History

Offshore accounts are useful business tools for any number of reasons. However, they also involve a tangle of tax laws, international treaties and legal precedent. You’ll find a brief history of recent IRS behavior regarding off shore accounts below.

Protect your investments by contacting Daniel Rosefelt & Associates, LLC, Attorney & CPA at (301) 656-4424 or reach out by completing our ten-second consultation form.

Swiss Bank Accounts

The United States and Switzerland entered into a Tax Exchange Information Exchange Agreement (TIEA) in 1997, governing the mutual exchange of information between the countries. Pursuant Article 26 of the Tax Treaty between the countries, they agreed to exchange tax information needed for the “prevention of tax fraud or the like in relation to taxes” that are subject to the Treaty.

However, the two countries had different definitions of “Tax Fraud” with Switzerland having a more limited view of the term and the U.S. having a more expansive definition. As a result, the countries had difficulty in reconciling their differences and the scope of the information to be exchanged.

In 2003, the U.S. and Switzerland finally entered into a mutual agreement setting new guidelines for the exchange of tax information and substantially expanding the scope of tax information to cover civil and criminal penalties and situations in which one of the countries that a “reasonable suspicion” that tax fraud had been committed.

In that same year, 2003, the IRS began to understand the scope of the problem and the existence of large numbers of unreported foreign accounts held by U.S. taxpayers. As a result, the IRS began a diligent search for offshore accounts, and a commitment to find and prosecute non-compliant U.S. taxpayers with unreported foreign accounts and offshore income.

The Swiss Bank UBS became the initial focus of this effort, and UBS entered into an agreement (often referred to as a Q1 Agreement) with the U.S. to identify income earned by U.S. taxpayers, and if the customer would not agree to disclosure, apply back-up withholding to the income for remittance to the IRS. Furthermore UBS agreed to bar future investment accounts by those individuals. UBS soon failed to live up to the Agreement and became the starting point for a U.S. legal assault on unsorted foreign accounts and income held by U.S taxpayers. A critical tool in that assault was the elevation of FBAR reporting requirements, and its large civil and criminal penalties as a weapon in that war.

2009 Offshore Voluntary Disclosure Program (2009 OVDP)

After discovering the UBS scandal, the IRS announced the 2009 OVDP in March 2009. It offered taxpayers an opportunity to avoid criminal prosecution and a settlement of a variety of civil and criminal penalties in the form of single miscellaneous offshore penalty. It was based on existing voluntary disclosure practices used by IRS Criminal Investigation. Generally, the miscellaneous offshore penalty for the 2009 program was 20 percent of the highest aggregate value of the unreported offshore accounts from 2003 to 2008. Participants were also required to file amended or late returns and FBARs for those years. Publicity surrounding U.S. enforcement actions against certain foreign banks led to strong demand of this voluntary program by taxpayers. The IRS received 15,000 disclosures for the 2009 OVDP, prior to the scheduled Oct. 15, 2009 closing date for admission into that program. $3.4 billion in back taxes, interest and penalties were collected in that program and led to another 3,000 disclosures after the closing date.

2011 Off Shore Voluntary Disclosure Initiative (2011 OVDI)

The 2009 OVDP program resulted in many disclosures and furthered the investigation of many individuals and financial institutions that facilitated non-compliance with U.S. tax laws.  As these investigations continued, the IRS responded to requests from tax practitioners that additional individuals sought to come forward and voluntarily disclose their offshore accounts. In February 2011, the IRS announced the 2011 OVDI, which lasted until Sept. 9 of that year. Generally, participants of the 2011 OVDI program paid a 25-percent miscellaneous offshore penalty on the highest aggregate value of unreported offshore accounts from 2003 to 2010. In addition, some participants were eligible for a reduced special 5-percent or 12.5-percent penalties, depending on the severity of their noncompliance. The 2011 OVDI drew 15,000 disclosures and resulted in the collection of $1.6 billion in back taxes, interest and penalties for the cases that were closed that year.

2012 Offshore Voluntary Disclosure Program (2012 OVDP)

After the two prior voluntary programs, continued strong interest by taxpayers and tax professionals led to a third program. In January 2012, the IRS revised the terms of the 2011 OVDI program and made it permanent until further notice. Under the 2012 Offshore Voluntary Disclosure Program, participants pay a penalty of 27.5 percent of the highest aggregate balance or value of offshore assets during the prior eight years. The 5 or 12.5 percent penalties remained in effect for certain taxpayers. In June 2012, the IRS added an option to the existing disclosure program that enabled some U.S. citizens and others residing abroad to catch up on their filing requirements and avoid large penalties if they owed little or no back taxes. This option took effect in September of that year. This 2012 program has drawn 12,000 disclosures since its inception.

2014 Offshore Program Changes

In June 2014, the IRS announced major changes in the 2012 offshore account compliance programs, providing new options to help taxpayers residing in the United States and overseas. The changes are anticipated to provide thousands of people with a new opportunity to come back into compliance with their tax obligations. With expansion of the streamlined procedures for non-willful taxpayers, the IRS also adjusted the terms for taxpayers participating in the OVDP whose conduct may reflect willful non-compliance. The changes modify the OVDP program increasing the penalty to 50 percent for  certain taxpayers seeking relief from potential criminal prosecution when their bank is publicly identified as being under investigation by the IRS.

The IRS is encouraging taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that they or their banks being investigated. By then, it may be too late to avoid potential criminal charges, or the new higher penalties under the OVDP of 50 percent – nearly double the regular 27.5 percent.

Daniel Rosefelt, Attorney & CPA has significant experience in resolving international tax problems and can help you make the right decision about your undisclosed offshore accounts or unreported offshore income. Contact us at (301) 656-4424 or reach out by completing our ten-second consultation form.