Offshore accounts can be useful business tools for any number of reasons. However, they also involve a complex tangle of tax laws, international treaties and legal precedent. The following is a brief history and development of the IRS Offshore Voluntary Disclosure programs.
Swiss Bank Accounts
The United States and Switzerland entered into a Tax Information Exchange Agreement (TIEA) in 1997, governing the mutual exchange of information between the countries. Pursuant Article 26 of the Tax Treaty, the countries 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 taking a more limited view of the term and the U.S. adopting 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 entered into a mutual agreement setting new guidelines for the exchange of tax information. The new guidelines substantially expanded the scope of tax information to cover civil and criminal penalties, as well as situations in which one of the countries had a “reasonable suspicion” that tax fraud had been committed.
In that same year, the IRS began to understand the scope of the problem and gained a better understanding of the large number 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 Union Bank of Switzerland (UBS) became the initial focus of this effort and entered into an agreement (often referred to as a Q1 Agreement) with the U.S. to identify income earned by U.S. taxpayers. If a customer would not agree to disclosure, UBS would initiate back-up withholding to the income for remittance to the IRS. Further, 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 unreported foreign accounts and income held by U.S taxpayers. A critical tool in that assault was the elevation of FBAR reporting requirements and the large civil and criminal penalties.
2009 Offshore Voluntary Disclosure Program (2009 OVDP)
After the UBS scandal, the IRS announced the 2009 OVDP in March 2009. This Program offered taxpayers an opportunity to avoid criminal prosecution and to settle a variety of civil and criminal penalties in the form of a single “miscellaneous offshore penalty.” The 2009 OVDP 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 by taxpayers for this voluntary program. By its scheduled October 15, 2009, closing date, the IRS received 15,000 disclosures, leading to the collection of approximately $3.4 billion in back taxes, interest and penalties.
2011 Off Shore Voluntary Disclosure Initiative (2011 OVDI)
The 2009 OVDP was a success, resulting in thousands of disclosures and furthering 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 to extend the program, as additional individuals sought to come forward and voluntarily disclose their offshore accounts. In February 2011, the IRS announced the 2011 OVDI, which lasted until September 9 of that year. Generally, participants in 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 penalty, depending on the severity of their noncompliance. The 2011 OVDI drew another 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 success of 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 the program 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 eligible 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. The 2012 OVDP drew more than 12,000 disclosures.
2014 Offshore Program Changes
In June 2014, the IRS announced major changes to the 2012 offshore account compliance programs, providing new options to help taxpayers residing in the United States and overseas. The changes provided 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 modified the OVDP program by 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.
Conclusion of 2014 OVDP and 2018 Combined Voluntary Disclosure Program
Following a decline in disclosures (only 600 in 2017), the IRS announced in March 2018 that the OVDP would close on September 28, 2018. Since its initial launch in 2009, the various IRS Offshore Voluntary Disclosure programs led to more than 56,000 taxpayers coming forward and resulted in the collection of more than $11.1 billion in back taxes, interest, and penalties. In its announcement, the IRS made clear that offshore tax noncompliance would remain a top priority of the IRS, and encouraged taxpayers to enter the program before it closed.
In November 2018, the IRS unveiled new Voluntary Disclosure Guidelines, applicable to both offshore and domestic disclosures.
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 criminal charges or substantial penalties.
To learn more about the Voluntary Disclosure Program and any other options available to you, contact the dual-licensed Attorney-CPA’s at the law firm of Daniel Rosefelt & Associates, LLC, Attorney & CPA at (301) 656-4424 or reach out by completing our ten-second contact us form to know your real options. We serve clients from around the world at our offices in Bethesda, Maryland (Greater Washington D.C. Metro area), or from our satellite offices by appointment in Fairfax, Virginia and Saint Petersburg Florida.