Reporting Undisclosed Foreign Assets

On March 13, the IRS announced that it will close the Offshore Voluntary Disclosure Program (OVDP), effective September 28, 2018. In the announcement, the IRS encouraged taxpayers who need to disclose noncompliant and unreported foreign accounts and assets to come forward before the September deadline. Qualifying taxpayers who have unreported foreign accounts can still use the OVDP to come into compliance while avoiding the risk of criminal prosecution and minimizing otherwise applicable civil penalties, but only until that date. As of this writing, it not yet known whether the IRS will announce a new program or initiative to replace the OVDP.

Taxpayers have until September 28, 2018, to submit the OVDP Letter and Attachments and thus qualify for the terms of the current OVDP. Taxpayers who need to make a voluntary disclosure of offshore assets would therefore be best served to act quickly. Any subsequent program offered by the IRS is likely to come with even stiffer penalties, as evidenced by the increase in penalty rates between the original 2009 OVDP and the current OVDP.

For those taxpayers who need to make a voluntary disclosure of offshore matters after the deadline, the IRS’s general voluntary disclosure policy will continue to be available. Taxpayers proceeding in that manner will need to satisfy all of the requirements of making a voluntary disclosure noted above and should be mindful of two things in particular.

First, such taxpayers must make sure that they win the race by getting to the IRS before the IRS learns of their non-compliance. A taxpayer who comes forward after the IRS has learned of his conduct is not deemed to have made a timely voluntary disclosure. While the issuance of a summons to a third party seeking information about a class of people will not disqualify such taxpayers from making a voluntary disclosure under the IRS’s general voluntary disclosure policy, once the IRS has obtained the information from the third party that evidences a taxpayer’s non-compliance, that taxpayer is disqualified from making a voluntary disclosure; this is so even if the taxpayer is not aware that her information has been turned over to the IRS. As the IRS moves forward with its many sources of information, including its recent focus on unreported cryptocurrency-related income, taxpayers should come forward before their noncompliance comes to light.

Second, taxpayers and their advisors will need to grapple with the difficulty of making a voluntary disclosure without any certainty as to the financial cost of making such a voluntary disclosure. Voluntary disclosures made after the deadline will not be subject to any fixed penalty regime and will likely result in penalties that are even higher than the already steep 2014 OVDP penalty structure. This may lead some taxpayers to try to shoehorn their situation into one of the non-OVDP programs discussed above. Taxpayers struggling with this dilemma will need to be guided by competent professionals who can analyze the facts of their case and objectively determine whether their conduct was willful.