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IRS discusses offshore tax scams and notes OVDP will remain open for indefinite period

IR 2015-9

In a news release IRS has: 1) stated that its Offshore Voluntary Disclosure Program (OVDP) will remain open for an indefinite period, i.e., until it announces otherwise; 2) cautioned that avoiding U.S. taxes by hiding money or assets in unreported offshore accounts remains on its list of tax scams (know as the “Dirty Dozen”) for the 2015 filing season; and 3) cautioned that illegal scams can lead to significant penalties, interest, and possible criminal prosecution.

Background. On Mar. 26, 2009, IRS announced its first OVDP (2009 OVDP), a form of a tax amnesty program. It permitted U.S. taxpayers with unreported foreign accounts to avoid criminal charges and pay reduced civil penalties by making a voluntary disclosure to IRS. The 2009 OVDP ran through Oct. 15, 2009.

Thereafter, on Feb. 8, 2011, IRS announced a second OVDP (2011 OVDP). The 2011 OVDP was originally scheduled to close on Aug. 31, 2011, but IRS extended the closing date to Sept. 9, 2011.

On Jan. 9, 2012, IRS reopened the OVDP (2012 OVDP). On Jun. 18, 2014, IRS announced changes to the 2012, which took effect on Jul. 1, 2014.

According to IRS, since the opening of its OVDP in 2009, there have been more than 50,000 disclosures, resulting in the collection of more than $7 billion from the OVDP initiative alone. Furthermore, IRS stated that the thousands of offshore-related civil audits that it conducted have produced tens of millions of dollars. And, according to IRS, its pursuit of criminal charges has lead to billions of dollars in criminal fines and restitutions.

Unlike the previous programs, the 2012 OVDP does not impose a deadline by which taxpayers must make a voluntary disclosure to be eligible for avoiding criminal prosecution and pay reduced penalties – that is, it is open ended. However, according to the IRS web page on the 2012 OVDP, it may end the current program at any time.

News release discusses future of OVDP. In IR 2015-9, IRS declares that the OVDP will remain open for an “indefinite period until otherwise announced.”

RIA observation: While perhaps a nuanced linguistic difference, the statement stands in contrast to what’s stated on IRS’s webpage: “IRS may end the 2012 program at any time in the future.” Hopefully, IRS will further clarify the issue in the near future.

News release also warns about hiding income offshore. In the news release, IRS also stated that, over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

Even if there are legitimate reasons for maintaining an offshore financial account, taxpayers must comply with certain filings requirements. The failure to comply may result in penalties, interest, and possible criminal persecution.

According to IRS, it uses information obtained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of aiding clients in hiding their assets overseas. It also works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

Tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts since 2009, taking advantage of the special opportunities to comply with the U.S. tax system and resolve their tax obligations, stated IRS. And, it said, the provisions of the Foreign Account Tax Compliance Act that are being phased in over the next few years make hiding income offshore increasingly more difficult.

RIA caution: Taxpayers interested in participating in the 2012 OVDP should consult the National Tax Advocate’s (NTA’s) recently issued report to Congress, which highlighted flaws with the OVDP. According to the NTA, the flaws do not bode well for fairness and justice in IRS’s implementation of future settlement programs and undermine voluntary taxpayer compliance. See Weekly Alert ¶  29  01/22/2015.

References: For the IRS offshore voluntary disclosure initiative, see FTC 2d/FIN ¶  V-3829  et seq.; United States Tax Reporter ¶  72,014.15; TaxDesk ¶  871,019; TG ¶  71869.