5 Points To Consider As Overseas Disclosure Program Ends

By Amy Lee Rosen

Law360, Los Angeles (May 14, 2018, 10:42 PM EDT) — While the IRS’ termination of the Offshore Voluntary Disclosure Program has left many hopeful it will be extended or replaced, potential violators who have yet to disclose their foreign bank accounts need to weigh their options, with the most important question being whether to enter the program before it shuts down.

The IRS decided in March it would end the 2014 OVDP on Sept. 28. The program, established in 2009, lets taxpayers who have not yet shared information on their foreign bank accounts with the federal government to disclose that information while avoiding certain penalties. But participants have dwindled over the years, from about 18,000 at the peak in 2011 to about 600 in 2017.

Before Sept. 28, potential violators can enter the OVDP without worrying whether their conduct is willful or nonwillful, but those who choose not to enter the program because they are worried they may not qualify must weigh the risks between filing the initial application and using other disclosure options that will still be available. If taxpayers who contemplate entering the program don’t do it soon, however, potential violators could receive steep penalties of at least $100,000 or up to half the amounts in their foreign bank accounts for certain misconduct. They may even face criminal charges if their conduct is later determined to be willful.

Here, Law360 explores five topics for tax practitioners and their clients to consider as the OVDP approaches its end.

Go Through Your Client List

Lawyers typically have client lists that track people who have come in to discuss important legal issues, and accountants may have clients they are concerned about, so now is the time to reach out to these people to let them know they have a short time left to decide whether to enter the program.

Shannon Retzke Smith, a partner at Withers Bergman LLP, said lawyers should mind their client lists carefully. Look for those who have already come in seeking legal advice but may not have been ready to do something in the past, and call them, because their time is now up.

“At this point, those people have a choice. They really need to come in,” she said. She stressed that if a client is still thinking about what to do, the attorney should reach out and tell that person to make a decision now, because it can’t wait another year.

The Internal Revenue Service is now coming for people, so the time is now to do something about it while you still can, Smith warned.

The idea the IRS will prosecute everyone seems unlikely, because there are about 8 million noncompliant people abroad, while a little more than 1 million reports on foreign bank and financial accounts, or FBARs, are filed yearly, she said, and those people still need a program to go into after Sept. 28. Smith said that while she thought a program still needed to exist for people who fail to enter before Sept. 28, she feared a potential new program would not be better than what’s currently available under the OVDP.

“The terms aren’t going to get better than 0 percent penalty for people living offshore,” Smith said. “I’m worried that will become higher.”

Consider How Filing Affects Others

Before making a decision on whether to enter the program, it is important to consider the effect that a disclosure may have on related parties, such as a family member, since entrance requires mailing an Offshore Voluntary Disclosure Letter and an attachment, which means sharing a lot of information.

“The taxpayer wants to consider whether anybody else will be affected, like if an account is held by a parent or a sibling,” said Niles Elber, a member at Caplin & Drysdale Chtd. “That information gets provided as part of the voluntary disclosure.”

The finality of the OVDP’s closure may cause a situation in which a taxpayer is prepared to make a disclosure, but doing so could put a family member or other significant person in jeopardy without giving that person a chance to make his or her own disclosure, Elber said.

“Given limited opportunities or maybe not preferable opportunities to deal with this, you definitely want to give that consideration now,” he said. “You don’t want to put that off to the last minute, either.”

Organize Documents and Consider Applying Early

The actual application procedures require organizing and submitting a lot of information, and because the IRS takes some time to determine whether an applicant can initially qualify to enter the OVDP, many tax practitioners are pushing for people to organize information and consider filing sooner rather than later.

Caroline D. Ciraolo, a partner at Kostelanetz & Fink LLP and former acting assistant attorney general of the U.S. Department of Justice’s Tax Division, told Law360 that people should file sooner, because beginning the actual application to enter the OVDP program requires a significant amount of information that takes time to gather, and because the filing is signed by the taxpayer under penalty of perjury.

“For taxpayers who believe that they could benefit from the program, they can’t wait until September until they start that process because according to the FAQs at the announcement of the closing,” she said, “there needs to be a lot of information submitted before then.”

The OVDP’s closure is different than those of past programs, when someone just submitted a preclearance request by the deadline with a name, a Social Security number and why the person wanted to be cleared, she said.

“The information the IRS requires includes what are the tax years at issue, what is the tax liability, what is the tax income and unreported income,” Ciraolo said. “It’s important that taxpayers start now if they want to take advantage of the current program.”

Before a taxpayer can even submit the materials for the OVDP program, she said, a preclearance letter must be submitted, and it could take a month or two to find out if a client is cleared for entrance into the OVDP. Waiting until the last minute isn’t an option.

“It’s important if you are thinking of the program to submit a preclearance letter as soon as possible,” Ciraolo said.

Ciraolo and Elber co-wrote a letter on behalf of the American Bar Association’s Section of Taxation to the IRS earlier this month, urging the agency to extend the Sept. 28deadline.

Elber said Sept. 28 is still a hard deadline, at least for the time being, so if a client likes a concrete idea on how to resolve a potential FBAR issue, making use of the OVDP eliminates uncertainty.

For clients who see him for advice, he said it was: “Do what’s going to let you sleep at night — and if you’re coming to see me it’s likely because you can’t sleep at night.”

“And the OVDP does get you there,” he added, “but at a cost.”

Weigh the Risks

Applying for and entering the OVDP has its own risks, because if a person is not accepted into the program, financial information is shared with the IRS that at least indicates a foreign bank account exists. So it is important to weigh the risks in entering the program, juxtaposed with the other options that will still be available.

A taxpayer who is allowed into the OVDP, whether or not that person is a willful or a nonwillful violator, will generally pay taxes, interest and a 20 percent penalty on whatever is owed. That amount could be up to 27.5 percent, or in some cases as high as 50 percent, depending on whether the bank is on an IRS list of foreign financial institutions that have been determined to help evade paying U.S. taxes.

Victor A. Jaramillo, who is of counsel at Caplin & Drysdale Chtd., said it was important to weigh the risk factors between entering the OVDP, or entering an alternative such as the streamline program if a taxpayer is likely to be a nonwillful violator. A client may also consider a quiet disclosure or a manual disclosure, he said. All have different risks, requirements and penalties.

“Assess the risk tolerance of your clients,” Jaramillo said.

Streamlined Foreign Offshore Procedures were announced in 2012 for people living outside the United States and were extended to taxpayers residing in the U.S. in 2014. Streamline requires a taxpayer to file three years of amended returns and six years of delinquent FBARs. While no penalty is applied to nonresident taxpayers, resident taxpayers must pay a 5 percent miscellaneous penalty, but the streamline process does not have a preclearance procedure like that under the OVDP.

“For streamline you run your risk assessment on your story or willfulness,” Jaramillo said. “Your penalty is either 0 or 5 percent depending on whether you qualify as foreign.”

If a streamline procedure is disclosed for a smaller account and is found to be nonwillful, the penalty could be $10,000 per account or less, he said.

In a quiet disclosure, on the other hand, a taxpayer amends tax returns and files previously unreported FBARs. The risk with this option is it shows that the taxpayer is willful, which would eliminate that person from the streamline procedure. If the IRS pursues an investigation, the taxpayer could face penalties of at least $100,000 or up to half of the foreign accounts for certain misconduct, and even potentially receive criminal charges.

“Obviously the IRS has expressed its disdain for quiet disclosures,” Jaramillo said.

Another option is a manual disclosure, where a taxpayer slaps a cover letter on amended returns, lets the IRS know he or she is willing to cooperate, then see what happens, he said.

“If you go under the manual, you’ll owe tax and wait for them to assess penalties — which is failure to file, or failure to pay, plus accuracy-related penalties,” Jaramillo said.

He said sometimes the manual disclosures are assessed automatically by the IRS and a taxpayer gets audited, so if a person uses this method it’s similar to streamline and has a similar penalty rubric, he said.

Refresh Your CI Rolodex

Refreshing contacts from the IRS’ Criminal Investigation Division can help clients who decide not to enter the program, so revisiting those relationships can help for those remaining who choose not to file an application before the end of September.

Before OVDP began in 2009, if a client possibly had a foreign bank account that needed to be disclosed, an attorney would contact someone from CI at IRS to discuss the case on anonymous terms in hopes of reaching a handshake deal.

Smith told Law360 that if the civil penalty structure that currently exists is eliminated, there must still be a way for the bad actor to disclose and there must be somewhere for that to happen, whether it’s in a handshake deal, or some new and formal procedure that the government comes up with.

“There has to be some way to process that person,” she said. “It is likely there will at least be a period of time after when this period ends and a new [program] being created, if any, where you’ll be trading on relationships in CI, again, to try to get a deal with a client that comes in that doesn’t meet the streamline criteria.”

Smith thinks that a relationship between an attorney and someone from CI can help close a deal if a client chooses not to enter OVDP before it closes. “You develop a degree of trust with these agents over time — you call Jeremy and he’d keep his word, I keep mine, deal is done,” she said. “You develop that over years, and you know if you have a handshake that’s what it’s going to be.”

Along with refreshing CI Rolodexes, the attorney should also consider the geography of where to pursue a handshake deal for a client because some jurisdictions are friendlier toward foreign bank disclosures than others, Smith said. Even different offices in the same state may not treat disclosures similarly.

“I’d point to Florida and California as being very unfriendly,” she said. “In the Northeast, you tend to get agents who have dealt with very sophisticated agents who can sift out who belongs in what category, so it’s more tailored. In Florida, they think everyone is the devil.”

–Editing by Robert Rudinger and Neil Cohen.

Written by Weisberg Kainen Mark, PL

Weisberg Kainen Mark, PL

Weisberg Kainen Mark, PL is a Miami-based law firm focused on providing comprehensive legal support to individuals and corporate entities caught up in tax controversies or charged with a criminal act. As experienced trial lawyers with a passion for justice, our firm provides clients with compelling advocacy, attorney availability, and creative solutions to your tax or criminal law matters.