On November 29, 2018, the Internal Revenue Service (“IRS”) announced a new set of rules governing the 2018 Offshore Voluntary Disclosure Program (“OVDP”). The OVDP allows taxpayers with undisclosed foreign accounts to potentially avoid criminal prosecution and/or severe civil penalties. Previously, taxpayers that entered into the OVDP were required to amend tax returns for up to eight years, disclosing any previously undisclosed foreign source income. Participants were also required to satisfy any tax liabilities reflected on the amended returns and were assessed an additional 20 percent accuracy-related penalty. Finally, participants of the OVDP were subject to a 27.5 percent penalty (a Title 26 penalty) on the highest aggregate undeclared foreign financial assets during the last eight years of noncompliance. The 27.5 percent did not just include the value of undisclosed foreign financial accounts, it also included the value of non-financial assets, such as real estate, art, and jewelry in the calculation of the penalty.
The 2018 OVDP Reduces the Number of Amended Returns Required to Participate in the Program
The 2018 OVDP may be a better or worse deal for taxpayers compared to the prior OVDP depending on the participants facts and circumstances of the case. Under the 2018 OVDP, participants are now only required to amend six tax returns compared to eight. The IRS will no longer assess an additional 20 percent accuracy-related accuracy penalty on unsatisfied tax liabilities. However, in lieu of the accuracy-related penalty, the IRS will now assess a 75 percent fraud penalty on the amount of tax due for the year with the highest tax liability. (However, the IRS reserves the right to assess the 75 percent penalty on other years).
The 2018 OVDP Penalty Structure- Increased for Some and Decreased for Others
As discussed above, under the last OVDP, participants were subject to a so-called 27.5 Title 26 miscellaneous penalty. It was called a miscellaneous penalty because there were no provisions in the Internal Revenue Code that specifically authorized the IRS to assess such a penalty. The penalty was assessed on the aggregate of all undeclared foreign assets. Under the 2018 OVDP, the IRS will assess penalties under 31 U.S.C. Section 5321(a)(5)(C)(i). Under 31 U.S.C. Section 5321(a)(5)(C)(i), the IRS can impose a penalty of $100,000 or 50 percent of the balance of an unreported foreign financial account. The 2018 OVDP appears to cap the 50 percent penalty for all unreported accounts within the six year compliance period to one year. However, the IRS is not limited to assessing the penalty to only one year. At first glance it appears that the 2018 OVDP penalty structure is draconian. However, in certain cases, the 2018 OVDP penalty structure is more generous than the previous OVDP, especially if the IRS limits the penalty to one compliance period. This is because under the 2018 OVDP the penalty is not assessed on all undeclared foreign assets. Instead, the penalty is limited to only undisclosed foreign financial accounts. It is easy to envision cases where taxpayers will end up paying less penalties through the 2018 OVDP as compared to previous OVDPs.
Conclusion
The spirit of a voluntary disclosure for taxpayers with undisclosed foreign financial accounts still continueswith the 2018 OVDP. Under current practice, the IRS still considers a disclosure of undisclosed foreign bank accounts and foreign source income a true “voluntary disclosure” through the 2018 OVDP. The 2018 OVDP is an option for individuals who willfully failed to disclose foreign financial accounts and/or foreign source income on their tax returns or FBARs. With that said, unlike previous OVDPs which was formulaic and governed by rules promulgated by the IRS, there is no one size fits all formula for 2018 OVDP and there are no rules governing the program. This means the IRS agent reviewing a disclosure will have sole authority to determine the penalties that could be assessed against a participant. It is not too difficult to envision a scenario in which a “gung-ho” agent will seek to impose penalties for every OVDP compliance year. Although participants will have normal administrative appeal options or options in court to contest an agents determinations, anyone considering entering into the 2018 OVDP should tread carefully.
Anthony Diosdi is one of the founding partners of Diosdi Ching & Liu, LLP, a law firm with offices located in San Francisco, California; Pleasanton, California; and Fort Lauderdale, Florida. Anthony Diosdi concentrates his practice on tax controversies and tax planning. Diosdi Ching & Liu, LLP represents clients in federal tax disputes and provides tax advice throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: Anthony Diosdi – adiosdi@sftaxcounsel.com
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.