Since 2009, the Internal Revenue Service has offered three different amnesty programs for taxpayers with undeclared foreign bank accounts. These programs, the current version of which is entitled the Offshore Voluntary Disclosure Program (OVDP), have been subject to harsh criticism because they adopt a “one size fits all” penalty structure which fails to take account of the facts and circumstances of each case and, in particular, the reality that not every U.S. taxpayer with an offshore bank account is intending to evade his/her U.S. tax obligations. This is particularly true in the case of U.S. taxpayers who reside abroad, and may not be fully informed of their U.S. tax obligations (including the necessity to report non-U.S. bank accounts on the FBAR form).
The Taxpayer Advocate has been particularly critical of the IRS and its administration of the offshore voluntary disclosure programs. In her most recent report to Congress, the Taxpayer Advocate found that the “The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Made Honest Mistakes” and offered the following commentary:
Many people fail to report offshore income and file related information returns for a wide variety of reasons. With few exceptions, the IRS requires them to “opt into” a punishing offshore voluntary disclosure settlement program. The combination of the reporting statute and the way the IRS administers it creates the potential for such harsh penalties that some taxpayers agree to pay unwarranted amounts to avoid the penalties.
The median penalty paid under the 2009 program by taxpayers who had the smallest accounts, and did not have legal representation, was nearly eight times the unpaid tax. It was also disproportionately greater than what the IRS extracted from those with the largest accounts; they paid a median of about three times the unpaid tax. Thus, the IRS has extracted the most extreme penalties from unrepresented taxpayers with small accounts who were voluntarily trying to correct a mistake. By contrast, IRS data suggests that those who don’t try to comply often remain undetected. Yet the IRS’s audit rate with respect to foreign financial account reporting is less than 0.25%.
In 2012, in response to this criticism, the IRS announced a new compliance program for non-resident U.S. taxpayers who were not compliant with their tax and FBAR reporting obligations. This program, referred to as “Streamlined Filing Compliance Procedures for Non-Resident Non-Filer U.S. Taxpayers,” was described by then-IRS Commissioner Douglas Shulman as “a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues.” The IRS formulated this procedure in response to revelations that many U.S. taxpayers living abroad only recently became aware of their U.S. tax and FBAR obligations. Taxpayers who wish to take advantage of the new procedure are required to file delinquent tax returns for the past three years and delinquent FBARs for the past six years, but the program is only available to taxpayers who have not filed U.S. returns. Penalty relief is available to taxpayers who present “low compliance risk.” While this new program appeared to be a step in the right direction, it still was subject to criticism by the Taxpayer Advocate (see here) and others because of its burdensome nature and the fact that penalty relief was uncertain and depended upon the IRS’ analysis of each individual taxpayer’s “compliance risk.”
On June 3, 2014, in remarks at the OECD International Tax Conference (available here), IRS Commissioner John A. Koskinen revealed that the IRS was considering modifications to the terms of the current OVDP in order to make them more fair and equitable. In particular, Commissioner Koskinen stated as follows:
Now, while the 2012 OVDP and its predecessors have operated successfully, we are currently considering making further program modifications to accomplish even more. We are considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don’t necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. For example, we are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives. We have been considering whether these individuals should have an opportunity to come into compliance that doesn’t involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas. We are also aware that there may be U.S.-resident taxpayers with unreported offshore accounts whose prior non-compliance clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn’t involve the threat of substantial penalties.
We are close to completing our deliberations on these respects and expect that we will soon put forward modifications to the programs currently in place. Our goal is to ensure we have struck the right balance between emphasis on aggressive enforcement and focus on the law-abiding instincts of most U.S. citizens who, given the proper chance, will voluntarily come into compliance and willingly remedy past mistakes. We believe that re-striking this balance between enforcement and voluntary compliance is particularly important at this point in time, given that we are nearing July 1, the effective date of FATCA. We expect we will have much more to say on these program enhancements in the very near future. So stay tuned.
To date, more than 43,000 taxpayers have taken advantage of the offshore voluntary disclosure programs offered by the IRS since 2009, and have paid more than $6 billion in taxes, penalties, and interest to the U.S. Treasury. These statistics make clear that the offshore voluntary disclosure programs are by far the most successful voluntary disclosure programs ever offered by the IRS, and even more taxpayers are enrolling in OVDP now as a result of the U.S.-Swiss bank program (described here) and the upcoming July 1 effective date of FATCA. Commissioner Koskinen’s comments that modifications to the terms of the OVDP are welcome news to taxpayers and practitioners, but until the specific details are announced we can only take a wait and see approach.