One of today's most talked about tax topics is the Offshore Voluntary Disclosure Program of 2014 (OVDP) and the compliance of individuals, institutions, and governments with the Foreign Account Tax Compliance Act. However, it is vital for one to understand why the IRS provided the public with the opportunity represented by this program.
For years upon years, there have been questions at the bottom of Schedule B regarding whether a taxpayer had any financial interest or signatory authority over a foreign bank account. Those questions were mostly ignored until spring 2007.
Swiss banks are known for their secrecy, and it is a part of Swiss culture. However, money held in these Swiss banks mainly comes from individuals outside of Switzerland. The previous regime in Swiss banking allowed wealthy individuals throughout the world to keep money in these banks in such a way that no third party would have access to any of the account information.
Why was this the standard of Swiss banking for such a long time? Swiss private banking plays a major role in Switzerland's economy. Thousands of people are employed in this business, and the amount of revenue it creates for the country is astronomical. Furthermore, when high-net-worth individuals wanted access to their money, they would come to Switzerland and spend their wealth, benefiting many businesses.
Bradley Birkenfeld worked for the Union Bank of Switzerland (UBS) as a midlevel banker for approximately 10 years and now is considered by many one of the most important whistleblowers in history. While working in Switzerland, Birkenfeld helped invest and move his clients' money. If the client wanted something, such as a car or diamonds, bankers like Birkenfeld would deliver the asset to the client personally because the clients were not permitted to have online bank accounts. Meetings related to the accounts typically took place in Switzerland or in the United States.
Birkenfeld was the first person to expose information about Swiss bank accounts. When he went to the US Justice Department, he gave the US government knowledge of approximately 19,000 clients and assets worth $19 billion in the United States, which were managed by UBS out of Switzerland. Although Birkenfeld turned over information on 19,000 clients, he still did jail time for not turning in his biggest client. After Birkenfeld was released, the IRS wrote him a $104 million whistleblower reward check.
Subsequently, the IRS came out with a program where individuals would be able to come clean regarding any offshore accounts in order to avoid criminal charges.
14 OVDP Requirements for Taxpayers
The following is a list of requirements that taxpayers must meet in order to participate in the 2014 OVDP:
- All taxpayers must provide copies of previously filed original federal income tax returns for tax years covered by the voluntary disclosure.
- All taxpayers must provide complete amended federal income tax returns for all tax years covered by the voluntary disclosure, with supporting schedules detailing previously unreported income from foreign financial accounts or domestic sources.
- A copy of the completed and signed Offshore Voluntary Disclosure Letter must be provided.
- Agreements have to be completed and signed by taxpayers to extend the period of time to assess tax and to assess Report of Foreign Bank and Financial Accounts (FBAR) penalties.
- Taxpayers who are disclosing foreign financial accounts must provide copies of filed FBARs.
- Copies of statements for all financial accounts reflecting account activity must be provided for the tax years covered by the voluntary disclosure.
- Taxpayers who are disclosing foreign entities must provide a statement identifying all foreign entities that are held directly or indirectly.
- Taxpayers who are disclosing foreign entities must complete returns that are required to be filed, such as forms 3520, 3520-A, 5471, etc.
- Taxpayers with estate and gift tax issues are required to provide gift or estate tax returns.
- Taxpayers must pay 20 percent accuracy-related penalties under Code Section 6662(a) on the full amount of the offshore-related underpayments of tax for all years.
- Taxpayers must pay failure-to-file penalties under Code Section 6651(a)(1).
- Taxpayers must pay failure-to-pay penalties under Code Section 6651(a)(2).
- Taxpayers must pay a miscellaneous Title 26 offshore penalty of 27.5 percent of the highest aggregate value of the OVDP assets during the period covered by the voluntary disclosure.
- Taxpayers must agree to cooperate with the IRS's and the Justice Department's offshore enforcement efforts. If requested, taxpayers must provide information about financial institutions and other facilitators who helped the taxpayers establish or maintain an offshore arrangement.
Effective July 1, 2014, the 2012 OVDP was modified and replaced with the 2014 OVDP. Included in the modification is the increased penalty of 50 percent applied to all of the taxpayer's assets subject to the OVDP penalty if certain circumstances exist (otherwise the penalty remains at 27.5 percent).
The taxpayer is subject to this 50 percent penalty if there has been a public disclosure/filing that the financial institution where the account is held or that the facilitator who established and maintains the taxpayer's offshore account is under investigation by the IRS or the Justice Department. The modification also requires taxpayers to include all offshore account statements, as well as payment of the offshore penalty and any additional taxes due at the time of the OVDP application. As part of the 2014 modifications, these statements and other voluminous records can be filed electronically on a CD or DVD.
Additionally, the streamlined procedures first introduced with the 2012 OVDP were also modified to include US taxpayers and eliminated the requirements that the taxpayer has $1,500 or less in unpaid tax per year, as well as the risk questionnaire. The IRS added to the 2014 streamlined program the requirement that the taxpayer certifies that the nonfiling of offshore accounts was not willful. With the nonwillful section included in the streamlined program, the IRS has eliminated the reduced penalty section of the 2012 OVDP and has instructed taxpayers to utilize the streamlined program instead.
Nonfiling under the OVDP can result in significant penalties from the IRS and the Justice Department, as well as the possibility of criminal prosecution and jail time. Certain taxpayers have decided to file amended returns and quietly include their offshore account income in the amended returns without filing under the OVDP, which is known as a âsilent disclosure.â Silent disclosures are being closely analyzed by the IRS and, if audited, can result in increased penalties with criminal prosecution as well. The IRS recommends that taxpayers who have already filed these amended returns submit an application utilizing the OVDP to take advantage of the penalty framework, as well as including a copy of the original and amended returns with the application.
Regardless of the intensive requirements, taxpayers with undisclosed foreign accounts should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties, and eliminate the risk of criminal prosecution. Another benefit of making a voluntary disclosure is the opportunity to calculate the total cost of resolving all offshore tax issues.
Taxpayers who don't submit a voluntary disclosure run the risk of detection by the IRS and the imposition of potentially much higher penalties, including those relating to fraud and foreign information returns, in addition to the increased risk of criminal prosecution.