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Sunset on penalty relief for delinquent US tax filers

Sunset on penalty relief for delinquent US tax filers

Anna Brooks and Terry Hoban examine some IRS programs aimed at delinquent offshore US tax filers, which are set to expire soon.


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Skydivers against a sunset

With more than 56,000 taxpayers using the program and a whopping USD11.0 billion in back taxes collected by the United States (US) Internal Revenue Service (IRS), the IRS’s wildly successful Offshore Voluntary Disclosure Program (OVDP) is entering dusk before darkness descends with the close of the program in September 2018.

The OVDP was introduced in 2009 and is currently operating in its third incarnation. The program was specifically designed to give delinquent taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to wilful failure an opportunity to come forward and report all foreign financial assets and pay the tax due in respect of those assets.

Under the program, the taxpayer may avoid criminal prosecution and possibly settle civil/criminal penalties via a single ‘miscellaneous offshore penalty’ equal to 27.5 percent of the aggregate balance of unreported offshore assets.

The planned shutdown of the OVDP is a reflection of the IRS’s continued improvements in third-party data collection from a wide variety of sources, and overall increased taxpayer awareness to disclose offshore income and reporting obligations.

Notwithstanding the closure of the ODVP, the IRS is continuing the Streamlined Filing Compliance Procedures (SFCP) for taxpayers who were unaware of their filing obligations (as opposed to wilfully failing to disclose). About 65,000 additional taxpayers have come into compliance under the SFCP. The SFCP Foreign Offshore program provides taxpayers living overseas an opportunity to catch up on filing obligations (3 years returns/6 years foreign account reporting) and pay the tax and interest due with no penalties assessed on the taxpayer. The IRS have said that the SFCP, as with the OVDP, may also come to an end at some point.

You would be very much mistaken if you thought the IRS closing the OVDP means they no longer care about offshore tax avoidance. Don Fort, Chief of IRS Criminal Investigation, has said "[t]he IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts with the use of information resources and increased data analytics,” and "[s]topping offshore tax noncompliance remains a top priority of the IRS."

So as the sun sets on the OVDP program, it’s a timely reminder to all individual taxpayers with US connections that they only have six months if they wish to come forward and report previously undisclosed foreign financial assets under the ODVP.

For other taxpayers completely in the dark about their US filing and reporting obligations, its time to utilise the SFCP, before the IRS lets the light fade on this program as well.

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