United States: The Countdown Has Begun - Long-Standing US Tax Amnesty Program Ends September 2018

The IRS recently announced the end of the Offshore Voluntary Disclosure Program (OVDP) by 28 September 2018. Clients should be prepared to act quickly.

The recent increased publicity and awareness of FATCA has prompted many US citizens and green card holders residing in Asia to come to terms with their US tax and reporting obligations. Through conversations with US qualified lawyers and accountants, US taxpayers living abroad have come to learn that they are required to report their worldwide income even though they have lived and worked in Asia for many years. Even those US taxpayers who have been filing regularly have learned that they may have left out an item of income or a required information return, perhaps in relation to a non-US financial account, an ownership interest (however small) in a non-US company, or a gift received from a non-US family member.

Current options for US tax amnesty: the Offshore Streamlined Program and the OVPD

Currently, non-compliant US taxpayers living abroad can regularize their US tax affairs primarily through either the Offshore Streamlined Program or the Offshore Voluntary Disclosure Program (OVDP). Deciding whether to enter into the Offshore Streamlined Program or the OVDP requires a review of the taxpayer's facts and circumstances and an understanding of each program's benefits and risks.

Very generally, the Offshore Streamlined Program is designed for taxpayers whose US tax reporting errors with respect to offshore income and holdings stemmed from nonwilful conduct. By contrast, the OVDP is designed for taxpayers who would have difficulty or are not capable of demonstrating that their tax non-compliance is nonwilful.

OVPD is coming to an end in September 2018

Much of this is about to change. The IRS announced that the OVDP will close in about five (5) months, on 28 September 2018. This announcement also highlights four (4) key takeaway messages for US taxpayers living abroad:

1) IRS tolerance for tax-non-compliance is waning.

Since the OVDP program has been in existence for nearly a decade, and has been widely publicized domestically and abroad during that time, the IRS has far less sympathy for today's noncompliant taxpayers than the noncompliant taxpayers of yesteryears. With only 600 OVDP program participants in 2017 (down from a high of 18,000 participants in 2011), the IRS believes these "stragglers" to be somehow more wilful than their OVDP participating predecessors and, therefore, more deserving of criminal prosecution and penalty.

Additionally, it does not make economic sense to keep the OVDP program operating when participation is waning so significantly, as the resources that were allocated to the administration of the OVDP program can be diverted elsewhere once the OVDP program is complete. Interestingly, the IRS seems to hope for a grand finale (with respect to bringing even more US taxpayers into US tax compliance) from the OVDP program, as they are giving taxpayer's ample warning (over 6 months) of the closing of the program in an effort to drive up 2018 participation.

2) Reporting of foreign financial assets and foreign information returns remains a top priority.

The news release makes clear that the winding down and ultimate closing of the OVDP program does not signal a softening of the US government's position on unreported foreign accounts, assets, trusts and entities. Just the opposite, the release makes clear that, if anything, the US government is strengthening its position against wilfully noncompliant taxpayers by using FATCA and other means to collect taxpayer information and eliminating civil remedies for dealing with such noncompliance. Going forward, such taxpayers will be relegated to the domain of Criminal Investigations, which is a far less friendly place for wayward taxpayers.

3) Perhaps the Offshore Streamlined Program would also be winding down sooner than expected.

The OVDP program changed drastically over the last 10 years and is now being eliminated entirely (as we know it). The IRS announcement states that the Streamlined Programs, which are designed for taxpayers whose US tax reporting errors with respect to offshore holdings stemmed from inadvertent, nonwilful conduct, will remain in place (along with the Delinquent FBAR and Delinquent International Information Return Procedures). However, it is hard to overlook the latent threat that the IRS "may end the Streamlined Filing Compliance Procedures at some point," thus indicating that Taxpayers should not rely on these programs' continued existence, as they can be stripped away at any moment.

4) A new tax amnesty program with possibly harsher penalties and even criminal prosecutions.

Interestingly, the IRS announcement briefly mentioned a so-called 'IRS-Criminal Investigation Voluntary Disclosure Program' as a potential new tax amnesty program. While the announcement provides little details about this new program, there are a few clues that suggest its core nature. First, it seems likely that the new program (as the name suggests) will be in the criminal realm, with Department of Justice and IRS-Criminal Investigations leading the charge. Second, it seems likely that the penalties associated with the new program will be more stringent than those under the current OVDP program. Perhaps the penalty will increase from 27.5% to 50% or higher of unreported assets, and rather than 8 years of amended US tax filings as required in the current OVDP program, 10 or more years could be required, which would increase the tax, interest and penalties associated with coming into compliance. Additionally, jail time and other criminal penalties may also be part of the deal.

Immediate Action Required

With so much uncertainty, taxpayers who have US tax noncompliance issues (whether it be wilful or nonwilful) with respect to offshore accounts, assets, entities or trusts should come forward immediately to take advantage of the predictable and well-trodden programs that are currently in place. The opportunity to participate in the OVDP program is fading fast and what will be available to taxpayers after 28 September 2018, promises to be far less appealing (assuming a taxpayer is able to avoid detection until that time). The IRS has made it abundantly clear that nothing is a given and that today's deals are likely the best deals that will be on the table for many years to come.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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