The third formal Offshore Voluntary Disclosure Program (OVDP 2012) was announced on January 9, 2012. The IRS finally got around to posting Frequently Asked Questions (FAQS) on its website on June 26, 2012.  The Tax Wars Blog post on August 6, 2012, “Still out in the Cold? IRS Leaves Open Door for Voluntary Disclosure – 2012 OVDP” discusses the OVDP 2012 in some depth.

IRS had announced on June 26 (IR 2012-64) that even without guidance 1,500 submissions had been received under OVDP 2012.  This follows over 33,000 submissions under the first two offshore disclosure initiatives in 2009 and 2011.

The IRS has stepped up efforts to identify and combat offshore tax evasion. There is now increased information sharing with other countries following the OECD guidelines.  IRS is making better use of third-party information and data mined from the 2009 and 2011 initiatives.  The IRS expects to launch a new wave of offshore investigations and expand these investigations and indictments to countries other than Switzerland and Liechtenstein.  The IRS has even stationed agents overseas and partnered with foreign governments on tax enforcement matters. Bank secrecy barriers have substantially broken down in Switzerland and Liechtenstein and inroads are being made elsewhere.   All of this activity is giving offshore taxpayers pause and causing many to want to comply with U.S. tax law and consider entering the OVDP 2012.

In addition, foreign banks are disengaging from U.S. depositors.  The Wall Street Journal on October 20, 2012 “Wary Swiss Banks Turn Away Yanks, “ reported that Swiss banks have little appetite to deal with the risks of non-compliance with FATCA and are “ushering American clients out or limiting the range of products offered to them.”  Also, the growing complexity of complying with U.S. tax law makes it cost ineffective for many foreign banks to service a relatively small number of U.S. customers.

Those contemplating wiping the slate clear need to understand that deciding how to come into compliance is a process not a single act.  There are alternatives to consider that are very fact specific.  Thus what is good for Mr. Jones may not be good for Mr. Smith.  Before any voluntary disclosure is made or delinquent or amended returns are filed an analysis is required to determine many questions of facts, law and mixed fact and law, including, but not limited to:

• When, how and why the accounts were opened?
• Are the accounts reportable on the FBAR?
• Who made the decision to go offshore and was an adviser involved?
• Was the primary motivation to evade the payment of tax or were other motivations paramount?
• Was income not reported or merely FBARS not filed?
• If income was not reported on the foreign accounts, were otherwise truthful and accurate U.S. tax returns filed, if required?
• Were foreign taxes paid on the income not reported?
• Will any of the investments be classified as a PFIC (Passive Foreign Investment Company?
• Is the taxpayer eligible for any Treaty Relief from U.S. taxation?
• Is the source of the offshore accounts from a legal source of income and is the legal source provable?
• What records are available and will the foreign financial institution cooperate in furnishing records?
• Are any of the unreported income proceeds invested in non-financial account assets and what are those assets?
• Are foreign family members involved with the offshore financial accounts and, if so, how will disclosing their identity impact them under U.S. or foreign county law?
• For married taxpayers, should the disclosure be joint or separate, or should only one spouse enter the OVDP 2012?
• Does the taxpayer have a basis for claiming that the failure to file FBARS was due to reasonable cause or was not a willful violation of the Bank Secrecy Act?

These are some of the initial considerations that must be addressed before deciding how to accomplish re-entering the tax system.  Entering the OVDP 2012, as discussed in the earlier post, is an arduous, time-consuming and expensive proposition.

There are substantial benefits to be derived from the OVDP 2012.  These include avoiding criminal prosecution; but, even if that is a remote and unlikely event, averting the potentially draconian civil FBAR penalties is a major incentive. 

Those still out in the cold should step up to the plate and face the pitcher.  It is now possible to transverse the bases safely to home plate. The ball, however, is going to become harder to hit, the longer one waits.  One does not want to be stuck out in left field without a safe harbor from the very serious consequences of non-compliance with Bank Secrecy Act and Internal Revenue Code filing and reporting requirements.

© 2012 by Robert S. Steinberg, Esquire
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