One oddity about the Offshore Voluntary Disclosure Program (OVDP) is that the FBAR years included in the criminal and reduced penalty partial-amnesty period are geared to one’s income tax filings.  (IRS OVDP FAQ 9) Thus, once a correct income tax return is filed for a year, the FBAR for that year is removed from eligibility for the program.  For example, a taxpayer with a previously unreported offshore account may want to come into the program.  If he or she files a 2013 Form 1040 and reports all offshore income but does not timely file the FBAR for 2013, the delinquent 2013 FBAR will not be part of the OVDP.  This can happen when the Form 1040 is filed after the FBAR June 30 due date.  The OVDP period will not include 2013 and will cover the FBARS due for 2005 through 2012.

If on the other hand, the 2013 return is filed incorrectly, before counsel is involved (as counsel would not suggest filing a false return), or not filed, the 2013 FBAR will be included in the OVDP period which will then run from 2006 through 2013.

There may be transactions in 2013 that are problematic for an OVDP filing, such as:

• Investment in a new Passive Foreign Investment Company (PFIC)
• Investment of offshore funds in other assets
• Formation of a nominee entity.
• Transferring the foreign funds into the name of a relative.

The above are only examples but all present problems for an OVDP submission, opt-out or quiet disclosure.

Submitting ones name before filing a correct 2013 return and FBAR, removes 2013 from the OVDP and eliminates the potential problems these transactions present since 2013 will not be included in the OVDP period.

Of course, other compelling reasons for submitting one’s name now rather than later are:

• 14 largest Swiss banks under Department of Justice (DOJ) investigation.  Most will doubtless enter into deferred prosecution agreements with DOJ.
• Large number of other Swiss banks agreeing to enter Swiss bank settlement program with DOJ under which they will submit names.
• Coming implementation of FATCA and growing number of signed FATCA disclosure agreements and agreements under negotiation.
• Growing number of TEIAs (Tax Exchange of Information Agreements) being signed by former tax haven nations seeking to avoid black sheep status under OECD guidelines.
• Growing number of indictments of bankers, lawyers and promoters of offshore schemes who are flipping on their former clients.
• Although pleading not guilty many still expect ex-Swiss banker Raoul Weil to cut a deal for himself and name many names.
• Growing E-Trak IRS database developed from prior voluntary disclosures that agency is using to identify and track down other non-reporting taxpayers.

The decision to come in from the cold and report offshore accounts is a first step towards solving an offshore problem.  Retaining experienced mature counsel will start the process. Upfront, there will necessarily be an analysis of how to proceed.  The OVDP provides attractive advantages for most but it is not the only route to a safe harbor.  How to proceed can only be determined on a case by case basis from a careful analysis of all of the facts and circumstances and applicable law and administrative guidelines applicable to these matters.

© 2014 by Robert S. Steinberg
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