Over 55,000 taxpayers have come into compliance by entering the Offshore Voluntary Disclosure Program. An untold number of less culpable non-willful taxpayers have come into compliance under the Streamlined Filing Compliance Procedures. Some with reasonable cause have used the delinquent FBAR procedures or delinquent foreign reporting form procedures or have made “quiet disclosures.” But, many more are still out of compliance with U.S. tax law. Those still out in the cold, so to speak, run the gamut of culpability ranging from not negligent (reasonable cause) to non-willful (streamlined eligible) to civilly willful but not criminal to criminal conduct.
Whatever the reasons for not having come into compliance the time is growing very late for taking action that will avoid the most severe FBAR civil penalty or criminal indictment. Said simply, it is becoming more difficult to find how someone would not have known about the FBAR and foreign reporting requirements as more and more is written about these matters in the press. That is not to say, however, that it has become, as the one Department of Justice Tax Division senior official has recently indicated, inconceivable that one failing to file a 2015 FBAR would not have known about the filing obligation. But, it is definitely more difficult to establish facts that explain how a person would not have known.
Not only is it becoming continuously more difficult to establish non-willfulness for the Streamlined Program, but it is becoming increasingly more likely that one’s non-compliance will be discovered or made public. A taxpayer becomes ineligible for the OVDP if the IRS or DOJ have identified him or her as being connected to offshore non-compliance. Taxpayers under examination (received an audit letter) are ineligible for the Streamlined Program. Thus, sticking your head in the sand can have disastrous results. You are virtually a letter away from a much more expensive proposition to come into compliance or, even worse, possible incarceration.
Think you have a good hiding place? Think your bank or advisors keep secrets? It the so called “Panama Papers” proves anything it is that the expectation of complete secrecy and privacy are fantasy. Somebody always knows, governments are always snooping, criminals always obtain and sell information and hackers always breach security systems for the satisfaction of revealing private information. Those who still think otherwise are deluding themselves. The Swiss veil of secrecy was pierced and other walls of secrecy are crumbling all over the globe. And the news will get worse, not better. Just a few developments:
- Already, some 100 countries have adopted the OECD Common Reporting Standard (CRS) for sharing information aimed at deterring tax evasion.
- Beginning in 2017 some 60 early adopters of the CRS will begin to automatically exchange 2016 financial information (AEI) for financial institutions including banks, brokers, custodians, etc. The information reported will include information such as the account holder name, address, country of residence, date of birth, account number, account balances and, gross earnings
- The G-20 countries are considering further sanctions on tax havens that refuse to adopt the OECD information sharing regime.
- The DOJ is marshalling information gleaned from 100 banks through the Swiss Bank Settlement Program. The DOJ and IRS will be carefully reviewing information obtained from these banks and under treaty requests. They also have information from whistleblowers and cooperating witnesses.
- The U.S. Treasury is considering rules that will require the disclosure of beneficial owners of shell entities formed in the U.S.
- The IRS has amassed a large data-base from OVDP submissions that enables it to cross reference and cross check names in search, countries, banks, enablers in search of other tax evaders.
- The DOJ and IRS are extending their investigatory tentacles beyond Switzerland to the Caribbean, Middle East, Asia and Central America. The net is being cast farther and wider.
- FATCA coming online has resulted in foreign banks implementing due diligence practices with regard to depositors. U.S. citizens are being asked to complete Form W-9.
- The DOJ has opened a criminal investigation regarding matters pertainig to the Panama Papers. This development should come as no surprise to anyone.
Moreover, the IRS continues to stress that the OVDP and Streamlined Programs are not permanent programs and may be ended or changed at any time. Recall that the Miscellaneous Offshore Penalty has already been increased four times going from 20% (2009) to 25% (2011) to 27.5% (2012) and to 50% for those with accounts at listed enabler foreign financial institutions (2014).
The net is tightening around those who are still out of compliance. When someone has dug himself or herself into a hole, the first step to solving the problem is to stop digging. Fleeing from one bank to another or one country to another digs the hole deeper. Those who engage in funds-flight are simply creating evidence of wilfulness.
Stop digging the hole deeper. Consult with a tax attorney experienced in these matters. There is no one-size-fits-all solution. The OVDP may be appropriate for one taxpayer and may be overkill for another. Similarly, the Streamlined Filing Compliance Procedures may be safe, if handled properly, for one taxpayer but very risky for another. Filing quietly based on reasonable cause may also still be appropriate for some who can clearly establish that their actions in not filing did not amount to negligence.
Deliberations about which course has the best chance of arriving at a safe harbor for a particular taxpayer is a matter for the experienced tax attorney. CPAs and other non-lawyers, or, even lawyers who lack experience in this practice area, should not advise taxpayers about whether they should enter the OVDP or employ another means by which to come into compliance.. Further, whatever path is chosen, the execution of the plan should be overseen by the tax attorney. Filing returns under these programs should never simply be handed over the return preparer, however competent a return preparer he or she may be. The entire process, whether OVDP, Streamlined or quiet disclosure, is definitively legal in nature, with criminal possibilities tottering about if not handled properly.
Robert S. Steinberg, Esquire