In John Milton’s epic biblical poem “Paradise Lost,” the fall of Man is depicted. The Devil is banished to Hell.   The Modern Wealthy Man has had his own fall.  The morality-play today devolves around tax-evasion and the loss of privacy.  Keeping one’s financial affairs secret from the masses, sometimes for good cause such as to protect personal safety, but often for more shady reasons like the evasion of tax obligations, is no longer a certainty.

After the Panama Papers were disseminated, no one with a sane mind would have continued to believe that offshore financial accounts in Tax Haven jurisdictions could continue to perfectly wall-off one’s financial affairs from public scrutiny.  Now comes the Paradise Papers to reinforce that point for any remaining non-believers.

The Paradise Papers were obtained by the German newspaper Suddeutsche Zeitung which called in the International Consortium of Investigative Journalists to head the inquiry.

Like the Panama Papers the obtained documents reveal financial dealings of many wealthy political leaders, celebrities and other extremely wealthy individuals.  Even the Queen of England’s financial affairs were revealed in the leak.

What is lost in these revelations?   The Paradise Lost is privacy and secrecy.  They simply do not exist anymore for information trusted to computer networks or cloud-based applications.

Very sophisticated hacker-groups are determined to obtain such information, no less governmental tax authorities.   Does this mean we are likely to go back to paper documents stored in rusting file cabinets?  Certainly not for most transactions, although I have read that certain spy agencies are employing typewritten again in their spy-craft.

What this does mean for U.S. non-compliant taxpayers is that their foreign financial accounts long hidden away in some remote tax haven jurisdiction are no longer safely hidden away that they will never be found-out.

If such accounts beneficially owned or controlled by U.S. citizens or resident aliens, are uncovered by the IRS and Department of Justice, the resultant criminal and civil sanctions may well feel like Hell.

So, the question is: What to do?  The options are limited.

One may continue to imitate an ostrich – stick one’s head in the sand and wish for non-discovery, like those poor souls who knew they should have left Europe during World War II but waited too long and fell under Nazi occupation.  The tragic consequences of those indecisions are well known.

The consequences of tax non-compliance today are less tragic but harsh enough: at a minimum severe or draconian amounts to pay for tax, penalty and interest; and, the distinct possibility of incarceration for tax crimes committed, no less, the embarrassment and shame of reputation that goes along with becoming a felon.

The above, sounding not particularly too palatable, the question still sits on the table, “What to do?”

Fortunately, there is a course of action that both caps the adverse financial consequences of one’s tax non-compliance and affords amnesty from criminal prosecution.  This result can be accomplished by entering an IRS / DOJ amnesty program called The Offshore Voluntary Disclosure Program or OVDP.

The OVDP is a special program under which IRS settles all potential criminal and civil tax issues relating to unreported offshore financial accounts under a specified civil penalty regime that is less severe than the maximum civil penalties that could be asserted by IRS outside of the program, were you audited, but in some cases more severe than the lowest level of civil penalties that IRS would assert outside of the program.  In the OVDP, IRS also grants immunity from any criminal charges that otherwise might arise from the non-reporting.

The OVDP has several beneficial features, namely:

• Offers certainty that you will not be charged with a crime and that the civil FBAR penalty will be no more than 27.5% (50% if any account is with certain identified banks or facilitators under investigation) of the highest aggregate value in U.S. dollars of your offshore accounts during the OVDP period discussed below.
• Allows you to repatriate and use offshore funds remaining after paying the tax and penalties and / or have funds owned by your parents remitted to them.
• Removes the cloud of fear handing over you about discovery of the non-compliance.
• Does all of the above without tainting your name, identifying you as a tax-violator and without disclosing to the public that you have entered the program.

The OVDP is a process that is completed in phases:

1. Submit your name or names to the Criminal Investigation Division (CID) of IRS and CID will send notification by fax if your name or names are cleared or if you are already under audit consideration or have already been identified. In the latter instance, you will not be eligible to participate in OVDP and likely will be audited by IRS which could result in civil penalties more severe or less severe than are offered in OVDP and or criminal sanctions for all or some of you.
2. Assuming your name clears CID, you will then submit a detailed OVDP Letter and Attachment for each foreign account to CID. The information required by this letter and the attachments is quite detailed and may take some time to gather, organize and relate in a coherent, accurate narrative.  The letter must be completely truthful and submitted within 45 days of initial clearance of your name by CID   CID will then notify by mail whether you have been provisionally accepted into the program.
3. Following provisional acceptance, you will submit within 90 days, a more detailed package of amended returns with supporting documentation. Your case will then be assigned to an examiner by the IRS Philadelphia Service Center for review and certification.  This is not equivalent to a full-blown audit and usually goes smoothly but sometimes requests for clarification or additional information or documentation are made.  Checks for the FBAR penalty and for the income tax, accuracy related penalty and interest due must also be submitted at this time.
4. The additional package will include amended returns and Amended FBARs (TD Form 90.22-1 or FinCEN 114) for each year of the OVDP period (8 years). The OVDP period is determined by income tax returns delinquent or requiring amendment. If any tax returns have not yet filed, such returns, if required, will be included with the OVDP submission.
5. Once the OVDP review is complete you will sign a contract with IRS stating the income tax, accuracy related and FBAR penalties and interest owed and paid. This contract called a “Closing Agreement” is binding on IRS unless it is later found that you fraudulently misrepresented facts in your submission. The IRS can still audit your returns on domestic tax issues, but that is not a common occurrence unless controversial domestic issues are raised in the returns.  Thus, the “Closing Agreement” and payment of tax, penalty and interest should end the matter.

In addition to the OVDP penalty, there will be income tax to pay on unreported income, a substantial underpayment or accuracy related penalty of 20% of the additional tax, and a failure to pay penalty of up to 25% applied to the unpaid tax plus accrued interest.

Even if accepted into the OVDP, you have the option of opting-out of the program and seeking a lower FBAR civil penalty while preserving the OVDP criminal immunity.  Opting-out, however, can result in a higher as well as lower civil FBAR penalty and can result in higher income taxes and income tax penalties being asserted by IRS. Thus, opting-out sometimes presents potential monetary benefits but poses additional risks not present if one remains in the OVDP.

To be eligible for the OVDP one must act propitiously.  Once IRS or the DOJ has your name as being noncompliant you become ineligible for the program.

Thus, I strongly urge individuals still out of compliance with U.S. tax law regarding foreign financial accounts to consult with a tax attorney experienced in these matters.

I, of course, am available for such representation.  There are other post on this blog-site dealing with various aspects of the OVDP and Streamlined Filing Compliance Procedures, another IRS program, for taxpayers whose noncompliance was not willful.

My credentials, experience and publications may be found on my website www.steinbergtaxlaw.com

© 2017 by Robert S. Steinberg, Esquire
All rights reserved

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