US tax disclosure opportunity

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20 November 2018

Following the closure of the offshore voluntary disclosure programme (OVDP) on 28 September 2018, the IRS has announced a new program to enable non-compliant taxpayers to make a disclosure and become up-to-date with their taxes.  

Details of the programme can be found here and the main features are as follows:-

• It is open-ended – there is currently no deadline for individuals to make a disclosure;
• It is aimed at individuals who  have engaged in potentially criminal behaviour from “wilful or fraudulent conduct”;
• It applies to disclosures of both onshore (US) and offshore income.   The previous voluntary disclosure regime applied only to offshore income;
• It covers both tax and tax-related criminal acts such as a deliberate failure to file foreign bank account reports (FBARs);
• Individuals will generally have to correct non-compliance for up to 6 years of taxes;
• The 75% penalty for fraudulent conduct will generally be restricted to one tax year (the year with the highest tax liability).  However the IRS retains discretion to impose penalties for all six years depending on the facts and circumstances of the case, and may even extend penalties beyond the six years if the taxpayer fails to cooperate fully.   

In order to make a disclosure, the taxpayer must submit a pre-clearance request  to the IRS Criminal Investigations unit in Philadelphia.  On acceptance into the scheme, the individual must promptly provide the tax filings as well as full facts and circumstances regarding the previous non-compliance, including details of any professional advisors involved.  The filings will then be subject to examination by the IRS.

It should be emphasised that individuals who have unreported offshore income or assets but have not engaged in ‘wilful’ conduct will be better off coming forward to the IRS using a different procedure such as the streamlined disclosure process which requires only three years of tax returns and reduced (or nil) penalties.   For some individuals it may be appropriate to simply file amended returns for the prior years.

US individuals are subject to a strict requirement to provide the IRS with details of foreign financial assets, such as bank accounts,  with substantial penalties for non-compliance.   However, where the failure has been “non-wilful”  and there is no further tax due,  the individual may escape penalties by making a disclosure under the delinquent FBAR and international information procedures.

Although there is  currently no deadline for making a disclosure, the IRS  could withdraw the program at any time.  Furthermore,  individuals  who do not make a disclosure and are subsequently “found out”  by the IRS are unlikely to be treated leniently.

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