IRS Announces it Has Raised $8 Billion Through its Offshore Remediation Programs While Conducting Thousands of Civil Offshore Exams and Numerous Criminal Offshore Investigations

BACKGROUND 

On Oct. 16, 2015, the IRS announced that its offshore compliance programs have generated $8 Billion in IR-2015-116.  More than 54,000 taxpayers have participated in IRS offshore remediation disclosure programs since 2009.  The IRS warned taxpayers with non-compliant offshore accounts to “strongly consider existing paths established to come into full compliance with their federal tax obligations.”  Of the 54,000 taxpayers, over 30,000 taxpayers participated in the non-willful Streamlined Filing Compliance Procedures with two-thirds participating after an expansion of the procedure in the summer of 2014. 

The IRS also informed taxpayers that they have already conducted thousands of offshore-related examinations and have pursued criminal charges as well in offshore noncompliance cases.  

THE CARROT 

The willful Offshore Voluntary Disclosure Program (OVDP) and it’s cousin, the non-willful Streamlined Filing Compliance Procedures provide two excellent opportunities for taxpayers to correct prior tax year non-compliance while gaining some certainty on the amount of tax and penalties that will apply in each case.  Additionally, non-complaint taxpayers may take advantage of the Delinquent FBAR Procedure and the Delinquent International Information Return Procedure as well.  Thus, there are four options for taxpayers with varying degrees of knowledge, willfulness and partial pre-existing compliance. 

THE STICK 

Currently in effect, Foreign Account Tax Compliance Act (FATCA) and the network of intergovernmental agreements (IGAs) between the U.S. and partner jurisdictions provide for automatic third-party account reporting.  This structure exponentially decreased a taxpayer’s ability to continue to hide an offshore account.  IRS Commissioner, John Koskinen noted,  “The groundbreaking effort around automatic reporting of foreign accounts has given us a much stronger hand in fighting tax evasion,” and “People with undisclosed foreign accounts should carefully consider their options and use available avenues, including the offshore program and streamlined procedures, to come back into full compliance with their tax obligations.” 

In the meantime, the Department of Justice’s Swiss Bank Program continues to execute non-prosecution agreements with Swiss financial institutions which provide that  the bank will disclose information regarding potential non-compliance by U.S. taxpayers.  These types of cooperative agreements are not limited to only Swiss banks. 

The announcement makes clear the point that non-compliant U.S. taxpayers who sit on the sidelines and do not enter into the OVDP risk more severe penalties and possible criminal prosecution, assuming, of course, that they are willful . 

TAKE AWAY 

The IRS has a number of various programs designed to address non-compliant U.S. taxpayers with all different levels of culpability.  With its high penalties, the OVDP is a nice “insurance policy” type of program which is run by IRS Criminal Investigation and provides criminal protections along with the certainty of a closing agreement with the IRS.  The Streamlined Filing Compliance Procedures, on the other hand, are merely filing procedures with no promise of criminal protection, or closure as the returns can be examined by the IRS at any time within the statute of limitations.  Now is the time to analyze the risks of non-action.   Substantial care and due diligence should be given to analyzing which program best fits an individual taxpayer’s facts and circumstances.  The consequences of not picking the correct program, if there is a later issue, could be the difference between a civil examination and a criminal investigation.