In a memo written by Deputy Commissioner for Services and Enforcement of the IRS, Kirsten B. Wielobob, the IRS has announced a new voluntary disclosure program to begin sometime in the near future.
OVDP began in 2009 as a way for U.S. residents with undisclosed foreign assets to disclose those assets in order to prevent the possibility of criminal indictment. While there was still a penalty attached to the undisclosed years, the IRS allowed the taxpayers to tell of their foreign assets and in return the taxpayers received a closing letter that stated all was taken care of and no criminal charges would be brought against them. During a time when criminal charges against individuals with undisclosed assets were all over the news, OVDP brought a viable and welcome respite for those wanting to come clean and avoid criminal liability.
OVDP has evolved through the years with four different versions being drafted since its inception in 2009. The last version, released in 2014, came to a close on September 28, 2018. Many believed that because of the dwindling numbers of people entering the program over the last 8 years (there were only 600 disclosures done in 2017) the 2014 program would end. However, the IRS has issued a memo stating that the new program is already here. The memo states, “Procedures in this memo will be effective for all voluntary disclosures received after the closing of the 2014 OVDP on September 28, 2018.” However, it should be noted that the memo goes on to say in relation to filing a disclosure request, “To accomplish this, CI will require all taxpayers wishing to make a voluntary disclosure to submit a preclearance request on a forthcoming revision of FORM 14457.” As of yet, the revision of the 14457 has not been provided, the IRS site still has the November 2017 version.
The memo also goes through the new process, which at first glance, seems a bit simplified from prior versions. For the 2014 process, a prescreening letter was sent to the IRS that stated the taxpayers name, tax identification number, address, name of the foreign financial institution where the assets were held, address of the institution, and phone number of the institution; along with a brief statement explaining the reason for the request. Once that prescreening letter was received, the taxpayer would receive a response within thirty days that either was an acceptance to apply, a denial to apply, or a request for more information. After acceptance to apply, then the form 14457 – Offshore Voluntary Disclosure Letter was filled out for each taxpayer, accompanied by a form 14454 – Attachment to Offshore Voluntary Disclosure Letter. (There needed to be a form 14454 for every individual offshore account that the taxpayer had control over.)
The filing of the 14457 and 14454 was the application, and if these were satisfactory to the IRS, the taxpayer would be accepted into the program and the real work would begin. The new program looks much more simplified and streamlined (not to be confused with the streamline disclosure program). The memo details the process on the IRS’s side as well providing more understanding to the taxpayer.
The biggest change in the new program compared to prior is the penalty. Since OVDP’s birth in 2009, the penalty has been a fee equal to about 20% of the taxes due for each undisclosed year, with an additional 27.5% penalty on the year with the highest account balance. The new OVDP states that the penalties will be placed against the one year with the highest tax liability. Meaning that if the taxpayer has six years of unreported foreign assets, the year that would have created the highest tax liability of those six will have an additional penalty against that liability. The memo states that the penalty will be 75% of the tax liability for that one year. This could create less of a penalty for those who have multiple years of undisclosed foreign assets where the value of the assets is similar year to year; and a much larger fee for those with only a few years or drastic differences in values over the period. There may be certain circumstances that the penalty will be attached to more than one year. However, the memo states that those circumstances are limited.
Another change to the program is the number of years the IRS wants to look back at and review. The former OVDPs have required disclosure of the previous eight years that the taxpayer had nondisclosed foreign assets, yet the current program only requires filing of the last six. The reason for this change is not immediately apparent, however, it may be a welcome change for some of the taxpayers who have accounts dating back to the inauguration of FATCA.
Our team at Christopher J. Byrne, PLLC has been providing disclosure guidance and filing assistance since the program’s inception in 2009. OVDP is one of three disclosure options out there. If you have foreign assets and are worried about your liability or are merely unsure whether you have undisclosed assets, give us a call and let us bring you back into compliance.