We’re about a month out from the end of the Offshore Voluntary Disclosure Program, but is it already too late for taxpayers looking to take advantage of it?
Although the deadline to file the OVDP letter and attachments is Sept. 28, 2018, the deadline to submit a request for pre-clearance into the program was Aug. 24. This is significant because the pre-clearance phase determines whether the taxpayer is eligible for the OVDP prior to making disclosures.
Risks of Filing Without Pre-Clearance
During the pre-clearance phase, the criminal investigation division determines whether the taxpayer is timely in filing for the OVDP. Various factors are used to determine timeliness, including whether the Internal Revenue Service already has that person on their radar (meaning it’s too late for voluntary disclosure). For example, because the IRS has already received information from a financial institution, that evidences the taxpayer’s non-compliance.
Without being able to obtain pre-clearance, the taxpayer runs the risk of having the detailed information they submit to the criminal investigation agents being used as an admission against his interest. The IRS may then use the submitted information as evidence to prosecute the taxpayer. According to Shannon Retzke Smith, a partner in the private client and tax team at Withers Bergman LLP in New Haven, Conn., each client’s situation needs to be evaluated on a case-by-case basis, including a careful analysis of factors, such as what country the client is from, whether their bank is one that has been contacted already to submit disclosure documents by the IRS and whether the client may already be under audit or have an account with the IRS.
Smith also mentioned, “keep in mind that, although the pre-clearance deadline has passed, there’s a chance that applications for pre-clearance may still be accepted.” It’s always worth a shot.
Available Options After OVDP Ends
For those clients for whom disclosure without pre-clearance may be risky, a number of other disclosure options will still exist after the end of OVDP, including the IRS streamlined compliance procedures. Keep in mind, however, that U.S. entities don’t qualify for the streamlined program, no matter how innocent the taxpayer may be in his non-compliance. Also, there’s a possibility the IRS will offer a subsequent program, however, that program is likely to come with even stiffer penalties if the history of previous programs is any indication. “Another risk of waiting to file until after the OVDP ends,” said Smith, “is that handshake deals often get swept into the new program [if any]. Are you potentially signing up for a 50 percent or a 70 percent penalty? You simply don’t know what you’re signing up for.”
Smith says one of the biggest weighing factors when considering which road to take is the likelihood a client is timely and whether their conduct was willful. If the client is likely making a timely disclosure, they would prefer to take advantage of the program rather than risk the uncertainty of penalties for disclosures made after the deadline.
Catch-22
The biggest problem with voluntary disclosure mechanisms available is the Catch-22 facing taxpayers: those who want to come forward and take advantage of the benefits of voluntary disclosure risk their information ultimately being used as an admission against their interests and face full prosecution if the IRS is already after them, which, without pre-clearance, they may have no way of knowing. This risk renders the mechanisms available virtually useless, as most taxpayers would rather not act and just take their chances rather than turning themselves in, since the penalties in this situation would be the same.