Kevin E. Packman is a partner with Holland & Knight's Miami office
The IRS currently offers the following five programs for noncompliant taxpayers: (i) the Offshore Voluntary Disclosure Program (OVDP), (ii) Streamlined Domestic Offshore Procedures, (iii) Streamlined Foreign Offshore Procedures, (iv) Delinquent FBAR Submission Procedures and (v) Delinquent International Information Return Submission Procedures. While the details and requirements of each program are beyond the scope of this newsletter, there are recent developments within the OVDP and streamlined programs that will be discussed.
On October 21, 2016, the IRS announced that it had collected more than $10 billion in tax, interest and penalties from more than 100,000 taxpayers who participated in OVDP and the streamline programs. Between 2009 when OVDP was first introduced and today, 55,800 taxpayers have taken part in OVDP paying more than $9.9 billion. This is compared to the 48,000 taxpayers who have participated in one of the streamline programs since they were first announced in July 2014. Those participating in streamline have paid approximately $450 million. In two years, 7000 fewer taxpayers participated in streamline, than participated in the OVDP over eight years. Based upon these numbers, it is reasonable to conclude that a number of OVDP participants would have qualified for streamline had the program existed prior to 2014. Additionally, it is also quite likely that streamline was used inappropriately by taxpayers for whom OVDP was more appropriate.
Costly Increase with OVDP
While the OVDP requires taxpayers to resolve the last eight years of noncompliance, pay tax, interest and tax penalties, it also includes an OVDP penalty. The penalty is 27.5 percent of the highest aggregate value of undisclosed offshore assets during the eight year period. The penalty also applies to previously disclosed assets if there is unreported income associated with the asset. Additionally, if an asset does not generate income, but was purchased with previously unreported income, then the penalty applies to that asset as well.1
The OVDP penalty jumps to 50 percent if any of the taxpayers undeclared assets were held at an institution or were affiliated with a facilitator included on a list titled Foreign Financial Institutions or Facilitators (hereinafter referred to as the Bad Boy list). Once the 50 percent penalty applies to any account or asset, it applies to all of the taxpayer's assets subject to the OVDP penalty. The Bad Boy list is essentially comprised of institutions and facilitators that are or were under investigation by the IRS or the Department of Justice. What is notable about the Bad Boy list is that it includes financial institutions from around the globe2. The concept of a Bad Boy list was first introduced in the current iteration of the OVDP in July 2014. Frequently Asked Question #7.2 applicable to the OVDP discusses the imposition of the 50 percent penalty and indicates that it also applies to facilitators. Specifically, FAQ 7.2 states:
Beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50 percent miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation: an event has already occurred that constitutes a public disclosure that either:
(a) the foreign financial institution where the account is held, or another facilitator who...