They say the third time’s a charm. And the third iteration of the IRS Offshore Voluntary Disclosure Program is likewise a good thing, according to Kevin Packman, a tax partner at Holland & Knight and chair of the offshore compliance team.
The programs allow taxpayers with undisclosed income from offshore accounts to come forward, pay a set penalty and avoid criminal prosecution.
“The IRS has always run on voluntary compliance,” he noted. “The first two programs [in 2009 and 2011] had tremendous success, because they gave a set penalty structure. Before, the voluntary disclosure program has been based on the discretion of agents on what to do with penalties, so there could be a similar situation or similar taxpayers and end up with different penalties.”
The IRS said that it has collected $3.4 billion so far from people who participated in the 2009 offshore program, and an additional $1 billion from upfront payments required under the 2011 program. In all there have been 33,000 voluntary disclosures from the two offshore initiatives.
“The 2011 program came about because many taxpayers missed the 2009 program,” Packman said. ”Now that the 2011 program is over, practitioners had similar questions about what to do for the taxpayers still coming forward. It’s frightening to meet taxpayers that didn’t know about the earlier programs or elected not to participate, but they exist. More and more banks are giving in to IRS demands and getting caught up in Department of Justice investigations. Now the taxpayers involved can come forward.”
“The penalty structure is almost identical to 2011, except that the high penalty is 27.5 percent instead of the 2011 program’s 25 percent,” he said. “That’s 27.5 percent of the highest aggregate balance in the account during the eight full tax years prior to the disclosure. It’s hard to say what the right number is, but if they put it too high no one will come forward. From the government’s viewpoint, the third program makes sense.”
Moreover, unlike the two previous programs, the new program has no set termination date. However, the IRS reserves the right to change the terms of the program at any time. For example, the IRS might increase penalties in the program for all or some taxpayers or defined classes of taxpayers, or decide to end the program entirely at any point.
The prior programs had tremendous success, agreed Barbara Kaplan, a shareholder in Greenberg Traurig. “The 33,000 taxpayers who have come forward is almost astronomical in terms of vol8ntary disclosure,” she said.
However, she indicated, there are areas that could use improvement. “The prior programs were thought to be too harsh, and the same holds true of this one,” said Kaplan. “For example, it doesn’t distinguish between levels of fault or responsibility of taxpayers.”
”Someone who didn’t participate in setting up the account or do anything other than fail to report income, or did report the income but failed to report the existence of the account on the FBAR [Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts] is treated as harshly as someone who engaged in active tax evasion and deceit,” she added.
It is also possible that a taxpayer failed to include the income in the tax return, but that it had no tax consequence, or a de minimis tax consequence, she observed. “In those situations it’s hard to say what the motivating factor was. Rather than trying to hide the tax, it’s more likely they were trying to hide the existence of the account, or they didn’t know they had to file the FBAR,” said Kaplan. “The government is treating the taxpayers in these cases just as if the unreported tax was $100,000. They suffer the same penalty as someone trying to avoid a substantial amount. The penalty is not on the amount of income, but on the amount in the account, so the program is great for the real crook but not so great for people who simply misunderstood their responsibility.”
