Given its limited resources and ability to detect foreign assets, accounts and income, the IRS has offered various voluntary programs to entice taxpayers to come clean and report this information. The IRS’s OVDP program and the more recent streamlined procedures are two examples. The Maze v. Internal Revenue Service, Nos. 15-1806 (D.D.C. 2016), highlights several of the benefits of the IRS’s streamlined procedures versus the IRS’s OVDP program.
Offshore Voluntary Disclosure Program or OVDP
To participate in the OVDP, a taxpayer is required to comply with the following requirements, among others:
- file eight years of tax returns and Reports of Foreign Bank and Financial Accounts (FBARs)
- pay tax and interest for eight years; and
- pay accuracy-related penalties for eight years.
In return for full compliance with the applicable requirements, the IRS offers participants the following three primary benefits:
- A compromise of all penalties for which a taxpayer may be liable by paying 27.5% of the aggregate value of the taxpayer’s foreign assets (other than the accuracy-related penalties).
- The IRS will not recommend to the Department of Justice criminal prosecution for any matter relating to tax noncompliance or failure to file a Report of Foreign Bank and Financial Accounts.
- The IRS and the taxpayer sign a closing agreement, which constitutes a final settlement of all matters relating to the disclosure period and to years prior to the disclosure period.
Streamlined Filing Compliance Procedures
In 2014, the IRS introduced the streamlined procedures. These procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was non-willful.
To participate in the 2014 streamlined procedures, a taxpayer is required to comply with the following requirements, among others:
- File three years of tax returns and six years of FBARs;
- pay tax and interest for three years; and
- pay a miscellaneous Title 26 offshore penalty equivalent to 5% of the value of the taxpayer’s foreign assets.
In return for compliance with the applicable requirements, these filings and payments serve as a compromise for all penalties not involving willfulness for the three years covered by the program.
The IRS can pursue the taxpayer for fraud-related penalties for all years and for willful FBAR penalties for all years, as well as other penalties from the years prior to the three years subject to this program. Also, there is no assurance regarding a decision not to refer the matter for criminal prosecution and there is no final settlement agreement resolving tax issues pertaining to prior years.
A taxpayer who submits an OVDP voluntary disclosure letter on or after July 1, 2014, is not eligible to participate in the streamlined procedures. But a taxpayer who submits a letter prior to July 1, 2014, but who does not yet have a fully executed OVDP closing agreement, may request treatment under the applicable penalty terms available under the streamlined procedures.
So taxpayers who submitted letters before the July 1, 2014 date can benefit from the reduced penalty terms and still obtain the criminal non-prosecution letter. Taxpayers who submitted letters after the July 1, 2014 date are barred from participating in the streamlined procedures and from benefiting from the reduced penalty terms. Thus, the timing dictates whether the penalty is 5% or 27.5%.
The Benefits of the Streamlined Procedures
In Maze, the taxpayers wanted to withdraw from the OVDP program and directly enter the streamlined procedures. The IRS refused to allow the taxpayers to do this. The taxpayer brought suit to force the IRS to allow them to withdraw from the OVDP program and directly enter the streamlined procedures.
The court was not able to reach the issue, as it concluded that it did not have jurisdiction to hear the taxpayers claims. Aside from the jurisdiction issue, the case is important as it explains why taxpayers may prefer the streamlined procedures over the OVDP program. This highlights some of the benefits of the streamlined procedures as compared to the OVDP program.
These benefits include a smaller offshore penalty, exposure to fewer civil penalties, lower filing burdens, and a shorter case-review time (and thus attorneys’ fees).