The federal Offshore Voluntary Disclosure Initiative (OVDI) ended on September 9, 2011.  This means that taxpayers with unreported foreign bank accounts have to make some tough choices about how to proceed if they intend to voluntarily disclose those accounts to the IRS. 

2011 OVDI Recap

OVDI offered immunity from criminal liability for a taxpayer’s noncompliance with the Report of Foreign Bank and Financial Accounts (commonly known as “FBAR”) in exchange for automatic penalties of 25 percent, 12.5 percent or 5 percent of the amount held in the foreign account depending the taxpayer’s particular situation.  While the IRS did not extend the OVDI deadline beyond September 9, 2011, taxpayers with undisclosed foreign bank accounts can still apply for relief under the Traditional Voluntary Disclosure Program at any time. 

Traditional Voluntary Disclosure Program

For decades, the IRS has followed essentially the same general policy regarding criminal and civil penalties for failing to disclose a foreign bank account pursuant to FBAR.  With regard to the criminal side, that policy holds that the voluntary disclosure of a foreign bank account will not itself guarantee criminal immunity but will be considered, along with all the other factors in the case, in deciding whether to recommend criminal prosecution.  In the overwhelming majority of cases, the IRS does not criminally prosecute taxpayers who willingly disclose information about their foreign account before they are discovered by the IRS.

Criminal penalties aside, the IRS can levy a wide array of civil penalties under the Traditional Voluntary Disclosure Program.  For instance, a taxpayer who comes forward for negligently failing to disclose his or her offshore account may be responsible for paying an assessment of $10,000 for each tax year beginning in 2005.  Additionally, the IRS can impose an assessment as high as the greater of $100,000 or 50 percent of the value of the undisclosed foreign account per violation and per year against a taxpayer who willfully fails to disclose his or her foreign bank account. 

Benefits of the Traditional Voluntary Disclosure Program

The fact that there is no formal OVDI-like penalty schedule under the Traditional Voluntary Disclosure Program may actually benefit a disclosing taxpayer.  Because there are no set penalties under the Traditional Voluntary Disclosure Program, the IRS must review the taxpayer’s particular situation and levy what they consider to be the appropriate tax assessments allowed under the FBAR.  If the taxpayer disagrees with this outcome and refuses to pay the FBAR assessment, the IRS must file a civil action in Federal District Court and pursue a judgment to recover from the taxpayer.  The IRS wants to avoid litigation because it is time consuming and expensive so they may be willing to offer a reasonable settlement following a refusal to pay an assessment.  Additionally, a recent case out of the Eastern District of Virginia (United States v. Williams found here) illustrates that that the IRS may encounter considerable resistance from the courts in pursuing the current FBAR assessment formula related to the willful failure to disclose a foreign bank account.  This case might also persuade the IRS to offer a more favorable assessment or settlement, or it might encourage the IRS to charge more people criminally.  

Drawbacks of the Traditional Voluntary Disclosure Program

The Traditional Voluntary Disclosure Program lacks the predictability of no criminal prosecution and civil penalties found in the 2011 OVDI.   However, with the right combination of strategy, experience and representation, the IRS may offer settlement packages that are far more attractive than the OVDI program. 

It is vital that you seek advice from an experienced tax attorney before disclosing a foreign bank account through the Traditional Voluntary Disclosure Program.  Every client’s facts and circumstances are unique and there are no easy cases in this post-OVDI world.  Call the Law Offices of Stephen Moskowitz, LLP today and get a team of experienced attorneys to advise and represent you.