Just when you thought it was safe to get back in the water, the IRS has issued a stern warning to taxpayers that unreported foreign accounts and income remain a top priority for enforcement. And your chance to seek shelter in the OVDP bunker before the IRS sniffs you down like a bloodhound is slowly fading. Since 2008, the IRS has operated its Offshore Voluntary Disclosure Program (OVDP), which is considered a tax amnesty program. But now, the final curtain will be coming down on the program as it will officially be coming to an end on September 28, 2018.
The Streamlined Procedures, a program tailored for taxpayers who can certify under penalties of perjury that their conduct was non-willful, will continue into the foreseeable future. However, as enticing as the streamlined procedures might be, the fact remains that the streamlined program has shortcomings that are not readily apparent. For example, the streamlined program does not immunize taxpayers from a referral being made to Criminal Investigation (CI) in the same way that OVDP did. As if that was not bad enough, IRS audits of streamlined submissions have risen dramatically in the last two years.
If you want the protection of the OVDP, you must act fast before the window of opportunity closes. The IRS announcement offers no guidance insofar as what a “Johnny come lately” must do if he wants to apply to the OVDP before the bewitching hour. The general consensus among tax professionals is that September 28, 2018 is a “hard and fast date” at least when it comes to the deadline by which taxpayers must submit their “Initial Submission” requesting admission. Blow that date and any chance of getting into OVDP is as unlikely as a robber who robs a 7-Eleven wearing a mask but with his name stitched across his uniform getting off scott free.
Not be be knit picky, but it is necessary to distinguish between a “pre-clearance request” and an “Initial Submission.” A pre-clearance request is the first of three steps in the rather tedious OVDP application process. Unfortunately, filing a pre-clearance request on or before September 28 does not guarantee that you will get in under the wire. In fact, because a pre-clearance request demands such a small amount of information about you and can be prepared quickly, it may just have the opposite effect. In other words, waiting until the eleventh hour to submit it may guarantee rejection of your application on the grounds of late filing.
As benign as a pre-clearance letter might be, it still serves a purpose. The purpose of requesting preclearance is to confirm that the IRS isn’t already hot on your trail. The metaphor that I like to use here, as graphic as it might be, is the hunting of a fox by a thirsty bloodhound. If the bloodhound has already detected the scent of the fox and is hot on his trail, then the fox is “squat.” Indeed, no amount of pleading with the bloodhound is going to save the fox from the sharp and carnivorous teeth of the bloodhound.
A pre-clearance letter must include the following information:
- Applicant identifying information including complete names, dates of birth (if applicable), tax identification numbers, addresses, and telephone numbers.
- Identifying information of all financial institutions where undisclosed OVDP assets are held. Identifying information for financial institutions includes complete names (including all DBAs and pseudonyms), addresses, and telephone numbers.
- Identifying information of all foreign and domestic entities (e.g., corporations, partnerships, limited liability companies, trusts, foundations) through which the undisclosed OVDP assets were held by the taxpayer seeking to participate in the OVDP. Information must be provided for both current and dissolved entities. Identifying information for entities includes complete names (including all DBAs and pseudonyms), employer identification numbers (if applicable), addresses, and the jurisdiction in which the entities were organized.
- Executed power of attorney forms (if represented).
Pre-clearance is binary: it requires either a “yes” or “no” answer. Usually the answer is “yes,” which means that the taxpayer can advance to Step 2.
There can be no larger of a doomsday scenario than if the answer is “no.” If the answer is “no,” then you’re probably already under investigation and the last thing on your mind should be providing the IRS with additional information. To do so would be no different than giving the IRS the ammunition it needs to squash you like a bug. Instead, the only thing on your mind should be lawyering up.
With the September 28 deadline looming on the horizon, many taxpayers are afraid to take any chances and are bypassing the pre-clearance step altogether and going directly to the Initial Submission. And this is a sound strategy.
While a pre-clearance request can be whipped up in no time, the taxpayer may not hear back from the IRS for what seems like an eternity, even though the IRS claims that it will respond within 30 days. If you decide to submit a pre-clearance request, it goes without saying that you should do so lickity split, but in any event no later than August 28, 2018. While waiting for a response to your pre-clearance request, it is best to be proactive and begin assembling your Initial Submission. This way you won’t have to scramble to draft your OVDP letter and Attachments in the eleventh hour with a gun to your head. Instead, you can do so leisurely and then submit them promptly upon receipt of the IRS’s response.
In the past, once a taxpayer received pre-clearance, the taxpayer had 45 days to submit their Initial Submission. While that time frame is still listed on the IRS website, it is not clear whether the IRS will honor it if those forty-five days stretch out to a date beyond September 28, 2018. Needless to say, it is better to be safe than sorry. Be vigilant and begin preparing your Initial Submission immediately after faxing the IRS your pre-clearance letter.
The Initial Submission demands more information than the Preclearance Request. However, delinquent or amended tax returns and FBARs need not accompany an Initial Submission. Instead, an Initial Submission consists of two forms: the letter and attachments. Each is a standardized IRS form with numbered questions and empty cells that must be filled in with a response. The letter, referred to as Form 14457, contains questions that are designed to elicit history pertaining to the foreign accounts, foreign assets, and reporting behavior. Additional questions probe deeper, requiring the taxpayer to disclose how he or she learned about OVDP, the source of the foreign funds, an estimate of the combined account/asset values for each year, and other general information. Only one Form 14457 is required.
If you thought completing Form 14457 was arduous, wait until you get a hold of Form 14454. The volume of information needed to complete this form is even greater. If Form 14457 is “Nemo,” then Form 14454 is “Mr. Grinch.” As a preliminary matter, a separate Form 14454 must be completed for each foreign account, even if all of the foreign accounts are maintained at the same foreign financial institution. Form 14454 contains more detailed questions. For example, it asks whether you made deposits into the foreign account from the United States, or whether you transferred funds from the account to the United States. It also asks about the personnel at the foreign bank who facilitated, advised, and/or counseled you about opening up the foreign account. While bank statements need not accompany Form 14454, if experience is such a good teacher, it is difficult if not impossible, to accurately complete this form without them.
The most tedious and time-consuming part of making an OVDP disclosure comes at the end, in Step 3, when all of the tax returns and FBARs must be prepared. Recall that they are not required for the Initial Submission. Step 3 is referred to as the “Final Submission,” which need not be completed by September 28, 2018.
While time is of the essence, do not be hasty. Applying for the OVDP is a big decision and should not be made haphazardly without sitting down with a tax attorney for a thorough and comprehensive risk assessment. A risk assessment is necessary to identify which compliance options are best suited for you. One size does not fit all.
Like the last grain of sand passing through the bulb of an hourglass, the September 28, 2018 deadline will be here before you know it. Getting a jump on things now instead of waiting until the last minute will allow you to weigh your options and make a carefully reasoned decision.