August 1, 2016

OVD Initiative Update: When is "Streamlined" NOT so Streamlined?

By Victoria Tarakanova, Staff Accountant, Tax & Business Services

OVD Initiative Update: When is "Streamlined" NOT so Streamlined?

The wisdom of the old Fram Oil Filter commercials of the 90’s — “You can pay me now…or you can pay me later” — still applies. It’s good advice, even when it comes to making important tax choices.

Since 2012, 30,000 Americans avoided stiff tax penalties by declaring they had innocent reasons for failing to disclose offshore holdings. Those taxpayers chose the Streamlined Procedures program instead of the more expensive and more complex OVDP [Offshore Voluntary Disclosure Program]*. But that “streamlined” decision had you forfeit one very important feature of the OVDP. You received no closing agreement with the Internal Revenue Service (IRS) and, therefore, no protection from later criminal prosecution.

The Justice Department and the IRS are currently combing through thousands of secret records obtained from 80 Swiss banks to determine whether taxpayers were truthful. They continue to emphasize that they are mining the data received from third party sources and will compare such information with the information included in Non-willful Certifications submitted with streamlined filings.

“[We’re] taking all of that data and scrubbing it for leads,” a trial attorney in the Justice Department’s Tax Division said at the New York University Tax Controversy Forum in July. The effort has been fruitful already. She added that with some taxpayers, “We say we could indict this case tomorrow.”

The US government received extensive data from these 80 Swiss banks under settlements in which the banks disclosed how they helped taxpayers evade US taxes. For their cooperation, the banks avoided billions in penalties.

So for these 30,000 Streamlined Procedure filers, the risk of being scrutinized falls on the accuracy of their disclosures. They received a big benefit utilizing the Streamlined Program, as current domestic US taxpayers pay a 5% penalty, while offshore residents pay zero. And nothing sounds more enticing to a delinquent filer than the prospect of a zero penalty for coming clean with the Treasury.

Another 55,000 taxpayers have filed under the OVDP and paid penalties of 27.5%, but the government agreed to never prosecute them over their disclosures. Since the inception of the OVDP in 2009, these penalties and back taxes have exceeded $8 billion.

At the Forum, the Justice Department attorney concluded with: “We’re getting spreadsheets with US client names, account numbers, details, entity names and account balances. It’s a little bit of a dangerous time if you are an offshore account holder and have not gotten it right, because there’s just been an avalanche of information that’s come to the Department and the IRS.”

So, it’s just a little bit dangerous? Perhaps Streamlined wasn’t the best choice after all? Remember, you can pay Uncle Sam now, or pay him later. But when the later payment could include criminal prosecution, it is vastly more than a little bit dangerous.

*Summary of OVDP vs. Streamlined Programs OVDP Streamlined
a. Income tax returns 8 years 3 years
b. Foreign accounts filing 8 years 6 years
c. Non-willful certification Not required Required
d. Applicable misc. penalty 27.5% / 50% 0% / 5%