Just as the Internal Revenue Service bolsters its international enforcement capabilities and activities, it is also phasing out its voluntary disclosure program.
The IRS said it is ramping down the 2014 version of its Offshore Voluntary Disclosure Program and will close it entirely on Sept. 28. That amounts to a last call for individual or corporate taxpayers who know they have unresolved compliance problems related to unreported foreign financial assets and failures to file appropriate returns. Voluntary disclosure generally results in reduced penalties compared to actions that are initiated by the IRS, thus incentivizing taxpayers to come forward voluntarily.
The IRS says the current voluntary disclosure program has drawn in more than 56,000 taxpayers to settle up $1.1 billion in back taxes, interest, and penalties. The IRS says it is winding the program down in part because the number of taxpayers coming forward through the program is diminishing — only 600 disclosures in 2017 compared with 18,000 in its peak year of 2011 under an earlier iteration of the program. The IRS also cites “advances in third-party reporting,” an apparent reference to new reporting requirements under the Foreign Account Tax Compliance Act, or FATCA, and increased awareness among U.S. taxpayers of their reporting obligations.
After the IRS shuts down the offshore voluntary disclosure program, taxpayers who want to self-report some lapse in compliance will be able to access other streamline reporting or “non-willful information return” programs, says Jim Mastracchio, a partner at law firm Eversheds Sutherland. “A path to full tax compliance will still be available, but the process for disclosure will involve direct contact with IRS criminal investigation through its local office practices,” he says. “There will be no certainty as to the amount of penalties that might be imposed in any given case by the IRS civil examination division.”
The IRS has been picking up its efforts in international enforcement, says George Abney, a partner at law firm Alston & Bird. With its voluntary disclosure programs well publicized over the past several years, “anyone who is still in violation of U.S. tax law and using international accounts or entities to do it really doesn’t have much excuse any more,” he says. “Now that the IRS is putting together its international criminal enforcement, it’s gearing up to pursue more criminal cases.”
With countries increasing their cross-border cooperation and technology becoming more advanced and more available, the IRS international criminal investigation unit is expanding its overseas presence and openly advising U.S. entities to be mindful of their tax obligations. “They are gathering voluminous information from multiple sources, including FATCA, and using fairly sophisticated data mining computer programs to piece together information and connect the dots,” says Abney.
Although FATCA has been unpopular in many business circles and with many members of Congress, “it has not been repealed or replaced,” says Abney. “It’s still the law.”