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IRS to end Offshore Voluntary Disclosure Program in September

The IRS has announced that it will begin winding down its Offshore Voluntary Disclosure Program (OVDP) on September 28, 2018. Under the OVDP, a taxpayer with undisclosed foreign assets or income could come forward to pay tax, interest and reduced penalties in exchange for immunity from criminal prosecution. The IRS will continue its separate Streamlined OVDP, which is only available to certain taxpayers unaware of their international reporting obligations.

The IRS made the announcement now in order to give taxpayers who may still want to come forward time to do so. “Taxpayers have had several years to come into compliance with U.S. tax laws under this program,” said Acting IRS Commissioner David Kautter in a statement. “All along, we have been clear that we would close the program at the appropriate time, and we have reached that point. Those who still wish to come forward have time to do so.”

The program has been very successful, collecting more than US$11 billion in tax, interest and penalties from more than 50,000 taxpayers. With advances in international reporting and information-sharing regimes, the IRS has also aggressive pursued taxpayers who have tried to hide assets abroad. Since 2009, it has indicted 1,545 taxpayers for criminal violations related to international activities with 671 indicted specifically on international criminal tax violations.

Even with the OVDP ending, the IRS will not stop vigorously pursuing international tax evaders. Any US taxpayer who may have unreported assets or income abroad should come forward now and take advantage of the OVDP while it is still available. Otherwise, come September, such taxpayers could face huge penalties and potentially even prison.

About Denton’s Tax Controversy

Dentons’ Tax Controversy team has successfully represented over 100 clients in various OVPD and streamlined OVPD proceedings, addressing a wide variety of tax compliance issues from taxpayers all across the globe. In addition, Dentons is one of few firms that has experience litigating Report of Foreign Bank and Financial Accounts (FBAR) penalties under the Bank Secrecy Act, which are almost always at issue in OVDP proceedings.

If you would like to discuss the above further, please contact any of the members of the Dentons Tax Controversy team.

The Streamline Program Turns Two

The Streamlined Filing Compliance Procedure (SFCP) is now two years old. The SFCP was designed for taxpayers whose failure to disclose their offshore accounts was “non-willful,” due to a lack of understanding or knowledge of reporting requirements for U.S. persons. Unlike the full blown Offshore Voluntary Disclosure Program (“OVDP”), the SFCP places the burden of proving that the taxpayer’s noncompliance was willful on the IRS once the taxpayer has asserted that their non-compliance was not willful. Taxpayers who’s tax returns and informational filing requirements satisfy the SFCP are only required to file tax returns for the previous 3 years and FBAR’s for the previous 6 years while taxpayers in the OVDP must file tax and information returns and FBAR’s for the previous eight years.

One point of contention for taxpayers who entered into the OVDP before the SFCP was introduced in 2014, and whose noncompliance would have qualified them for the SFCP, is that they should be able to switch to the SFCP and take advantage of the reduced penalties on the income tax liability and file only 3 years of income tax returns. While the reduced miscellaneous penalty is available under the OVDP by requesting transitional relief, such relief is not guaranteed and often denied.

Recently, a group of taxpayers brought suit in the Washington D.C. District Court to challenge the IRS’s position that taxpayers who were enlisted in the OVDP prior to the implementation of the SFCP, cannot have their matter transferred to the SFCP. The taxpayers in this case contend they were being treated unfairly under this system as they were no different than those who came forward later in time and entered the SFCP.

Unfortunately, the court did not decide the merits of the case. Rather, the court held that the suit hinders the IRS’s ability to make decisions regarding the enforcement of tax liabilities and dismissed the suit as being barred under the Tax Anti-Injunction Act (26 U.S.C. § 7421), which prohibits suits that restrain the assessment and collection of taxes.   This case highlights the difficulties that can arise when the Service creates settlement programs independent from regulatory oversight and commentary.

Automatic Information Exchange: Did the Dog Just Catch the Bus?

John Harrington recently published an article in Tax Notes Today (available through the Lexis paywall) regarding eight potential challenges presented by an international automatic exchange system. 

On February 13, the OECD released details of its proposed common reporting standard, or CRS.  With the release of this report, the OECD and G-20, like the dog intent on catching a bus that it has long chased and finally caught, now have to figure out what do to with the prize they have captured.  Harrington discusses how an automatic information exchange could affect taxpayers, financial intermediaries, and governments.

IRS Issues PFIC Regulations: A New Start to an Old Beginning

On December 30, 2013, the US Treasury Department (the “IRS”) published a package of proposed, temporary, and final regulations relating to Passive Foreign Investment Companies (“PFICs”) and their shareholders. The most significant component of the package is its guidance on the new annual filing requirements for PFIC shareholders, but the package also includes other, generally minor, changes to existing rules governing PFICs and their shareholders.

The IRS issued the regulations just in time to meet a self-imposed year-end deadline: the IRS wanted the new reporting rules to become effective before 2013 ended so that the new reporting rules would apply during the next filing season. Still, the package includes good news for some PFIC shareholders since the new regulations eliminate a retroactive filing requirement for 2011 and 2012 taxable years that had been threatened in a 2011 IRS notice.

The new regulations address in a limited way a package of technical PFIC regulations originally proposed by the IRS in 1992. Because the new package includes, in a modified form, a small portion of the 1992 proposed regulations, the new package withdraws that portion of the 1992 proposed regulations. The remaining (and outstanding) portion of the 1992 proposed regulations includes provisions that have been severely criticized. So, US investors and tax practitioners must await further IRS action to clarify the status of those proposed provisions and the interpretation of the applicable statutory rules.

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US Government Announces 6-Month Delay in Certain FATCA Rules

Recognizing the practical and logistical problems faced by US withholding agents and foreign financial institutions (“FFIs”), and the uncertainty faced by many FFIs and foreign governments about whether an intergovernmental agreement (“IGA”) will be in effect by January 1, 2014, US tax authorities on July 12, 2013, issued Notice 2013-43. Notice 2013-43 states that the US Treasury Department and US Internal Revenue Service (“IRS”) will postpone by six months, to July 1, 2014, the start of withholding required by the so-called Foreign Account Tax Compliance Act, or “FATCA,” and make corresponding adjustments to various other time frames provided in the final regulations. The Notice states that its goal is to allow for a more orderly implementation of FATCA. The Notice gives affected entities more time to adjust to FATCA; it generally does not, however, relax the long-term, substantive withholding and reporting obligations imposed by FATCA.

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Jerome Walker, a member of Dentons’ Corporate practice, co-authored this article.

Changes Proposed to US Tax Reporting Rules for “Outbound” Transfers

On January 30, 2013, the US Treasury Department (IRS) proposed amendments to existing gain recognition agreement (“GRA”) regulations that apply to US persons who transfer stock of a US corporation or a foreign corporation to a foreign corporation. The proposed changes to the GRA regulations address the consequences to US persons for failing to file GRAs and related documents (failure to file), to comply in any material respect with the terms of, or rules governing, GRAs (failure to comply), or to satisfy other reporting obligations. The proposed changes would affect not only future reorganizations and contributions of stock to foreign corporations, but also prior transfers that continue to be subject to GRA reporting. The proposed changes also provide similar failure to comply rules with respect to liquidating distributions to foreign corporations and certain other document filing requirements arising with a US person’s transfer of stock or assets to certain foreign corporations.

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US Issues Final FATCA Regulations

On January 17, 2013, the US Treasury Department (IRS) released final regulations to implement the US reporting and withholding rules originally enacted in 2010 and frequently referred to as the Foreign Account Tax Compliance Act, or FATCA. Beginning on January 1, 2014, the FATCA rules generally impose a 30 percent withholding tax on many types of payments of US-source income to a foreign entity (“withholdable payments”) unless the foreign entity reports certain information about any US account holders or owners it possesses. The FATCA rules apply directly to withholding agents, foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs), but their indirect impact is far broader and often affects unsuspecting parties.

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Jerome Walker, a member of Dentons’ Corporate practice, co-authored this article.

IRS Updates FATCA Guidance

On October 24, 2012, the US Internal Revenue Service (“IRS”) issued Announcement 2012-42 along with a table (reproduced below) that summarizes certain Foreign Account Tax Compliance Act (“FATCA”) due diligence deadlines. The changes announced are limited, but they demonstrate that the IRS and the US Treasury Department continue to make modifications to the FATCA withholding and reporting rules in response to comments, especially comments focused on practical problems encountered by entities trying to implement and comply with FATCA.

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Jerome Walker, a member of Dentons’ Corporate practice, co-authored this article.

IRS Clarifies and Tightens New “Anti‑Inversion” Regulations

On June 7, 2012, the US Treasury Department (the “IRS”) issued new regulations interpreting the US tax rules that apply to “expatriated entities.” An expatriated entity, sometimes referred to as an “inverted company,” is a US company (usually the parent company of a group of US and foreign affiliates) that seeks to become a lower-taxed foreign company rather than a higher-taxed US company. In 2009, the IRS issued temporary regulations that were scheduled to expire on June 8, 2012 (the “2009 temporary regulations”), and the regulations released on June 7 were issued shortly before the 2009 temporary regulations lapsed.

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US Treasury Department Issues Final “Bank Deposit” Interest Reporting Regulations

On April 17, 2012, the US Treasury Department released final regulations and a revenue procedure setting forth the requirements for US offices of certain financial institutions to report on the interest earned by nonresident individuals. Although the regulations, and the multiple sets of proposed regulations that preceded them, are often referred to as the “bank deposit” interest regulations, the preamble to the regulations notes that they will affect commercial banks, savings institutions, credit unions, securities brokerages, and insurance companies that pay interest on deposits. The new reporting rules apply to interest paid on or after January 1, 2013.

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New Foreign Tax Credit Regulations Issued

On February 14, 2012, the US Treasury Department (“IRS”) published in the Federal Register regulations dealing with two separate but related foreign tax credit issues. One set of regulations, which are proposed and temporary, provide guidance to taxpayers on how to interpret section 909 of the US Internal Revenue Code which denies a foreign tax credit for certain “foreign tax credit splitting events.” The other set of regulations, which are final, provide guidance on which person is considered to pay a foreign tax and is therefore eligible to claim a credit for the foreign tax paid.

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US Department of the Treasury Releases Proposed Regulations Implementing FATCA

On February 8, 2012, the US Department of the Treasury (the “Treasury Department”) issued detailed proposed regulations to implement the withholding and reporting rules commonly referred to as the “Foreign Account Tax Compliance Act” or “FATCA.” The proposed regulations supplement and, in some cases, modify the rules the Treasury Department previously announced in a series of notices. The release of the new rules provide an opportunity, in advance of the implementation dates, for foreign financial institutions (“FFIs”) to, among other things, determine the impact of the reporting and withholding requirements on their operations, including how much due diligence is required, whether the FFI systems must be enhanced, whether FFI records are currently readily retrieveable, whether the current number of customer files require that due diligence commence now, whether the FFI has sufficient staffing levels, whether FFI staff is sufficiently trained to implement FATCA, and whether third party assistance is required.

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Edward Hickman and Jerome Walker, members of Dentons’ Corporate practice, co-authored this article.

IRS Announces Third Special Offshore Voluntary Disclosure Initiative

The Internal Revenue Service (IRS) announced on January 9, 2012 that it has reopened its voluntary disclosure initiative for the third time, in response to the US government’s continuously widening investigation of foreign banks relating to unreported offshore accounts of US persons. This third special disclosure initiative follows the IRS’s 2009 and 2011 Offshore Voluntary Disclosure Programs (OVDPs) and is available to those taxpayers who did not file in time for the 2009 or 2011 OVDPs. As in the past the OVDPs are designed to bring offshore money back into the US tax system and help individuals with undisclosed income from hidden offshore financial accounts get current with their taxes. This program allows individuals with previously unreported foreign financial accounts to significantly reduce their exposure to substantial civil tax penalties and, in many cases, to eliminate the possibility of criminal prosecution. Foreign accounts include assets held in offshore trusts, foundations, corporations and other entities.

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Specified Foreign Financial Assets: New Form Must Be Filed With US Tax Return

The US Department of the Treasury (the “IRS”) recently released temporary and proposed regulations (the “Temporary Regulations”), effective December 19, 2011, to implement the provisions of the Hiring Incentives to Restore Employment (HIRE) Act that require individuals to report specified foreign financial assets (“SFFAs”) to the IRS. The Temporary Regulations apply to individuals required to file Form 1040, “US Individual Income Tax Return,” and to certain individuals required to file Form 1040-NR, “Nonresident Alien Income Tax Return.” The reporting required under the Temporary Regulations must be made on Form 8938, Statement of Specified Foreign Financial Assets.

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The Erosion of the Fifth Amendment Privilege

“You’d have to be living in a hole not to know that the U.S. government is really focused on offshore tax evasion,” IRS Commissioner Shulman told Bloomberg News earlier this year. The Bank Secrecy Act of 1970 (“BSA”) permits civil and criminal penalties for U.S. taxpayers who fail to report interests in foreign financial accounts. In the past, however, civil and criminal enforcement was rare; between 1996 and 2002 only twelve indictments were reported. In 2001, heightened financial reporting requirements were enacted under the Patriot Act, which is expressly designed to help prosecute international crimes. The government’s formal declaration of war on foreign tax evasion was commemorated in 2008 when a district court authorized the IRS’s John Doe Summons on Swiss bank UBS, demanding documents identifying U.S. taxpayers with unreported accounts. This order followed the indictments and guilty pleas of a high-profile UBS customer and his private UBS banker. In 2009, the DOJ charged UBS with aiding U.S. taxpayers in tax evasion. The bank avoided prosecution by paying $780 million and disclosing account data. Shulman promised severe penalties as the government pursued “criminal avenues” for these targeted individuals. Criminal charges have since been filed against numerous taxpayers, bankers, financial advisers, and lawyers linked to the data. Still, earlier this year, the IRS threatened offshore bank account holders with the increasing risks of criminal prosecution.

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