Pros and Cons of Offshore Disclosure: Should I Still Submit?

Manage Offshore Account Risks with Voluntary Disclosure

Foreign accounts disclosure is the process of submitting prior year, previously undisclosed foreign account, asset, investment, and income information to the US government (IRS and FinCEN) in order to get into tax and reporting compliance. The IRS offers various ‘amnesty’ programs and there have been many versions of these different programs over the years. Currently the four main programs/procedures include:

• • • IRS Voluntary Disclosure Program

    • Streamlined Filing Compliance Procedures

    • Delinquency Procedures

    • Reasonable Cause as an alternative to Streamlined or Delinquency

Getting into IRS Offshore Compliance

What is a Taxpayer to do when they realize that they are out of compliance?

Let’s take a look at some of the pros and cons of making a foreign account disclosure.

Pros of the IRS Offshore Disclosure

Let’s start with some of the benefits of the IRS offshore disclosure program.  

Taxpayers get to provide the Narrative

First, with offshore disclosure, the Taxpayer gets the opportunity to present the narrative to the IRS instead of being on the defensive. Thus, the Taxpayer gets to set the cast of characters and make their presentation to the IRS as to why they were non-willful (Streamlined or Delinquency). If, instead, the Taxpayers is willful, then they get to present their position under VDP before the IRS potentially launches a criminal investigation. Noting that just because someone is willful in the civil arena does not mean that they are criminally willful.  

Non-Willful vs Willful (Offensive vs Defensive)

When a taxpayer believes they are non-willful, it is typically easier for them to make that presentation on the offensive than it is to be on the defensive — and have to defend IRS claims that the taxpayer is willful.  

The Penalty can be Waived or Limited

Depending on which program the taxpayer qualifies for, such as the Streamlined Foreign Offshore Procedures, the Taxpayer may be able to get into full compliance without any offshore penalties. Since the ultimate goal of taxpayers seeking to get into compliance is to be compliant with the IRS, the Streamline Foreign (SFOP) is a great program for those who qualify for it.  

IRS Can Change the Program or Eliminate Amnesty Programs

The IRS has the authority to cancel or revise the programs at any time. For example, in 2018, the IRS terminated the OVDP Program — and Taxpayers who waited to submit to the program ended up paying a significantly higher penalty than those who submitted to the program at an earlier date.  

The IRS Can Still File a Lawsuit

It is important to keep in mind that while the Tax Court ruling limits the IRS’s ability to go after Taxpayers via issuing assessable penalties, that does not mean that the IRS is prevented from going after the Taxpayers in court. Even the Court in Farhy confirmed that the IRS still has the ability to file a lawsuit against Taxpayers. And, while the IRS will not be able to file lawsuits against everyone for every violation of 5471 and other international information reporting forms, that is a risk that many taxpayers simply do not want to take.  

Peace of Mind

There is a general sense of relief among many taxpayers who take the necessary steps to proactively get into compliance. This reduction of stress and the ability to move forward with future filings (and life in general) can bring a sense of satisfaction to many taxpayers.  

Cons to IRS Offshore Disclosure

While there are many benefits to submitting to offshore disclosure, there are some other considerations to be aware of as well, especially for taxpayers who may not want to submit and are looking for reasons not to.  

The Taxpayer May Never Be Issued a Penalty

There is no guarantee that the IRS will find you, and even if they do, depending on how the next batch of litigation turns out in Tax Court and Federal Court, the IRS may not have the immediate ability to go after as many taxpayers as they would like.  

No Refund Under the Streamlined Procedures

Directly in the content of the streamlined procedures certification form is verbiage that disallows a taxpayer to seek a refund under the Streamlined Filing Compliance Procedures. Entering the streamlined procedures is a voluntary submission process, and even if the law were to change in the future — chances are that Taxpayers would be estopped from seeking a refund based on the certification form they sign.  

Your Streamlined FBAR Penalty is More than Non-Streamlined

For some Taxpayers who are clearly non-willful but have significant amounts of unreported accounts along with some income, they will not qualify for Delinquency Procedures – but may not want to submit to the Streamlined Procedures, because the penalty under the streamlined procedures may be too high and not warranted – especially in light of Bittner. For example, a Taxpayer may be non-willful but has $8 million worth of foreign accounts. Under SFCP, they would have to voluntarily succumb to a $400,000 penalty under SDOP.  Taxpayers, especially in this type of situation, should speak with a Board-Certified Tax Law Specialist to evaluate the different options in order to safely and legally get into compliance by considering Reasonable Cause as an alternative.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.