Recently, I discussed the impact of so-called “soft letters” sent by the IRS to various groups of taxpayers with offshore asset disclosure compliance issues (see this generic example of an IRS soft letter). As my prior piece predicted, the IRS announced the Offshore Voluntary Disclosure Program (OVDP) will close to new applicants on September 28, 2018. Now that the IRS has set a date certain for the OVDP to close, non-compliant taxpayers wishing to enter the OVDP should determine what they must do before the deadline to qualify for the OVDP, or consider what other options remain if they do not wish to enter the OVDP. These options include responding to any “soft letter” they may have received.
Soft Letter Options
The term “soft letter” refers to one of four versions of Letter 5935, which apply to taxpayers who filed for pre-clearance with Criminal Investigation (CI) in Philadelphia or filed an OVDP application with CI in Austin, but then either: (1) were rejected; (2) withdrew; or (3) failed to provide complete information to complete the program disclosure requirements. If you received a “soft letter,” you have three options: (1) take your chances in the streamlined program; (2) take your chances outside the streamlined program on a reasonable cause argument; or, (3) if you’re really confident, simply provide a statement explaining why you should be excused. Take some poker lessons and a shot of whiskey before you decide which of these options you believe best applies to your situation.
Filing for the OVDP By September 28
Taxpayers wishing to enter the OVDP before it closes must provide a complete disclosure. This means more than filing the pre-clearance fax with CI in Philadelphia. A complete disclosure, filed by September 28, must include, at minimum, information about financial accounts and institutions required by the OVDP application letter and account attachments.
In announcing this change, Acting IRS Commissioner David Kautter noted “Taxpayers have had several years to come into compliance with U.S. tax laws under this program. 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.”
If you wish to complete the OVDP disclosure requirements and take advantage of the fixed penalty structure, then start now to ensure the financial institutions from which you need account data can provide what you need by the September 28 deadline. If you can’t provide 100 percent of the information are you disqualified? While we don‘t have guidance from the IRS on what “substantial compliance” means in this context, it is unlikely to mean that 100 percent of the data must be submitted by September 28. However, you should certainly do your best to provide as much data as possible and include a statement to explain how you will close the gap with your final submission. The IRS has posted FAQs regarding these sunset provisions which further explain how interested taxpayers may enter the OVDP before it closes.
Non-Compliant Taxpayers’ Disclosure Options After September 28
Certainly the world won’t end after September 28 when the OVDP closes. Many options will remain for taxpayers with undeclared offshore assets and income, including traditional voluntary disclosure procedures available under I.R.M. 220.127.116.11, which have existed since before 2001 when the IRS started its various iterations of offshore asset compliance programs. Both versions of the streamlined program (foreign and domestic) and the delinquent information return procedures remain available along with the traditional voluntary disclosure noted above. While options remain, the difficult process for recalcitrant taxpayers with undeclared offshore assets and income remains determining which compliance option best fits their individual facts and circumstances. To make that determination, taxpayers should secure the advice of a tax professional experienced with offshore disclosure procedures. That professional will evaluate where on the spectrum the taxpayer may fall for purposes of determining the right compliance option.