The IRS's Voluntary Disclosure Program

The objective of the Offshore Voluntary Disclosure Program (OVDP) is to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws.

It enables noncompliant taxpayers to resolve their tax liabilities and minimize their risk of criminal prosecution. To do so, a taxpayer must walk in lockstep with all of the provisions of the voluntary disclosure program. In other words, he must “truthfully, timely, and completely” comply with all of the provisions of the voluntary disclosure program. This is no small feat. When it comes to OVDP, full compliance means opening up your “financial Kimono” and disclosing all of the particulars of your foreign assets, from the financial institution where they were maintained to who specifically facilitated the opening of the accounts. Although voluntary disclosure does not provide an ironclad guarantee of immunity from prosecution, it generally results in prosecution not being recommended.

Another perk of OVDP, according to the IRS, is that it allows taxpayers to determine their miscellaneous offshore penalty to the very penny, thus creating peace of mind by eliminating the risk that the IRS will assert draconian FBAR penalties.

Voluntary disclosure is not something that the IRS or DOJ offers out of the “goodness” of their hearts or because they want to cut noncompliant taxpayers some slack. Instead, the U.S. government’s coffers are empty and in dire need of an infusion of cash and the IRS, as the nation’s tax collection agency, is charged with the responsibility of replenishing it. While prosecuting those who are not in compliance might seem like the most expedient way of remedying this problem, it is cheaper for the government if the taxpayer voluntarily comes forward than it is to hunt him or her down like a “fugitive from justice” and devote what are otherwise “scarce resources” to investigating and prosecuting the case.

While the Offshore Voluntary Disclosure Program is not exactly a get-out-of-jail free card, it may be the next best thing. It allows the taxpayer to partner with an experienced attorney upfront, so he or she can have an advocate every step of the way as opposed to waiting until things get hairy. As difficult a pill as OVDP might be to swallow, it’s much better to knock on the Service’s door than for them to come knocking on yours.

A question that I am repeatedly asked pertains to the shelf life of the OVDP. It is often couched as follows, “If the OVDP program is a creature of the IRS, does that mean that the IRS can discontinue it anytime it likes?” Technically, “yes.” However, a recent press release issued by the IRS goes a long way to assuaging the concerns of any “nervous nellies” by suggesting that the program isn’t going anywhere anytime soon.

In a press released issued on the IRS website on October 16, 2015 available here, https://www.irs.gov/uac/Newsroom/Offshore-Compliance-Programs-Generate-$8-Billion;-IRSUrges-People-to-Take-Advantage-of-Voluntary-Disclosure-Programs, the IRS announced that its Offshore Voluntary Disclosure Program (OVDP), which began in 2009, has led to more than 54,000 disclosures and generated more than $8 billion. IRS Commissioner John Koskinen stated in the press release that “[p]eople with undisclosed foreign accounts should carefully consider their options and use available avenues, including the offshore program and streamlined procedures, to come back into full compliance with their tax obligations.”

Hanging in the Balance

As with all tax policies, voluntary disclosure involves a balancing of interests. On the one hand, there is a significant revenue loss. Those taxpayers contributing to the gap – whether non-filers or evaders – need to be nudged to come back into the system. In other words, they need to be brought back into the fold. This militates in favor of the policy.

The alternative is cumbersome and unwieldy. For example, if the government had no policy or if the policy had so many restrictions that it would be easier for the taxpayer to climb Mount Rushmore in sneakers than to qualify, the government would lose revenue because taxpayers would have very little, if any incentive, to come out of the shadows and disclose. Thus, a carefully structured and implemented voluntary disclosure policy is a “win-win” for both wayward taxpayers and the government.

Not So Fast

As you might have guessed, there is some fine print and more than just a few caveats. Although the law on this point is somewhat unsettled, it is much better if the taxpayer doesn’t wait until the final stanza of “Just As I Am” to walk the sawdust trail. The essence of voluntary disclosure is that a taxpayer will not be prosecuted if he voluntarily discloses his misconduct before the IRS or DOJ is in hot pursuit.

The metaphor that I like to use here is the hunting of a fox by a thirsty bloodhound. If the bloodhound has already detected the scent of the fox and is hot on his trail, then the fox is “squat.” Indeed, no amount of pleading with the bloodhound is going to save the fox from the sharp and carnivorous teeth of the salivating bloodhound.

Moreover, at the risk of sounding crass and unseemly, the OVDP is not a one-night stand. In addition to filing accurate paperwork, the taxpayer must agree to cooperate on an ongoing basis. If the IRS has more questions, the taxpayer must provide answers, or the deal is off. This element is often a serious concern, because many taxpayers may have more to hide than a few dollars in the Azores.

How Does OVDP Affect the Case?

As unsettling as this might sound, a noncompliant taxpayer who tries “to get right” with the IRS may still become the target of a criminal prosecution. There are a myriad of reasons why, from the Service wanting to make an example out of the taxpayer in order to discourage other would-be “tax cheats” from engaging in similar conduct to the taxpayer outright refusing to give ongoing cooperation. This is where an important distinction should be made. While OVDP significantly “minimizes” a taxpayer’s chances of being criminally prosecuted, it does not provide an ironclad guarantee of immunity from prosecution.

This begs the question, "What becomes of a taxpayer who the government decides to prosecute, despite having made a voluntary disclosure?" Assume that the taxpayer is charged with tax evasion for allegedly filing fraudulent returns. To the extent that the taxpayer-defendant’s voluntary disclosure is deemed “admissible” at trial – that’s not to say that the government would be given a dispensation from having to prove that it is relevant in a legal sense before a judge ultimately deems it to be admissible – there is no doubt that the voluntary disclosure is open-and-shut proof that the original return was fraudulent. However, that is only part of the case.

The IRS must still convince a jury that the tax evasion was willful. Willfulness is the “cornerstone of any criminal tax matter." And it is a battleground where the odds are generally stacked against the taxpayer. When willfulness exists, it is like the “Helen of Troy,” in the sense that the government will mount an offensive as fierce as the “launching of one thousand ships.”

While voluntary disclosure might help the government establish that the original return was fraudulent, it may actually hurt the government’s case in the long run, at least on the issue of willfulness. How so? The fact that the taxpayer “fessed up” before the government came “knocking” may plant a seed of doubt – one that might even be “reasonable” – in the minds of sympathetic jurors, causing them to acquit, rather than convict. Also, voluntary disclosure should not be overlooked as another arrow in the defense attorney’s quiver when it comes to pretrial negotiations with prosecutors, who probably have fatter fish to fry elsewhere.