IRS Form 8938 and the Offshore Voluntary Disclosure Program (OVDP)

The announcement by the IRS of the opening of the new Offshore Voluntary Disclosure Program (OVDP) on January 9, 2012 came as a surprise to most tax practitioners, especially since the 2011 OVDI just ended on September 9, 2011. However, if one analyzes the number of new developments in international tax compliance over the past several years, then the surprise of the announcement of a new offshore voluntary disclosure program is greatly reduced. One of these latest developments is the new Form 8938.  This article analyzes some of the key aspects of the interaction between Form 8938 and 2012 OVDP.

2012 OVDP and Form 8938

In announcing the 2012 OVDP, IRS cited several reasons for announcing the new voluntary disclosure program for U.S. taxpayers with offshore assets, particularly the success of the previous programs and the wealth of information gathered by the IRS which would allow it to investigate (and ultimately penalize and/or prosecute) additional non-compliant U.S. taxpayers.

However, Form 8938 is likely to play a very important role in driving additional U.S. taxpayers toward 2012 OVDP.

Form 8938′s Impact on Foreign Asset Disclosure

The main reason for Form 8938′s potentially large impact on 2012 OVDP participation lies in the nature of Form 8938.

Form 8938 is and will be a significant tool for the IRS to identify the scope of international tax non-compliance of a given U.S. taxpayer.  The reason why Form 8938 is so useful for the IRS is that Form 8938 now requires a taxpayer to disclose more information, which connects various parts of a taxpayer’s international tax compliance including the information that escaped disclosure on other forms earlier. This summary, in turn, allows the IRS to effectively identify the overall scope of a taxpayer’s noncompliance. Form 8938 may lay the foundation (and road map) for an IRS investigation of whether the taxpayer has been in compliance previously.

Form 8938 May Force Taxpayers to Enter a Voluntary Disclosure Program

This ability by the IRS to discern whether the areas of actual or potential non-compliance in current as well as prior years puts previously non-compliant taxpayers in a very uncomfortable position. 

A previously non-compliant taxpayer who failed to reporting foreign bank accounts will have great difficulty with Form 8938.  Since Form 8938 required to be annually filed together with the tax return, the failure to file (or being untruthful) Form 8938 at this point is likely to turn previous non-willful non-compliance into a willful one.

For example, Question 3a of Form 8938 indirectly asks a problematic question: the date of the account opening (the question specifically asks whether the account was opened in the tax year).  For older accounts, this is a dangerous question. Answering that the account was not opened in the tax year, implicitly (and affirmatively by omission) states that account was opened in a prior year. As a result, prior years FBARs should have been filed. The answer to question 3a could provide incriminating evidence to the IRS.

Question 3a (similar to Question 7a of Form 1040 Schedule B) also does something far worse: it requires a response from the taxpayer.  Answering (or not answering) the question could demonstrate “willfullness” in failing to file FBARs. The IRS has previously used taxpayers’ answer (or non-answer) of Question 7a of Form 1040 Schedule B to successfully demonstrate “willfullness” and “intent” in criminal prosecutions.  A person who willfully fails to report an FBAR may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Willful violations would also be subject to criminal penalties.

Form 8938 is likely to have a major impact on the number and depth of voluntary disclosures as taxpayers are forced to re-evaluate their tax compliance strategies.

The impact of Form 8938 on your particular situation should be analyzed separately by a competent tax attorney. This article can only provide a very general background, because the exact strategies, including the enrollment into 2012 OVDP, will differ from situation to situation.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.