The New IRS Offshore Voluntary Disclosure Program and US Sanctions on Iranian Bank Accounts

Posted on June 24, 2014 by Farhad Alavi — Leave a comment

The Internal Revenue Service (IRS) announced last week that it was further incentivizing the self-disclosure by U.S. taxpayers of offshore financial assets and accounts not previously reported. Specifically, the IRS modified the 2012 Overseas Voluntary Disclosure Program (OVDP) effective July 1, 2014, drastically reducing penalties for certain non-willful, non-disclosure of foreign financial assets. This naturally creates questions for those who have not disclosed such accounts to the IRS and who may be in violation of U.S. sanctions on Iran as well. The IRS’s move appears to be aimed at motivating taxpayers to come clean on incomplete returns and follows on the coattails of the phase-in of the U.S. Foreign Account Tax Compliance Act (FATCA). FATCA places strict measures on non-U.S. financial institutions failing to report accounts they maintain for U.S. taxpayers.

In its various inceptions, the OVDP allows taxpayers to pay a preset penalty (the actual amount has varied based on the program) on offshore assets and accounts previously not reported on the Report of Foreign Bank and Financial Accounts (commonly referred to as the FBAR and FinCen 114) in order to avoid criminal prosecution. In exchange for thorough and accurate disclosures, the IRS’s Criminal Investigation division will recommend to the U.S. Department of Justice that the disclosing taxpayer not be prosecuted. While there is very likely no FATCA reporting between Iranian financial institutions and the IRS, this by no means implies that those U.S. persons holding accounts in Iran are in the clear. As such, responsible individuals should map out a strategy to come into compliance, particularly that penalties for violation of IRS regulations and OFAC regulations can be exceptionally punishing.

Revised and Reduced Penalties

A key point to notice when comparing the revised “2014” OVDP against its 2012 predecessor is the dramatic reduction in the penalty percentages. Effective July 1, 2014, participants in the 2014 OVDP can benefit from a 5% penalty for non-willful non-disclosure of foreign bank accounts. Previous penalties have typically been above 20%. While the penalty for non-disclosure of bank accounts is 5%, they can vary for various other types of non-disclosures.

The Interplay with Iran

As many know, U.S. persons require a specific license from OFAC to hold bank accounts in Iran. Absent such a specific license, holding bank accounts in Iran is prohibited under the Iranian Transactions and Sanctions Regulations, 31 CFR Part 560 as it constitutes the prohibited importation of services from Iran (and the contribution of funds into that account can be considered prohibited investment in Iran).

That said, many knowingly or unknowingly hold accounts in Iran. If these accounts are in certain designated institutions like Bank Saderat, Bank Melli, Bank Tejarat and Bank Sepah (among a number of others), there is an additional violation of dealing with a prohibited party. Further, such funds are potentially subject to blocking upon entry into possession of a U.S. person (such as a U.S. bank) and pulling money out of such banks requires a specific license from OFAC. Given the violation – many do not want to properly fill their FBAR forms in their tax returns. This only exacerbates the person’s problems. Accounts should be reported, and again, it goes to my point that what happens in Iran does matter in the United States.

Given the potential penalties that can arise from holding a bank account in Iran, individuals should naturally abstain from such behavior and only hold such accounts if they have specific licenses from OFAC. Those currently having accounts in Iran should very strongly consider voluntarily self-disclosing such accounts to OFAC and requesting authorization to liquidate and terminate those accounts and transfer the proceeds out of Iran. Notably, OFAC views such disclosures very favorably (if the self-disclosure qualifies under OFAC’s definition of a “Voluntary Self Disclosure,” the maximum civil penalty is automatically reduced by half, with other mitigating factors, as applicable, can further reduce the amount).

Given the U.S.’ policy of encouraging divestment from Iran, there is little reason to think a petition to close an account in Iran will be denied by OFAC. Not only does such self-disclosure put one on a more favorable footing with OFAC than waiting for OFAC to later discover the violation on its own, but it also enables the individual to accurately file any FBARs that must be reported.

Going Forward

Taxpayers seeking to take advantage of the revised OVDP must be approved by the IRS. This involves obtaining an initial preclearance approval. Upon approval, the taxpayer has 45 days to make the formal disclosure, although taxpayers may request an extension of up to 90 days. Notably, even if the taxpayer cannot pay all the sums due under an OVDP self-disclosure, he or she can request that the IRS arrange an alternative payment plan. Bearing in mind that the IRS can look back to the previous 8 years of tax returns, it is vital that self-disclosures be filed in good faith and diligently. OFAC can generally look back 5 years, although there can be tolling of the statute of limitations.

Conclusion

The IRS new program affords those who have not filed or adequately filed their FBAR disclosures with a powerful incentive to do so. Although eligibility and non-prosecution are not guaranteed, the revised OVDP presents a unique opportunity for taxpayers who have non-willfully failed to file adequate and complete reports on certain foreign assets to disclose with minimal penalty. Furthermore, while certain penalties have been drastically abated, the complexities of the program highlight the need for taxpayers to pay particular attention to compliance going forward.

Although holding foreign bank accounts and assets is not something unique to a select few, however, doing so without the sophistication of understanding one’s legal requirements can be the source of substantial civil and criminal liability under U.S. laws and regulations. Given the sanctions on Iran, those holding such accounts in that country should realize that they not only face liability for non-reporting under the FBAR, but also potential civil and criminal penalties under OFAC regulations.

In accordance with IRS Circular 230, any U.S. federal tax advice provided or presented in this communication is not intended or written to be used, and at no time can be used by the reader, the direct or indirect recipient or any other taxpayer (1) for the purpose of avoiding any civil or criminal tax penalties that may be imposed on the reader, the direct or indirect recipient, or any other taxpayer; or (2) in promoting, marketing, or recommending to any other party any type of partnership or other entity, investment plan, arrangement, or other transaction addressed or otherwise discussed in this communication. For more information on this disclaimer, please see Akrivis Law Group, PLLC’s website.