Offshore Voluntary Disclosure Programs (OVDP) and Streamlined Filing Procedures

How the Offshore Voluntary Disclosure Program Works

To encourage taxpayers with offshore bank accounts and assets to come forward and comply with Foreign Bank Account Reporting (FBAR) requirements – including those enacted by the Foreign Account Tax Compliance Act (FATCA) – the federal government created several Offshore Voluntary Disclosure Programs (OVDP), the latest being instituted in 2012. Under the terms of the 2012 OVDP, non-complying individuals and companies that voluntarily report undisclosed foreign income can reduce penalties by a significant amount, provided that they pay the back taxes, interest and accuracy-related penalties owed to the government.

The rules governing OVDP are complex, and once you enter OVDP, you will become subject to increased scrutiny by the IRS. Some people who have tried to take advantage of the program have even been subject to criminal prosecution, even though they entered the program in good faith. If you wish to take part in OVDP, you should consult with an experienced tax / OVDP attorney as soon as possible.

Taxpayers interested in participating in the program must first submit a pre-clearance request from the IRS. The IRS will respond with pre-clearance approval, subject to review of the taxpayer's application by the IRS Criminal Investigations unit. If the OVDP application is accepted, the IRS will notify the taxpayer within 45 days of the issuance of pre-clearance approval. The taxpayer must then provide complete disclosure of foreign assets and income, and cooperate fully with the IRS. Should he or she not do so, the taxpayer could become liable for civil and criminal penalties.

The 2012 Offshore Voluntary Disclosure Program is open-ended, but the IRS has the power to change its terms or terminate the program at any time. If you have questions or concerns about the OVDP, we recommend that you get legal help today. To speak with an experienced OVDP attorney in the Philadelphia, Pennsylvania area, contact Joseph R. Viola.

Opting Out of the Offshore Voluntary Disclosure Program

The 2012 Offshore Voluntary Disclosure Program enables a taxpayer to become compliant with Foreign Bank Account Reporting (FBAR) requirements by voluntarily disclosing foreign financial accounts and undisclosed income. Despite the attractiveness of this program, there may be circumstances in which participation in the program is not advisable. In addition, after a taxpayer enters the program, it may become apparent that the taxpayer is better off submitting to the standard IRS audit procedure rather than going forward in the program. As presently structured, however, the taxpayer has to "opt in" to the OVDP in order to later "opt out."

The 2012 OVDP provides for a graduated schedule of penalties based on the highest year of noncompliance, with a maximum of 27.5 percent of each account's highest balance. On the other hand, nonwillful FBAR penalties are $10,000 per account, per year.

Simply put, it may be advantageous to opt out of OVDP if the total nonwillful FBAR penalties you face are lower than OVDP penalties. However, if you do opt out, you still remain subject to the Criminal Investigations unit and you must fully disclose all requested information and pay the tax you owe. If you do not do so, you could face criminal penalties.

You should consider participating in the OVDP only after consulting with an experienced tax lawyer. If you are already in OVDP and wish to opt out of the program, speak with a lawyer. Once a taxpayer chooses to opt out of OVDP, the decision is irrevocable. Whatever your situation, the stakes are simply too high not to obtain a clear understanding of your situation, the potential risks you face, and your legal options.

Expanded Streamlined Filing Compliance Procedures Established in June 2014

Modified streamlined filing compliance procedures are available to U.S. taxpayers residing in the United States and abroad who can truthfully certify that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide to taxpayers in such situations with a streamlined procedure for filing amended or delinquent returns and resolving their tax and penalty obligations.

Streamlined Domestic Offshore Procedures

Under the new Streamlined Procedures, participating U.S. resident taxpayers must:

  1. file amended tax returns, together with all required information returns, for each of the most recent three years for which the U.S. tax return due date has passed;
  2. file any delinquent FBARs for each of the most recent six years for which the FBAR due date has passed; and
  3. pay a Title 26 miscellaneous offshore penalty equal to five percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets subject to that penalty during the years in the covered tax return and FBAR periods.

Tax returns submitted under the new Streamlined Domestic Offshore Procedures will be processed like any other return submitted to the IRS. Consequently, receipt of the returns will not be acknowledged by the IRS and the streamlined filing process will not culminate in the signing of a closing agreement with the IRS. Returns submitted under the Streamlined Offshore Procedures may still be selected for audit under the existing audit selection processes applicable to any U.S. tax return. They may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources. Thus, returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate.

Streamlined Foreign Offshore Procedures

U.S. nonresident taxpayers participating in the Streamlined Foreign Offshore Procedures are subject to similar requirements but must also meet the applicable non-residency requirements, i.e., the taxpaper did not have a U.S. "abode" and was physically outside the United States for at least 330 full days in one or more of the most recent three years for which the U.S. tax return due date has passed. A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with all filing requirements is not required to pay any miscellaneous offshore penalty or failure-to-file, failure-to-pay, accuracy-related, information return or FBAR penalties.

After a taxpayer has completed the streamlined filing compliance procedures, he or she will be expected to comply with U.S. law for all future years and file returns according to regular filing procedures.

OVDP or Streamlined Filing?

Taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful conduct – and who therefore seek assurances that they will not be subject to criminal liability and/or substantial monetary penalties – should consider participating in the Offshore Voluntary Disclosure Program and should consult with their tax professional or legal adviser.

Once a taxpayer makes a submission under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures, the taxpayer may not participate in OVDP. Similarly, a taxpayer who submits to an OVDP voluntary disclosure letter on or after July 1, 2014, is not eligible to participate in the streamlined procedures.

Contact an Experienced Philadelphia OVDP Attorney

Philadelphia, Pennsylvania tax attorney Joseph R. Viola has extensive experience representing taxpayers seeking to participate in the OVDP and requiring other advice regarding FBAR, FATCA and other legal issues relating to foreign bank accounts and assets. We welcome you to contact us for an assessment of your situation.