Offshore Voluntary Disclosure Program: The Basics (2013)

Let us start with the fact that the 2009 Offshore Voluntary Disclosure Program and the 2011 Offshore Voluntary Disclosure Initiative had deadlines but the new Offshore Voluntary Disclosure Program (OVDP) does not. This new program will be available until further notice to taxpayers who wish to come forward and disclose their foreign bank assets.

What Does the OVDP do? This program seeks to bring taxpayers who had undisclosed foreign bank accounts or undisclosed foreign entities for the purpose of evading or avoiding tax into compliance with the laws of the United States.

This program is a counter-part of the Criminal Investigation’s Voluntary Disclosure Practice. It addresses the civil side of the taxpayer’s voluntary disclosure of the foreign accounts and assets by defining the number of tax years covered and civil penalties that will apply.

Penalties that Apply for Non-Compliance with FBAR Requirements: These penalties are quite substantial. The FBAR penalty, which is a one-time penalty, is based on the highest aggregate balance in a taxpayer’s offshore account over an eight year period. This penalty is 27.5% of the above balance. Some taxpayers may qualify for a reduced 12.5% or 5% rate. Taxpayers might also have to pay a 20%-40% accuracy-based penalty for under-payment for eight years and failure-to-file &/or failure-to-pay.

There are also criminal charges to be faced if a taxpayer has undisclosed foreign bank accounts & doesn’t qualify for the OVDP. A person convicted of such tax evasion can face up to $250,000 in fines and a prison term up to 5 years. And failing to file an FBAR could subject a person up to $500,000 in criminal penalties and a prison term up to 10 years. More details of said criminal charges are on the IRS website.

What Forms Part of the OVDP? The FAQ 8 of the Offshore Voluntary Disclosure Program on the Internal Revenue Service’s website gives details of how the OVDP works with examples. In a nut-shell, a taxpayer will need to take the following actions:

• File both the original and the amended returns for prior eight years that report all income & disclose foreign accounts.

• File all missing FBAR reports.

• Cooperate fully with the OVDP process.

• Sign agreements to extend statute of limitations.

• Pay the penalties set.

Should You Make a Voluntary Disclosure? Since this could be one of the most important decisions you could make if you have undisclosed foreign accounts or assets, please read the following paras carefully. To be eligible to make a voluntary disclosure,

• One must not be under audit or criminal investigation;

• One must not have received notices from the IRS regarding undisclosed foreign bank accounts;

• Or the IRS should not have already received your name from a cooperating bank.

The decision to be part of the OVDP is based on each person considering it. Once entered into, all the participants are measured by the same yardstick. Moreover, the OVDP does not include any chances to offer mitigating evidence in support of a defense for non-filing which include reasonable cause and/ or good-faith reliance on advice of others.

If the taxpayer has prior failures which are not willful but are caused by inadvertence or negligence, and is able to prove it, he may be able to reduce the amount of penalties under special circumstances. However, there is no guarantee.

All of this will make any taxpayer apprehensive or indecisive about entering the OVDP. If you are one of those who is “willing to take a chance” and keep your foreign accounts undisclosed, know this: the IRS enforcement initiatives have taken on a very determined nature.

The US government has entered into tax treaties (as of 11/22/2013) with France, Germany, Italy, Spain, the UK, Denmark, Mexico, Switzerland, Norway & Japan under FATCA, 2010 {Foreign Account Tax Compliance Act}. These tax treaties increase the odds of the IRS becoming aware of undeclared bank accounts of US taxpayers. If this happens, the OVDP is no longer an option.

The banks are more than likely to comply with the FATCA notwithstanding the reputation of bank secrecy that some of the named countries have. This is because compliance guarantees immunity from prosecution from the US Govt.

So if you have undisclosed foreign bank accounts or assets, contact a tax professional right away to make an informed decision before it is too late.

Bibliography: FAQs for OVDP;; OVDP submission requirements; Various posts on by expert Robert Wood – also a member on TaxConnections.

In accordance with Circular 230 Disclosure

I am Manasa Nadig, enrolled to practice and represent taxpayers with the Internal Revenue Service. I have been in the business of Tax Preparation & Tax Planning since 1999. My firm, MN Tax Solutions, LLC is based in Michigan, USA. Please connect with me on TaxConnections for more information about myself & the services provided by my firm.

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2 comments on “Offshore Voluntary Disclosure Program: The Basics (2013)

  • We are in Canada and I have dozens of clients who are filing US returns for the first time. I have NEVER put one in the OVDI – we use the streamlined filing program which is much better and does not incur ANY penalties as long as the person is classified as low risk. We consider low risk to be if you weren’t intentionally hiding assets and trying to avoid US tax – most citizens just don’t know about filing – many were born in Canada to US parents and haven’t ever filed or gotten a SS# or anything else. In the last 14 months only 1 person has been rejected and we still have no reason from the IRS.

    But I like the Streamline filing very much – 3 tax returns, 6 FBARS and applicable trusts, corps, etc are limited and the best part – protection from penalties.

  • Thanks for your comment Diana. The New Streamlined Procedure is definitely a great option for non-resident US taxpayers who have resided outside the US since Jan 1st, 2009. I would highly recommend it for those who would be eligible in spite of the risks involved. A couple of clients from India were able to make use of this since the steady decline of the Rupee over this period meant they could take advantage of the $1500 threshold for low risk determination.

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