Each year, thousands of Americans utilize foreign bank or financial accounts and employ foreign income-generating assets. Just because these assets are in a foreign country, however, this does not mean that they are not subject to taxation or foreign information reporting by the IRS. In fact, over the last decade, the IRS has cracked down on those who fail to report foreign accounts, fail to file required foreign information returns, and evade income tax from taxable offshore income-generating assets on their returns, which can lead to severe civil and criminal penalties.
However, in the early 2010s, taxpayers in this situation were offered something of a life raft in the form of the various versions of the Offshore Voluntary Disclosure Program. While the OVDP program has expired, similar programs are available in 2020, and our skilled tax lawyers at the Tax Law Offices of David W. Klasing can help you determine which one could be most beneficial to you. Read below as we discuss the 2020 updates to the IRS OVDP (Voluntary Disclosure) Program.
The Offshore Voluntary Disclosure Program (OVDP) began in a slightly different form and with a slightly different name in 2009. It was on an offshoot of the traditional domestic voluntary disclosure program, which has been on the books for many years, focused on FBAR violations in particular. Under this program, taxpayers who had failed to report foreign bank and financial accounts or other foreign assets on their returns could be brought back into compliance and avoid criminal liability and the most severe civil penalties.
The program, which changed slightly over time, required the taxpayer to fill out certain forms and provide copies of past tax returns and supporting documents. It was a success upon its inception, but taxpayer participation slowed over the years. The official OVDP program was suspended in 2018 for this reason.
There are several alternatives to the now-defunct OVDP program if you have failed to adequately disclose foreign bank accounts and assets in your tax returns in previous years. The two programs described below do not comprise an exhaustive list of your options, and you should always consult with an experienced International Tax Attorney like those at the Tax Law Offices of David W. Klasing before filing for any sort of voluntary disclosure. We can advise you about whether you are opening yourself up to further liability and, if we agree that disclosure is the right move, can help you reconstruct and submit all the necessary documentation.
The streamline disclosure program offers a chance for those who have committed non-willful violations of tax law by failing to report taxable foreign income-generating assets or bank / financial accounts, or other required foreign information reporting a chance to be brought back into compliance. However, the keyword regarding this program is “non-willful.” You must submit a certified statement that you did not willfully fail to disclose this information to avoid paying income taxes. If you are found to have falsely certified non-willfulness, severe criminal and civil penalties can occur.
There are two different programs, one for residents of the United States and one for United States citizens living abroad. If accepted into the program, you will be required to fill out a series of forms and provide at least three years of amended tax returns which pick up the previously omitted foreign income and supply six years of FBAR statements. In exchange, you will most likely avoid facing any criminal tax charges. For non-residents, you will also avoid the “offshore penalty” entirely. For residents, you will have to pay a one-time penalty of 5% on the highest aggregate amount in the account over the years you were in violation measured as of December 31st of each applicable calendar tax year. This is far less than the 27.5 or 50 percent rates imposed under the various versions of the OVDP. Other fines and fees can also be avoided by going through this program.
As noted at the outset of this article, the OVDP was an offshoot of the traditional voluntary disclosure program (VDP). VDP was available to both those who failed to disclose domestic assets and accounts and those who failed to disclose foreign accounts and assets. Still, for the latter group, OVDP was usually a better option once it came into existence. This traditional VDP is still in existence and has been expanded since the end of OVDP to include new rules and regulations for foreign account or asset holders who use this program to make voluntary disclosures.
Under the expanded VDP, offshore penalties for those who go through the process of voluntarily disclosing will typically be limited to 50% of the highest aggregate amount in the offshore accounts over the six-year reporting period. There will also be a 75% civil fraud penalty assessed on the tax year with the highest additional tax liability. You may qualify for a waiver for penalties for International Information Returns. However, this is not “set in stone,” and the IRS will have the leeway to set lower or higher penalties in some instances.
The most common use of the domestic or expat streamlined voluntary disclosure program, delinquent international information reporting submission program or full blow offshore voluntary disclosure is by those who have not filed their FBAR reports properly in prior tax years. If you have interest in, or are a signatory over, one or more financial accounts in a foreign country with an aggregate value of more than $10,000 at any time in the previous year, you are required to file with the IRS what is known as a “Report of Foreign Bank and Financial Accounts,” or FBAR. Even the combined value of your foreign accounts reached the $10,000 threshold for a single day, you will be required to disclose each one of the foreign accounts in which you held assets during the previous tax year. Some of the information you are required to provide on an FBAR includes the name of the financial institution at which the account or accounts were held, the account number or numbers, and the maximum value of the account or accounts during the calendar year.
Failing to comply with your reporting duties under FBAR can result in serious penalties. For non-willful violations, civil penalties typically will be limited to $10,000 for each non-willful failure to file an FBAR. For a willful violation, the maximum penalty is increased from $10,000 per violation to $100,000 per violation or 50% of the amount in the account at the time of the violation. In addition, if you do not come forward through voluntary disclosure, you can face criminal charges for willful violation, which can result in further fines and other penalties being assessed in addition to the threat of jail time and a criminal record.
The domestic or expat streamlined voluntary disclosure program, delinquent international information reporting submission program or full blow offshore voluntary disclosure can also be used to get back into compliance if you have not met your FATCA reporting requirements in past years. Under the Foreign Account Tax Compliance Act (FATCA), U.S. taxpayers who meet certain thresholds of money and assets in overseas or offshore bank and financial accounts are required to make a disclosure each year on Form 8938. For unmarried couples, the threshold is $50,000 or more on the last day of the tax year or more than $75,000 at any time during the tax year. For those who are married filing a joint return, the thresholds are $100,000 or more on the last day of the tax year or more than $150,000 at any time during the tax year. If you are married filing separate income tax returns, the thresholds are $50,000 or more on the last day of the tax year or more than $75,000 at any time during the tax year.
If you are unsure whether you must disclose on Form 8938, it is always best to reach out before filing to an experienced dual licensed international Tax Attorney and CPA like those on the team at the Tax Law Offices of David W. Klasing. While we can of course help you get into a voluntary disclosure program later if you fail to meet your reporting obligations (so long as an IRS audit or investigation into the audit has not already begun), the best way to save yourself time, money, and headaches down the line is to hire an experienced professional before you file your taxes to make sure everything is done properly the first time around.
While the OVDP program has officially been suspended, there are still ways that you can use voluntary disclosure to bring yourself into tax compliance. However, you should always first consult with an experienced tax attorney like those at The Tax Law Offices of David W. Klasing, PC as we can advise you which program currently gives you the best chance of limiting your liability and coming away without bank-breaking penalties. Call our office today at (800) 681-1295 to set up a consultation.
See our 2011 OVDI Q and A Library
See our FBAR Compliance and Disclosure Q and A Library
See our Foreign Audit Q and A Library
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