The Internal Revenue Service (IRS) established the Offshore Voluntary Disclosure Program (OVDP) in 2009. The debut of the OVDP, which allowed taxpayers to mitigate civil penalties while lowering the risk of criminal prosecution related to undisclosed offshore accounts, proved so successful, attracting approximately 15,000 participants, that the IRS renewed the program for several consecutive years, cycling through updated versions in 2011, 2012, and 2014. Today, the OVDP continues to attract tens of thousands of noncompliant taxpayers, netting the IRS billions of dollars in back taxes with each new iteration of the program. But while participating in the OVDP is the appropriate action for some taxpayers, others may find that there are simpler, more cost-effective solutions to their tax woes. Because participation in the OVDP has major financial repercussions for the taxpayer, it is essential to rule out alternative approaches before making such a serious – and costly – commitment.
When Does it Make Sense to Avoid the Offshore Voluntary Disclosure Program (OVDP), and What Are the Alternatives?
The OVDP – which, in previous years, has also been called the Offshore Voluntary Disclosure Initiative, or OVDI – is targeted at high net-worth taxpayers with undisclosed offshore assets, such as checking accounts maintained with Swiss banks or other foreign financial institutions (FFIs). The Bank Secrecy Act (BSA) requires taxpayers to disclose such assets, provided certain financial thresholds are met, by electronically filing FinCEN Form 114, better known as the “FBAR” (Report of Foreign Bank and Financial Accounts). The same group of taxpayers is generally required to file Form 8938 (Statement of Specified Foreign Financial Assets), which is mandatory under the Foreign Account Tax Compliance Act (FATCA).
Failure to do either can lead to substantial penalties, avoidance or mitigation of which is the key factor motivating OVPD participation. However, as our international tax attorneys will explain momentarily, there are many noncompliant taxpayers for whom OVDP participation is not only unnecessary but detrimental. That is because the OVDP is intended specifically for taxpayers who underreported income tax with respect to offshore accounts – in other words, the program is intended to curb willful tax evasion. If a taxpayer fails to file an FBAR and/or Form 8938 due to ignorance of the reporting requirement rather than intent to evade tax laws, and the taxpayer did not underreport U.S. income tax concerning foreign financial accounts, it is likely more appropriate – and less perilous – to take the following actions, rather than enter the OVDP:
- File Form 1040X (Amended U.S. Individual Income Tax Return), with a delinquent Form (or Forms) 8938 attached.
- File a delinquent FBAR. Note that when filing a delinquent FBAR, taxpayers must indicate the reason for filing late on the cover of the form, which is electronic.
To quote the IRS directly, italics our emphasis, “The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.” This stands in sharp contrast to the numerous penalties taxpayers will have to contend with if they are admitted into the OVDP, which include, but are not limited to:
- A 20% accuracy-related penalty under 26 U.S. Code § 6662(a).
- A “miscellaneous Title 26 offshore penalty equal to 27.5%… of the highest aggregate value of OVDP assets… during the period covered by the voluntary disclosure.” In some cases, this penalty can climb as high as 50%.
- A potential failure-to-file penalty under 26 U.S. Code § 6651(a)(1).
- A potential failure-to-pay penalty under 26 U.S. Code 6651(a)(2).
As you can see, participating in the OVDP is not without cost to the taxpayer – quite the contrary. Thus, any decision to enter the program should be carefully weighed with assistance from an experienced OVDP attorney, who might determine that filing amended or delinquent tax forms is more appropriate, depending on the situation.
Depending on the circumstances, it may also be a sensible alternative for the taxpayer to enter the Streamlined OVDP, which, unlike the standard OVDP, is specifically designed for taxpayers whose “failure[s] to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct.” In fact, participants in the Streamlined OVDP are required to formally certify that such failures were non-willful. This is accomplished using Form 14654 (Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures), which contains the following statement:
“My failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. I understand that non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
For in-depth information on the subjects of OVDP, FBAR, and FATCA, which our international tax law attorneys have previously covered in exhaustive detail, you may be interested in our articles on:
- FATCA and undisclosed accounts
- FBAR penalties
- Making a streamlined disclosure
- Quiet vs. loud disclosures
International Tax Attorneys Can Help You Explore Options for Reporting Foreign Income
If you have undisclosed foreign bank accounts, it may be wise to participate in the OVDP. However, due to the substantial risks and costs of the program, it is prudent to first explore your full range of options. It may be possible to reenter compliance via less costly avenues, such as the Streamlined OVDP or the filing of delinquent tax forms.
To discuss your international tax concerns in a confidential, reduced-rate consultation with an experienced tax attorney, CPA, or EA, contact the Tax Law Office of David W. Klasing online, or call us today at (800) 681-1295. Our zealous team of tax and accounting professionals assists taxpayers with foreign assets held in Australia, Saudi Arabia, Singapore, the Philippines, and dozens of other nations around the globe.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San Bernardino, Santa Barbara, Panorama City, and Oxnard! You can find information on all of our offices here.
Foreign income and information non-compliance
https://www.youtube.com/watch?v=g2UlIE8oxPA
Here is a link to our practice video on warning signs than an audit has gone criminal.
What is an eggshell tax audit?
https://www.youtube.com/watch?v=saJLVlER-iM
What is an effective tax defense in an IRS eggshell tax audit?
https://www.youtube.com/watch?v=7qixPqWTtvA
So, you cheated on your taxes and you are under a tax audit…
https://www.youtube.com/watch?v=FZce4jqQJpI
Why should I hire a tax attorney to represent me in a tax audit?
