How effective is the one size fits all OVDP?

Date: 11/13/12

Topic: Foreign Accounts

From its inception the Offshore Voluntary Disclosure Program has characterized all but a few compliance violations as willful disregard of the FBAR rules. However, there can be many different reasons for taxpayer noncompliance. The one size fits all approach may be driving otherwise eligible candidates away from the program. To date, there have been approximately 28,000 filings for the 2012 OVDP. Yet, out of the many millions of taxpayers that have an FBAR reporting obligation, only 741,000 FBAR returns were filed in 2011. Because many potential OVDP participants do not fit the program very well, they often choose to remain out of compliance. To address this problem, at the November 9th International Tax Enforcement Conference, National Taxpayer Advocate (NTA) Nina Olson suggested an approach to the Offshore Voluntary Disclosure Program that would penalize taxpayers based on their individual level of non-compliance.

Nina Olson is the head of the Taxpayer Advocate Service (TAS), which is an independent organization within the IRS. The TAS is tasked with, among other things, identifying areas in which taxpayers have problems in dealings with the IRS and proposing changes in the administrative practices of the IRS to mitigate the identified problems. In this case, the problem is taxpayers with reasonable justification or otherwise relatively low noncompliance are nevertheless subject to the same applicable penalty scheme as those that have willfully disregarded their FBAR filing obligations. Thus, Olson has suggested a four-category solution to improve the OVDP experience and encourage additional taxpayer compliance.

The category specific approach to FBAR noncompliance would operate to ease this tension. Category 1 would be for resident and nonresident taxpayers who properly declared their income, but failed to file the requisite FBARs. Olson suggests this group be able to come into compliance without being assessed the 27.5% penalty, essentially according the “streamlined procedures” to both residents and nonresidents. Taxpayers who failed to properly report their taxable income but whose tax liability is under a specific dollar amount would fall into category 2 and be treated less harshly for their negligible noncompliance. Category 3 would be reserved for taxpayers with a valid reasonable cause to willfulness for their failure to file their FBARs and taxpayers should be able to opt out the programs civil penalty structure. Finally, category 4 would pertain to taxpayers with fact patterns that suggest a willful disregard of the FBAR rules. This group would continue under the current OVDP penalty structure.

Significant changes to the OVDP may be warranted in light of the increased pressure on foreign financial institutions to disclose foreign accounts.