If you visited our tax law blog earlier this week, you may have spotted a major announcement: in September 2018, the Internal Revenue Service (IRS) will discontinue its long-running Offshore Voluntary Disclosure Program (OVDP), which has been open to eligible taxpayers since 2009, when the program was first implemented. With September now only months away, taxpayers are quickly running out of time to participate in the final OVDP – and unless the IRS makes the unlikely move of reversing its position in the future, the option will likely never resurface. While these time constraints should encourage taxpayers to act swiftly, it would be unwise to enter the OVDP without a thorough understanding of what the program entails for participants. Therefore, our tax professionals have compiled a brief article explaining what to expect from the OVDP, with a focus on what is required of taxpayers who elect to enroll.
7 IRS Requirements for Taxpayers Who Participate in the OVDP
Our OVDP tax attorneys have frequently discussed the Offshore Voluntary Disclosure Program, and would encourage taxpayers to carefully read our comprehensive explanation of how the OVDP works, which touches upon issues such as:
- The potential penalties a taxpayer may face if he or she does not participate in the program.
- Similarities between the 2014 OVDP and previous iterations of the program.
- Differences between the standard OVDP and the streamlined OVDP.
- The legal importance of selecting an experienced tax lawyer, as opposed to an EA or CPA, due to potential vulnerabilities in the accountant-client privilege as compared to the attorney-client privilege.
We would also encourage you to explore our article on how to participate in the 2014 OVDP, which provides a detailed explanation of the materials taxpayers must provide to the IRS when submitting a voluntary disclosure package, such as signed statements and copies of previous income tax returns. This article is intended to help taxpayers understand what will be required of them should they choose to participate before time runs out in September.
To begin by providing some quick background, the OVDP was established to help formerly noncompliant taxpayers notify the IRS of offshore income, which, if certain thresholds are met – generally $10,000 under the Bank Secrecy Act (BSA) and $50,000 under the Foreign Account Tax Compliance Act (FATCA) – must be reported by U.S. citizens and resident aliens, who make such disclosures by filing an FBAR, filing Form 8938 (Statement of Specified Foreign Financial Assets), and/or submitting other documents as needed. However, noncompliance with these requirements is both widespread and economically costly. To remedy this issue, the IRS launched the OVDP, which reduces penalties for those who participate. However, due primarily to a sharp decline in taxpayer participation, the IRS has elected to terminate the program later this year.
While there can be valid reasons not to participate in the OVDP, for many taxpayers, this program represents the least damaging channel back to compliance, namely individuals at risk for future criminal tax or foreign information nonreporting (FBAR & other) prosecution. Nonetheless, even ideally-suited candidates must be made to understand that the OVDP is not necessarily a tax amnesty program. Prospective OVDP applicants should be prepared for the program’s sometimes harsh terms, which include the following:
- If you participate, you must supply the IRS with a comprehensive set of tax and banking documents, including but not limited to previous tax returns, a signed Offshore Voluntary Disclosure Letter, a signed Taxpayer Account Summary with Penalty Calculation, copies of FBAR forms, and financial statements. (For a detailed discussion of these materials, follow the link to how to participate in the 2014 OVDP above.)
- You must be cooperative with the IRS, which means (1) timely providing requested information and (2) consenting to time extensions for assessing tax liabilities and FBAR penalties.
- Depending on the circumstances, you may be required to pay the following penalties:
- Rather than paying, to quote the IRS, the “other penalties that may apply to the undisclosed foreign accounts, assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period,” you will instead be required to pay a Title 26 “offshore penalty,” which may be as great as (1) 27.5% of the balance of the unreported account, or (2) 50% of the account balance, if the foreign bank you have deposits with is on the following “foreign facilitators list” . (For reference, “Title 26” simply indicates the Internal Revenue Code (IRC), or U.S. Tax Code, which is just one portion of the broader U.S. Code. For instance, Title 18 deals with crime.)
- You must generally pay, in full, all “tax liabilities for years included in the offshore disclosure period, applicable interest, an offshore penalty [see the preceding point], accuracy-related penalties for offshore-related underpayments, and, if applicable, the failure-to-file and failure-to-pay penalties [see the third point above].” However, if this would present too great a financial hardship, you might be able to pay in installments or make alternate payment arrangements with the IRS.
- You must submit Form 906 (Closing Agreement on Final Determination Covering Specific Matters), which is more like a short-written statement with spaces for signatures than a conventional tax form with boxes for financial data.
- Finally, similar to the second point above, you must consent to “cooperate with IRS and Department of Justice… by providing information about financial institutions and other facilitators who helped you establish or maintain an offshore arrangement.” In other words, you must be willing to supply information about the banks and/or individuals who originally helped you conceal the income.
Keep in mind that these are the requirements for enrolled participants. To learn more about eligibility requirements for entering the program, see Questions 12 through 21 in the IRS’ OVDP FAQ, or, where appropriate, refer to the eligibility requirements for streamlined disclosure.
Our Tax Attorneys Can Help You Apply to the 2014 OVDP – Before Time Runs Out
As you can see, the OVDP is potentially rewarding – yet potentially perilous – with both benefits and drawbacks for taxpayers. Participating in the OVDP can be advantageous, but this is not a decision to be made lightly.
If you think you might be a suitable candidate for the IRS’ final OVDP, we urge you to consult our international FBAR attorneys as soon as possible. Remember, the OVDP is ending in less than a year – and if you prove to be an appropriate candidate, you and your tax attorney will need ample time to adequately prepare. To discuss whether the OVDP could be right for you in a reduced-rate tax consultation, contact the Tax Law Office of David W. Klasing online, or call us at (800) 681-1295 right away.
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
If you’re under audit and have undisclosed foreign bank accounts and unreported foreign income see: https://klasing-associates.com/tax-audit-help-2/foreign-account-tax-audit-representation/
And the following links…
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?
https://www.youtube.com/watch?v=NDwc4GUfBX8
