How to File an Offshore Voluntary Disclosure (OVDI) Letter

To file an Offshore Voluntary Disclosure Letter (OVDI) you should first obtain a “pre-clearance” from the IRS Criminal Investigation (CI) Division. (first sentence of the post). To do this, a taxpayer or his representative should fax the taxpayers’ name, date of birth, social security number and address to the IRS Criminal Investigation Lead Development Center at (215) 861-3050. If the pre-clearance request is sent by a representative, an executed Power of Attorney (Form 2848) must be faxed with the information. After it has determined whether a taxpayer is eligible to make a voluntary disclosure, CI will notify the taxpayer or the representative, via fax, whether the taxpayer is cleared to make a voluntary disclosure using the Offshore Voluntary Disclosures Letter.

Comment: In my opinion this submitting a preclearance is a one-way trip. Once you supply your information to obtain a preclearance you are committed to the terms of the OVDI or you exponentially increase your risk of criminal prosecution. This program should not be entered into without an experienced criminal tax attorney’s counsel.

The format of the power of attorney required for the 2012 OVDI is available online at:

The 2012 Offshore Voluntary Disclosures Letter is available online at:

If the taxpayer or his representative chooses to bypass the pre-clearance process, the Offshore Voluntary Disclosures Letter is to be mailed to the following address:

Step 2: The Voluntary Disclosure Package

Once the voluntary disclosure has been preliminarily accepted, the next step-is for the Taxpayer or his representative to send a full voluntary disclosure package no later 90 days after submission of the 2012 Offshore Voluntary Disclosures Letter to:

Note: If it is impossible due to circumstances beyond a taxpayer’s control to get the package in within the 90-day period such as where a foreign bank is not cooperating, an extension of time can be obtained by written request. A taxpayer requesting an extension must submit his name, address, date of birth, and social security number and should submit as much of the information as possible that will be required with the Voluntary Disclosure Package, including at a minimum the properly completed and signed agreements to extend the of time to assess tax (including tax penalties) request for up to a 90 day extension, including a statement of those items that are missing, the reasons why they are not included and the steps taken to secure them. Requests for extensions must be sent to the above Austin address before the date specified in the letter from the Criminal Investigation for completing the Voluntary Disclosure has expired.

All participants in the 2012 OVDI are required to file OVDI for the following for the 2003-2010 (or 2004 – 2011 tax years if 2011 was non-compliant as to foreign income):

1. Copies of previously filed (and if applicable, previously filed amended) federal income tax returns for the eight tax years included in the voluntary disclosure. (2003 – 2010) or (2004 – 2011).
2. Up to eight years of complete and accurate amended federal income tax returns (or original returns if delinquent or no amendment was necessary to report the foreign activity) that accurately report the previously omitted foreign activity (2003 – 2010) or (2004 – 2011).
3. A copy of the completed and signed Offshore Voluntary Disclosures Letter. The Offshore Voluntary Disclosures Letter is available online (above mentioned link).
4. Cut checks made out to the U.S. Treasury for the full amount of tax, interest and penalties owed. A separate check should be submitted for each tax year for which amounts are owed for the 20% accuracy-related penalty under IRC § 6662(a), and, if applicable, the failure to file and failure to pay penalties under IRC § 6651(a) plus interest back to the original filing date of the return. The memo line of the check should include the taxpayer’s tax identification number, the taxable year and the type of tax, i.e., “Form 1040” for individual income tax. A separate check should be submitted in lieu of all other penalties that may apply, (including the FBAR and offshore-related information return penalties, a miscellaneous Title 26 offshore penalty) equal to 27.5% (or in limited cases 12.5% (see FAQ 53) or 5% (see FAQ 52)) of the highest aggregate balance in foreign bank accounts/entities or value of applicable foreign assets during the 2003-2010 or 2004 – 2011 tax years. See step six for how this penalty is calculated. A taxpayer who cannot pay the total amount of tax, interest, and penalties due can submit a proposed payment arrangement and a completed Collection Information statement (Form 433-A in the case of a wage earner or self-employed individual and form 433-B in the case of a business). If the taxpayer establishes to the satisfaction of the IRS that he/she cannot presently pay the full amount owed, he can work out other payment arrangements.
5. Where required, a completed Foreign Account or Asset Statement, which is available online at Foreign Account: Required for applicants disclosing offshore financial accounts with an aggregate highest account balance in any year of $1 million or more. A separate statement is required for each foreign financial institution where funds are disclosed. A separate statement is required for each foreign account or asset included in the voluntary disclosure. (The Foreign Account statement above replaces this form where aggregate highest account balance in any year is $1 million or more)
6. A completed penalty computation worksheet, which is available online through a link at
   https://www.irs.gov/pub/irs-utl/ovdp-penaltyworksheet.xls

   This worksheet documents the taxpayer’s determination of the aggregate highest account balance of his/her undisclosed offshore accounts, fair market value of foreign assets, and penalty computation. The worksheet is to be signed by the taxpayer and the taxpayer’s representative if the taxpayer is represented.

7. Properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties. Consents are available online at:

   https://www.irs.gov/file_source/pub/irs-utl/f872ovdi.pdf

   Instructions for completing the consents are available online at: https://www.irs.gov/individuals/international-taxpayers/instructions-for-completing-the-form-872-and-the-consent-to-extend-the-time-to-assess-civil-penalties-provided-by-31-u-s-c-5321

8. Complete and accurate Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts, for foreign accounts maintained during calendar years covered by the voluntary disclosure (2003 – 2011) and/or copies of previously filed FBARs. The current FBAR Form should be used for all years for which the form is due. Taxpayers of their representatives with questions about the FBAR Form can call the FBAR Hotline at (800) 800-2877and select option 2 or, alternatively, can e-mail the question to:
   [email protected].
9. Offshore financial account statements reflecting (where applicable)For taxpayers disclosing offshore financial accounts with an aggregate highest account balance in any year of $500,000 or more, copies of offshore financial account statements reflecting all account activity for each of the tax years covered by the voluntary disclosure are required (2003 – 2011). Taxpayers are encouraged to explain any differences between the amounts reported on the account statements and the tax returns to ward off IRS inquiry on the matter. For those taxpayers disclosing offshore financial accounts with an aggregate highest account balance of less than $500,000, copies of offshore financial account statements reflecting all account activity for each of the tax years covered by the voluntary disclosure must be made available upon request.
10. Offshore Entities Disclosure (where applicable)Taxpayers who are disclosing offshore entities as part of their voluntary disclosure are required to submit the following documents with their voluntary disclosure package: A statement identifying all offshore entities for the tax years covered by the voluntary disclosure, whether held directly or indirectly, and the taxpayer’s ownership or control share of such entities. If accounts or assets were held in the name of a foreign entity, complete and accurate amended (or original, if delinquent) information returns that are required to be filed for all tax years covered by the voluntary disclosure (2003 – 2011). These forms include, but are not limited to, Forms 3520, 3520-A, 5471, 5472, 926 and 8865.A taxpayer can request that the Service waive the information reporting requirement, by submitting a completed and signed Statement on Dissolved Entities, which is available online at:
    https://www.irs.gov/pub/irs-pdf/f966.pdf
11. Estate and Gift Disclosure (where applicable)

If the taxpayer is a decedent’s estate, or is an individual who participated in the failure to report the foreign account, foreign asset, or foreign entity in a required gift or estate tax return, either as an executor or an advisor, the taxpayer must provide complete and accurate amended estate or gift tax returns (or original estate or gift tax returns, if these were not previously filed) for any tax years covered by the voluntary disclosure that are necessary to correct the underreporting of assets held in or transferred through undisclosed foreign accounts or foreign entities.

Foreign assets subject to penalty – 25% (or in limited cases 12.5% (see FAQ 53) or 5% (see FAQ 52)) of the highest aggregate value of applicable foreign assets during the 2003-2010 tax years:

The value of other previously undisclosed offshore assets will be subjected to a the aforementioned penalties if they are related in any way to tax non-compliance, regardless of the form of the taxpayer’s ownership or the character of the asset. Thus, a taxpayer who owns through a trust or a nominee a previously undisclosed foreign corporation would be subject to the 25% penalty on the value of the assets owned by the corporation. If the taxpayer owns offshore assets that were acquired with after-tax dollars (or dollars that are not subject to U.S. income tax) and the assets did not produce any income, the value of those assets may not be subject to the penalty.

The offshore penalty will be applied to all of the taxpayer’s offshore assets, whether held directly or through an entity, that are related in any way to tax non-compliance. This includes bank, brokerage and other financial accounts holding cash, securities or other custodial assets; tangible property, including real estate or art; and intangible property such as patents and interests a U.S. or foreign business. If property is held by an entity that the taxpayer controls or has an interest in, or controlled by the taxpayer through an entity, such as a trust, partnership of controlled foreign corporation, the penalty may be applied to the taxpayer’s interest in the entity’s assets.

Tax non-compliance includes failing to report income from the offshore assets and failure to pay tax on funds used to acquire the assets. Assets that do not generate income, such as artwork or the taxpayer’s vacation home, are not subject to the offshore penalty if the assets were acquired with after-tax dollars. If the assets were acquired in whole or in part by funds that were subject to U.S. tax, but the tax was not paid, the assets are subject to the penalty. If the asset generates income that was not reported and that was subject to U.S. tax (such as income from rental of a vacation home), the property is subject to the tax because there has not been tax noncompliance.

12.5% or 5% penalties rather than the 25% penalty:

If the highest aggregate account balance, including the value of includible offshore assets, does not exceed $75,000 in any year between 2003 and 2010, the taxpayer will be liable for a penalty equal to 12.5% of the highest aggregate account balance rather than 25%.

Two classes of taxpayers would be eligible for a 5% offshore penalty rather than the 25% penalty. The first class consists of taxpayers who meet all four of the following criteria:

1. they did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account);
2. they had infrequent and minimal contact with the account, such as requesting the account balance, updating account-holder information, or receiving periodic account statements;
3. they did not withdraw more than $1,000 from the offshore accounts in any year covered by the voluntary disclosure, except for a withdrawal closing the account and transferring the funds to an account in the United States; and
4. they can establish that all applicable U.S. taxes have been paid on funds deposited to the account and that only account earnings have escaped U.S. taxation. Funds deposited into an offshore account prior to 1991 are presumed to have been taxed if there is no information on whether they were taxed.

The second class of taxpayers eligible for a 5% offshore penalty are those who were foreign residents who did not know they were U.S. citizens.

Comparison to OVDI penalty framework with a voluntary disclosure outside of the OVDI penalty framework.

Although examiners do not have discretion to settle cases under the 2012 OVDI, a taxpayer is not required to pay more under the initiative than he would have to pay if he made a voluntary disclosure and was not covered by the initiative. The example given by the IRS is if a taxpayer has an offshore account only open during one tax year, with a maximum balance of $100,000, and rental property valued at $1 million, the maximum FBAR penalty would be $50,000 while the penalty under the 2012 OVDI would be 27.5% of $1.1 million, or $302,500. If the total tax, all “applicable penalties” (including the $50,000 FBAR penalty) and interest is less than the amount that would be owed under the 2012 OVDI, the taxpayer would pay the lesser amount.

Taxpayers that disagree with the application of the 2012 / 2011 OVDI or 2009 OVDP program to them:

A taxpayer who disagrees with the application of the offshore penalty can elect in writing to withdraw from the 2012 / 2011 OVDI or 2009 OVDP. If a taxpayer does so, the IRS will decide whether to refer the case for a normal examination or to a Special Enforcement Program Agent. All years in the voluntary disclosure will be subject to a complete examination and all applicable penalties will be imposed. A taxpayer who elects to withdraw, however, remains subject to CI’s voluntary disclosure practice and must cooperate completely with the IRS and arrange to pay all taxes, penalties and interest ultimately determined to be due. If the taxpayer does not do so, he risks being referred to CI for criminal investigation.

Note: No opt out is possible after signing the 906 closing agreement.

Processing of the Voluntary Disclosure Package

After submission of full and complete Voluntary Disclosure Package, the case will be assigned to a revenue agent to certify the tax returns for accuracy, completeness and correctness. Normally, an examination of the returns submitted under the 2012 OVDI will not be conducted, although the Service reserves the right to conduct an examination. The certification process is less formal than an examination and does not carry with it all the rights and legal consequences of an examination, such as notices, a 30-day letter, a notice of deficiency, or appeal rights. The certification process will not constitute a “second examination” if one or more years in the voluntary disclosure have previously been examined. The examiner can ask any relevant questions, request any relevant documents, and make third party contacts, if necessary to certify the accuracy of the amended returns, without converting the certification to an examination.

If the taxpayer does not comply with these requests, he/she will not have made a voluntary disclosure. The IRS will not begin processing a request until it receives the complete Voluntary Disclosure Package. Cases will be processed on a “first come-first serve basis.” Thus, taxpayers who apply for the 2012 OVDI should begin gathering the required information and having amended returns and other required forms as soon as possible. Where a taxpayer is having trouble obtaining records from a foreign bank, you should speak with the assigned agent or, if no agent is assigned, call the IRS OVDI Hotline at (267) 941-0020.

Upon completion of the certification process, the taxpayer will execute a closing agreement for the years covered by the voluntary disclosure.

Conclusion

The IRS hopes that many eligible taxpayers who did not participate in the 2009 OVDP or 2011 OVDI programs will participate in the 2012 OVDI program and come into compliance. According to Commissioner Shulman, “Tax secrecy continues to erode. We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.”