Getting Compliant with Overseas Voluntary Disclosure Program
Taxpayers with foreign accounts and overseas income must submit this information to the IRS otherwise they can face severe financial penalties and possible incarceration. A tax attorney can help gather and prepare the necessary documents so that they can be filed and processed without delay.
The Bottom Line on the Offshore Voluntary Disclosure Program
The Offshore Voluntary Disclosure Program (OVDP) is a program that allows individuals who have willfully ignored their tax obligations and failed to report or pay taxes stemming from foreign accounts and assets that have not been disclosed to the IRS.
The program is open to individuals who are not currently under investigation by the IRS. As such, it is advisable for individuals who are non-compliant with the regulations to seek legal counsel from a tax attorney at the earliest possible opportunity.
Statistics to Note
As of October 2016, the IRS had collected over $10 billion in taxes, interest, and penalties. These funds came from over 100,000 taxpayers who chose to participate in the OVDP and streamline programs.
Since the two programs were introduced, the number of individuals entering into them has declined. There are several reasons for this that include greater awareness of taxpayer responsibility in regard to foreign accounts and the declining number of individuals who are eligible for entry into the programs.
Streamline Program Makes Compliance Easier
The IRS has made it easier for individuals to enter into the OVDP. The streamlined process makes it possible for individuals to file amended or delinquent tax returns, finalize their tax due and penalties, and take steps to become compliant with current regulations.
The program has extended eligibility to taxpayers residing in the US and it has eliminated the $1,500 tax threshold. It has also removed the risk assessment process that was a feature of the initial program that went into effect in 2012.
One of the key elements of the streamlined compliance procedures is that taxpayers must certify that their failure to comply was not willful. Moreover, taxpayers who have previously filed delinquent or amended returns are required to satisfy any previous penalties prior to filing again.
Penalties for Noncompliance
Failing to comply with FBAR requirements can be a costly mistake. The IRS can assess fines of $10,00 per account, per year for non-willful noncompliance. However, that rises to $100,000 per year or 50% of the account balance plus criminal penalties if the noncompliance is willful.
Should individuals fail to file their Statement of Specified Foreign Financial Assets (Form 8938), then they can be subject to fines of $10,000 for failing to disclose these assets, in addition to penalties of up to $10,000 for every 30 days after they receive notice from the IRS.
These fines can go up to $60,000 and may include the pursuit of criminal charges. These penalties can include fines of up to $250,000 for individuals, or $500,000 for corporations. They may also include incarceration of up to 5 years. If tax fraud is established, the IRS may seek civil penalties that can be equal to 75% of the underpayment that can be coupled with the full amount of the tax that is due.
Be Cautious With Quiet Disclosures
It is not uncommon for delinquent taxpayers to file quiet disclosures in the hopes that their noncompliance will go unnoticed by the IRS. The fact of the matter is that the IRS is keeping a keen eye out for these quiet disclosures. Individuals who find themselves under investigation as a result of these quiet disclosures can find themselves under audit very quickly.
Quiet disclosures should be carefully discussed with a tax attorney prior to filing. In most cases, it is only advisable for clients who were signatories on foreign accounts but had no control of, or financial interest in these accounts.
The OVDP Process
The process commences with the submission of the OVDP forms. These include returns, penalty calculations, statements from accounts, FBAR forms, and asset valuations. This information should be submitted to the IRS criminal investigation division for pre-clearance. This step takes about a week to ten days to complete.
Once these forms are submitted and accepted, individuals are given a due date for the full submission. This due date can be extended upon request if additional time is required. In addition to the finalized documentation required for pre-clearance, individuals will also be required to file additional information including Forms 3250, 3250A, 5471, and 5472. It is also recommended that individuals pay any tax due during this stage to avoid further assessment of interest penalties.
Finally, the ODVP examiner will review the taxpayers’ full submission of documents. They may request an IDR during this phase as well as any requested changes to tax returns. This step also requires individuals to meet with the OVDP examiner to discuss penalty computations and consequences. As such, it is crucial that individuals be represented by a tax attorney throughout each step of the process.