Summary of the IRS' Offshore Voluntary Disclosure Program
Sep 06, 2017
This FBAR Wiz post will explore the nitty gritty details of the IRS' Offshore Voluntary Disclosure Program (aka "OVDP" aka Offshore Voluntary Disclosure Initiative). The current version of the Offshore Voluntary Disclosure Program sets the penalty at 27.5%. Under the program, the account owner must also agree to be taxed on the prior eight years of income in the account rather than three or six. You might wonder why owners of foreign accounts would step forward under the voluntary program when they are virtually assured that in addition to eight years of federal income tax on the account earnings, they will be required to pay a 20% accuracy penalty on the amount of income tax due, interest, and 27.5% of the highest account value as an additional penalty? Well, you see, under the IRS' Offshore Voluntary Disclosure Program, the potential for criminal prosecution is removed. In addition, outside the voluntary program, the penalties can be far higher, as much as the greater of $100,000 or 50% of the highest account value for each violation. These two benefits alone make the Offshore Voluntary Disclosure Program well worth your while - if you qualify. In most cases, this larger penalty has been applied to the highest account value over the last three or six years, depending on which statute of limitation applies (see Internal Revenue Manual § 18.104.22.168.7(4)). But see Zwerner, No. 1:13-cv-22082-CMA (S.D. Fla., complaint filed 6/11/13), for a case where the government is attempting to collect multiple-year maximum civil penalties in an FBAR matter. The first step in deciding to enter the voluntary program is to write to the IRS Criminal Investigation Division to get yourself precleared to enter the program. Please note that this step should be completed by a professional - either a CPA or attorney. A taxpayer whose bank has already provided the IRS with the client’s information is not likely to receive clearance. If the taxpayer is precleared to enter the program, the next step is to amend the last eight years of income tax returns to include any previously unreported income from the foreign account. The below items must be submitted when disclosing a foreign account, generally within 45 days after receiving a preclearance letter: Copies of original returns (and amendments) filed for the years covered by the voluntary disclosure. Amended returns and certain tax return schedules for the years covered by the voluntary disclosure. A completed foreign account or asset statement if the information on the statement was not already disclosed on the offshore voluntary disclosure letter. A check for the tax, interest, and penalty computed on the account. A signed offshore voluntary disclosure letter with the necessary attachment. Completed penalty computation worksheet. Signed extension of time to assess tax (including penalties and FBAR penalties). Completed FBARs. For applicants disclosing offshore financial accounts with an aggregate highest account balance in any year of $500,000 or more, financial account statements showing all account activity during the voluntary disclosure period. For applicants disclosing offshore financial accounts with an aggregate highest account balance in any year 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 available upon request. It should be noted that in most instances, the taxpayer will be required to sit down with the IRS agent assigned to the taxpayer’s case in a meeting that might also include a supervisor and an attorney from the IRS District Counsel’s office. To get started on this process, it all begins with determining the extent of your IRS disclosure obligations, which can be quickly and anonymously determined by using the free FBAR Wiz app, available here. The FBAR Wiz can get you onto the right track by helping to understand what forms you need to file. Then, you can make an informed decision on whether the Offshore Voluntary Disclosure Program may be the right option for you.