The Offshore Voluntary Disclosure Program (OVDP) is an initiative by the IRS to assist individuals, estates, and businesses into Offshore and Foreign Compliance. But what does it mean? Offshore refers to anything that is not domestic, meaning, in the IRS’s perspective, you have money overseas. The money can be in the form of foreign accounts, investments, or property. Voluntary means that you are entering the program on your own volition: you cannot be currently audited or under examination; it has to be a proactive decision. Disclosure refers to full disclosure, if you want to disclose offshore assets, then you must disclose all of it, whether it was held in an institution that no longer exists or held anonymously where you believe the IRS would never find it. The OVDP is an approved IRS Program, which means it has specific time requirements: disclosures must be done according to the program’s milestones or you risk removal from the program. The Offshore Voluntary Disclosure Program, in its current 2014 iteration, will terminate on September 28, 2018.
Eligibility
You can be eligible to join the Offshore Voluntary Disclosure Program if you have invested legal source funds (funds not derived from criminal activity) in undisclosed assets overseas. As well, you must not have made a submission pursuant to a streamlined procedure, such as the Streamlined Filing Compliance Procedures (SFCP). The act of not disclosing assets must have been willful to be able to use the OVDP, if it was not willful, then you would use the SFCP to become compliant. Lastly, you also cannot be under civil examination or criminal investigation by the IRS; it must be a proactive action on your part and by your own volition.
How the OVDP Helps
You may wonder why you would acquiesce to the IRS, especially if you think that an offshore asset can never be found out by the IRS, but you also have to realize that the penalties are very heavy, and criminal prosecution is possible for willfully not disclosing offshore assets. You may even consider becoming compliant with the current year and not correcting prior years, or filing amended returns and paying any tax or interest related to previously undisclosed offshore assets and income, the former being a “quiet disclosure” and the latter a “qualified quiet disclosure.” Both options are very risky (especially the quiet disclosure), as quiet disclosures could lead to you being criminally prosecuted if the amounts and facts surrounding the case are not acceptable to the IRS examiner. By using the Offshore Voluntary Disclosure Program, you are able to limit the amount of penalties you incur for your willful acts.
Penalties
The Offshore Voluntary Disclosure Program will assess a mandatory “miscellaneous Title 26 offshore penalty” of 27.5% on the highest account balance in exchange for not facing criminal prosecution. The penalty will jump to 50% if the foreign financial institute is on the IRS’ Foreign Financial Institutions or Facilitator’s List. You will also be required to pay 20% accuracy-related penalties under IRC § 6662(a) on the full amount of your offshore-related underpayments of tax for all years; pay failure-to-file penalties under IRC § 6651(a)(1), if applicable; and Pay failure-to-pay penalties under IRC § 6651(a)(2), if applicable. The penalty for not using the OVDP and having the IRS discover your foreign assets can reach up to 100% of the value of the foreign account in a multi-year audit scenario. If you can show reasonable cause, the IRS has extreme leeway with penalties and could waive your penalties entirely, but it is a huge risk to take without the help of the OVDP
How to Apply for the Offshore Voluntary Disclosure Program
To start the procedure to apply for the Offshore Voluntary Disclosure Program, you must first submit a preclearance letter to the IRS. It will typically take 30 to 45 days for a response from the IRS; if they had already discovered your undisclosed assets, then they will deny your preclearance. Once you have been granted preclearance, you will have 90 days to fully comply with any provisions stated in their response (submission of amended tax forms and questionnaires), and in exchange, the IRS will not recommend prosecution by the Department of Justice for noncompliance. Once you have submitted all the required forms stated in the letter, the IRS will then propose a closing agreement (Form 906), at which point you can sign the agreement or decide to opt out of the OVDP.
Leave a Reply