Everything You Need to Know About the Offshore Voluntary Disclosure Program’s Streamlined Submissions Process
The Offshore Voluntary Disclosure Program (OVDP) was created by the Internal Revenue Service in 2009 with the goal of encouraging the voluntary reporting of previously undeclared offshore accounts that the IRS should have been notified about by U.S. affiliated taxpayers.
OVDP 2009 ended on October 15, 2009, however, this pioneer program was subsequently followed by additional OVDP protocols, including the 2011 Offshore Voluntary Disclosure Initiative. In 2014, the OVDP underwent its last major change, although there have been some clarifications and modifications since that time. The OVDP 2014 version remains in effect today, as of July 2017.
As OVDP Programs and rules have undergone changes, the core purpose of the OVDP has remained the same: prompting U.S. affiliated taxpayers to alert the IRS to their prior failures to comply with requirements mandating the reporting of certain offshore accounts. Taxpayers are incentivized to participate in the OVDP and to voluntarily disclose foreign accounts to the IRS because of the promise of a reduced penalty for voluntary disclosure.
Those with undeclared offshore accounts must understand both their obligations to the IRS regarding the reporting foreign accounts, as well as understanding what the Offshore Voluntary Disclosure Program is and whether they are eligible for participation. For taxpayers seeking to minimize potential financial penalties for noncompliance with reporting rules, it is particularly important to understand the IRS Offshore Voluntary Disclosure Program (OVDP) Streamlined Submissions Process.
A Washington D.C. tax lawyer at Thorn Law Group can provide comprehensive advice regarding the Streamlined Submissions Process for the current OVDP and, if participation in this process is an appropriate course of action, a tax attorney at our firm attorney can provide representation throughout our clients’ dealings with the IRS resulting from OVDP participation. Contact Kevin E. Thorn, Managing Partner of Thorn Law Group, before making the decision to participate in the OVDP so you can fully understand different voluntary disclosure processes and penalties, as well as ensure the right choice for your individual situation is made.
What is the OVDP Streamlined Submissions Process?
The Offshore Voluntary Disclosure Program's Streamlined Submission Process is a process by which certain eligible taxpayers with undeclared foreign financial accounts can address their past failures to report financial assets that they own outside of the U.S. and that they were supposed to disclose to the IRS.
Taxpayers who are affiliated with the United States – including U.S. citizens who live abroad – are required to report their foreign financial accounts to U.S. taxing authorities. In addition to declaring on their tax returns all income earned from foreign accounts and from foreign investments – and in addition to providing all relevant information to the IRS about their foreign assets – there are several other special reporting requirements that are specific to foreign financial assets. These reporting requirements apply to a wide variety of offshore assets, including bank and investment accounts, brokerage accounts, foreign stock and securities held outside of financial accounts, foreign mutual funds, foreign private equity funds, and foreign hedge funds.
Reporting Foreign Bank and Financial Accounts
Taxpayers who own these foreign financial assets must file a Report of Foreign Bank and Financial Accounts (FBAR) for each year in which the aggregate balance of foreign accounts exceeds $10,000. FBARs are not filed with the IRS along with your regular tax return. Instead, they are filed electronically to the Financial Crimes Enforcement Network (FinCEN) using FinCEN Form 114. Some taxpayers were not aware of this special reporting requirement outside of their standard obligations to the IRS, but they are none-the-less subject to the FBAR mandate if their accounts exceed $10,000 in aggregate value at any time during the year.
This means a U.S. taxpayer, including a person living abroad, would be mandated to file FBARs for having either a single foreign account with a balance exceeding $10,000 or would be mandated to file an FBAR if the taxpayer had two or more accounts, the combined total of which exceeded $10,000. The filing requirement is not based on average balances, but is instead based on the highest balance in the offshore account on any day of the year. If a taxpayer had a single day in which the combined value of his foreign accounts exceeded $10,000, the FBAR filing requirement was triggered for the year in which account balances exceeded this dollar amount.
Those FBAR filing requirements not only apply to account owners but also, in most cases, to those with signature authority over foreign financial accounts. This means U.S. affiliated taxpayers could be responsible for filing FBARs even for accounts they did not open, if they had signature authority on those financial accounts.
Although many U.S. affiliated taxpayers were not aware of strict FBAR filing requirements, or were unaware of their specific reporting requirements, these taxpayers became caught in global efforts to fight revenue loss resulting from investments in offshore tax havens. Unfortunately, as the U.S. government began a crackdown on tax evasion, many taxpayers found themselves facing civil investigations, substantial financial penalties sometimes exceeding the value of their accounts and even the threat of criminal investigations for failure to comply with all requirements for the reporting of their foreign financial accounts.
Why the OVDP Was Created
Taxpayers, in some circumstances, began to file “quiet disclosures” or amended tax returns for prior years during which they had initially failed to make reports of their offshore foreign accounts. The taxpayers would file an amended return specifically to declare offshore accounts and investments they had not told the IRS about when their initial returns were filed for the year in question. However, these quiet returns could put taxpayers at risk of very substantial financial loss and taxpayers were often left unsure of what would happen if they came forward or of what types of penalties they could be faced with for admitting to the IRS they had not disclosed foreign accounts in the past.
The OVDP was created to provide taxpayers with an option for reducing their penalties if they followed a specific protocol for voluntarily disclosing their failures to report their offshore funds. In particular, the Streamlined OVDP Submission Process was created for taxpayers who did not intentionally and willfully break tax laws to make things right with the IRS before the agency began an investigation and potentially levied large fines or brought criminal charges. A traditional OVDP program, on the other hand, was open to willful violators who would face more stringent penalties.
How Does the Streamlined OVDP Process Work?
Taxpayers who participate in the OVDP Streamlined Process will need to:
- File original or amended tax returns and information returns. This could include IRS Forms 2926, 3520, 3520-A, 5471, 5472, 8621, and 8938.
- File original or amended FBARs.
- Pay a 5 percent penalty, as well as pay any unpaid taxes and interest for any undeclared offshore foreign income. The penalty is calculated based on the highest combined value of the undeclared offshore accounts at year end during the years for which the amended returns have been filed.
When you submit the appropriate forms and pay the penalties, you must be willing to certify, under penalty of perjury, that you did not act willfully if you wish to participate in the Streamlined OVDP Process. In other words, you must attest to the fact that your failure to properly disclose offshore funds was due to a good faith misunderstanding of what U.S. tax law required or because you made an honest mistake, inadvertently failed to file or were negligent.
What Are the OVDP Rules for Non-U.S. Residents Living Abroad?
Those with obligations to report their offshore accounts to U.S. taxing authorities but who are non-residents living abroad may also be eligible to participate in a zero-penalty version of the Streamlined OVDP Program. If a non-resident is married, both spouses must be considered non-residents for U.S. tax purposes in order to be eligible for the zero-penalty OVDP Program.
However, to participate in OVDP as a non-resident of the U.S., you must meet specific residency requirements, submit past tax returns and FBARs as well as pay any back taxes and interest that were due on the undeclared offshore funds. Because Americans living abroad are eligible for Foreign Earned Income exclusions and other tax credits, there may be no back taxes owed or the amount owed may be very small.
A Washington D.C. tax lawyer should be consulted for help in filing the proper forms and ensuring you have correctly calculated potential penalties.
Who is Eligible to Participate in the Offshore Voluntary Disclosure Program’s Streamlined Submissions Process?
The OVDP Streamlined Submissions Process is an option only for:
- Individual taxpayers or estates of individual taxpayers who have a valid taxpayer identification number, such as a Social Security number.
- U.S. individual taxpayers who reside either inside or outside of the United States.
- Taxpayers whose conduct was NOT willful (e.g. taxpayers who can certify their conduct in failing to report foreign assets was not the result of an intentional effort to evade IRS obligations).
- Taxpayers who are NOT currently under investigation by the IRS. If the IRS has initiated a civil examination of a taxpayer's returns, that taxpayer is not permitted to use OVDP's Streamlined Procedure. This is true regardless of whether the IRS investigation is related in any way to the taxpayer's undisclosed foreign assets.
Taxpayers who have filed delinquent or amended returns in the past in an attempt to address a past failure to report foreign assets will still be eligible to use the Streamlined Procedure to participate in the Offshore Voluntary Disclosure Process. However, taxpayers who submitted amended returns that included 'quiet disclosures' outside of the OVDP will still have to pay any penalties associated with their prior amended filings.
If your violation was a willful one, you will not be eligible for the Streamlined OVDP and will need to use the traditional – and costlier – Amnesty Program available for willful violators.
Should You Participate in the Streamlined OVDP Program?
Making the decision to participate in the Streamlined OVDP Program is a big decision. Because you must pay penalties – on top of back taxes and interest – a lot of money is at stake. There is also a risk that the IRS will determine you were not actually a non-willful violator, thus triggering more serious consequences. Still, avoiding the potentially larger penalties and eliminating the threat of criminal prosecution can be strong incentives for participation.
There is, unfortunately, a substantial risk that the IRS will discover undeclared offshore accounts on their own, even if taxpayers do not come forward with voluntary reports of offshore assets. The IRS has been cracking down not only on individuals, but also on foreign financial institutions believed to have been facilitating tax evasion. The IRS created an amnesty program for banks, just as the OVDP was created for individual investors.
The Swiss Bank Program encouraged foreign banks to come forward voluntarily, report their part in facilitating tax evasion and provide U.S. taxing authorities with information about accountholders. Seeking to avoid criminal prosecution, banks have readily agreed to participate in the Swiss Bank Program and many of the world's largest banks have provided the U.S. government with extensive information about the offshore accounts of U.S. affiliated individuals.
Once your information has been provided to the IRS and/or once a bank which held your foreign financial accounts is cooperating with the U.S. government, it will generally be too late for you to participate in the Streamlined Submission Process for the OVDP. This means larger financial penalties are a likely outcome when the IRS discovers your undeclared funds due to the comprehensive and detailed account information your financial institution has provided.
Even Swiss Banks, with their storied history of privacy, have willingly disclosed accountholder information to the IRS, and some of the oldest and most respected Swiss banks have participated in the Swiss Bank program. No taxpayer is safe from having the IRS discover their offshore funds and those who have not already participated in the Streamlined Submission Process for the Offshore Voluntary Disclosure Program can expect to face very substantial financial penalties when the IRS discovers funds offshore that were not properly declared.
Contact a Washington D.C. Tax Lawyer for Help With OVDP Streamlined Procedures
Thorn Law Group can help you to determine if participation in the streamlined OVDP is the right option for you and can assist you throughout the entirety of the process of completing your OVDP forms, submitting the paperwork to the IRS and addressing any issues the Internal Revenue Service may have with your OVDP submission. You should involve an experienced attorney early in the process when deciding whether to make a Streamlined Submission as part of the Offshore Voluntary Disclosure Program. Call Managing Partner Kevin E. Thorn today at 202-349-4033 so our Washington D.C. tax lawyer can provide you with the advice you need to make the right choice and protect your foreign accounts and investments.