Streamlined Filing Compliance Procedures vs. OVDP
If you are a U.S. connected person and you have foreign accounts, you have various obligations to the IRS to report those accounts. For example, among your obligations, you have to report foreign income. If you have offshore accounts with an aggregate balance which reaches $10,000 at any point during the year, you also have to file an annual Report of Foreign Bank and Financial Accounts (FBAR).
If you have failed to follow any of your reporting requirements in the past, the IRS is taking steps to try to urge you to come forward now. One possible option you can take advantage of is to participate in the Offshore Voluntary Disclosure Program (OVDP).
Another option is to take advantage of Streamlined Filing Compliance procedures. These options can have very different consequences, so you should not make your choice until you have talked with a Washington DC tax attorney.
The Difference Between the Two
Streamlined Filing Compliance Procedures were recently introduced to prompt taxpayers to submit amended returns and to file original returns, which were supposed to be filed but weren't. Tax returns submitted under the Streamlined Filing Compliance Procedures have to report income from foreign sources, income from U.S. sources, and deductions for applicable tax years.
Streamlined filing is different from the Offshore Voluntary Disclosure program because you have to certify that the failure to follow tax rules was not willful, but instead happened because of negligence or mistake. Willful violators cannot take advantage of Streamlined filing but can take advantage of OVDP.
All Streamlined filers have to submit a non-willful certification and the IRS will review the certification to determine if you actually did make a mistake or if you acted intentionally. The IRS may look at the source of funds, deposits and withdrawals from the foreign account, whether the account was disclosed to tax preparers; and a variety of other factors. If the IRS determines you acted willfully despite claiming otherwise, your declaration of non-willfulness could constitute perjury.
The Consequences of Streamlined vs. OVDP
If you are a U.S. taxpayer who lives outside of the U.S. and you take advantage of Streamlined Filing Compliance Procedures, all penalties are waived by the IRS. If you are a U.S. taxpayer who lives in the U.S. and you are eligible for Streamlined Filing, your penalties are limited to five percent of the assets that are held offshore and that created the tax compliance problem. Any penalties which would normally be assessed on undeclared income from foreign sources will be waived.
While this sounds like a good deal for U.S. taxpayers, it is important to realize that the Streamlined Compliance rules don't limit civil penalties which could arise due to reporting income from U.S. sources.
Streamlined Compliance also does not necessarily protect taxpayers from criminal prosecution if their actions were found to be in violation of the tax law. OVDP, on the other hand, can provide protection from criminal prosecution but financial consequences can be dire.
Before you decide whether Streamlined or OVDP is the right choice, you should talk with Kevin Thorn, a DC tax attorney, to find out which option is likely to have the best results for you.