By: Joseph Siegmann, and
The Internal Revenue Service (IRS) created the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Domestic Offshore Procedure (SDOP) to encourage taxpayers to disclose foreign accounts and income that were subject to reporting but were not previously reported to the IRS.
While both the OVDP and SDOP encourage taxpayers to disclose unreported foreign accounts and income they are directed at taxpayers in different circumstances. Taxpayers who did not willfully fail to report their foreign accounts or income qualify for the SDOP. In contrast, the OVDP offers amnesty, at a price, for taxpayers who willfully did not disclose their foreign accounts or income to the IRS. While both programs are important for taxpayers, this article focuses on the OVDP.
The OVDP requires taxpayers entering the program to amend, or file for the first time, their past eight years of tax returns and six years of FBARs and report all of the previously unreported foreign accounts and income. In return for disclosing the accounts and filing the returns and FBARs, the IRS agrees to waive the usual FBAR penalties and instead assess a single penalty called the offshore penalty. The offshore penalty varies by program but the OVDPs is 27.5 percent[1] of the highest years’ aggregate value during the period covered by the OVDP. In addition to the offshore penalty, the taxpayer is still liable for any unpaid taxes, interest or penalties related to the unreported income. While this is a hefty penalty, the offshore penalty is much less than the full FBAR willful failure to file penalty.
In addition to the reduced civil penalty, the OVDP incentivizes disclosure by providing protection from potential criminal prosecution. Only the OVDP and not the SDOP provides protection from criminal prosecution.
After determining that the OVDP is the correct program, the taxpayer’s next step is entering the OVDP and completing a voluntary disclosure. There are four basic steps to successfully completing a voluntary disclosure under the OVDP: (1) a preclearance request; (2) preliminary acceptance into the OVDP; (3) submission of the complete voluntary disclosure; and (4) execution of a closing agreement with the IRS.
The taxpayer should submit a preclearance request to determine their eligibility for the OVDP. Although this is not a required step, it mitigates the risk of a taxpayer disclosing significant incriminating information to the IRS and then being rejected from the OVDP. To receive preclearance the IRS must not have already initiated a civil examination or criminal investigation of the taxpayer, notified the taxpayer that it intends to commence such an examination or investigation of the taxpayer, or received information from a third party regarding the US taxpayer’s foreign accounts or income.[2] The preclearance request requires the taxpayer to submit to the IRS Criminal Investigation Lead Development team the taxpayer’s identifying information[3] such as complete names, date of birth, tax identification number, address, and telephone number. After submitting the preclearance request the IRS will notify the taxpayer within 30 days whether the taxpayer has been precleared to make a voluntary disclosure under the OVDP. Preclearance does not guarantee a taxpayer’s acceptance into the OVDP. Taxpayers only have 45 days from the IRS preclearance notice to make their application for the OVDP.
After receiving a taxpayer’s preclearance the next step is applying to the OVDP by submitting Form 14457, Offshore Voluntary Disclosure Letter; and Form 14454, Attachment to Offshore Voluntary Disclosure Letter for each account that must be disclosed. These forms must be submitted to the IRS’s voluntary disclosure coordinator. Once submitted the taxpayer should be notified within 45 days whether they are preliminary accepted into the OVDP. The full voluntary disclosure must then be submitted within 90 days of their preliminary approval.
The actual voluntary disclosure under the OVDP requires the preparation of many documents including amended tax returns, foreign account asset statements, consent to extend the period of time for the IRS to assess taxes, and payment.[4] Each taxpayer entering the OVDP will have slightly different documentation requirements and the OVDP instructions must be consulted. Once the voluntary disclosure has been submitted, the IRS reviews the information and if the IRS has additional requests, the taxpayer is obligated to cooperate with the IRS and provide the requested information, if available. In our firm’s experience, the more complete the initial voluntary disclosure, the fewer questions the IRS will ask when reviewing the voluntary disclosure.
Once the IRS accepts a taxpayer’s voluntary disclosure under the OVDP, the IRS sends the taxpayer Form 906, Closing Agreement on Financial Determination Covering Specific Matters, which explains the terms of the OVDP. The taxpayer must sign and return the Form 906 to the IRS. Once the IRS receives the signed Form 906 it will countersign the document and provide the taxpayer with a copy of the executed Form 906.
Endnotes
[1] The OVDP offshore penalty is 27.5 percent. However, a 50 percent penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation.
[2] Internal Revenue Manual Section 9.5.11.9 (B); A third party is an informant, other governmental agency, or the media.
[3] Identifying information includes financial institutions at which undisclosed OVDP assets are held. Identifying information of all foreign and domestic entities) through which the undisclosed OVDP assets were held by the taxpayer seeking to participate in the OVDP; this does not include any entities traded on a public stock exchange. Information must be provided for both current and dissolved entities. Identifying information for entities includes complete names (including all DBA’s and pseudonyms), employer identification numbers (if applicable), addresses and the jurisdiction in which the entities were organized.
[4] At a minimum, the voluntary disclosure submission package must include the following (1) copies of previously filed original returns and amended returns for the years covered by the voluntary disclosure; (2) complete and accurate amended or original tax returns for the years covered by the voluntary disclosure, along with the schedules detailing the amount and type of previously unreported income; (3) a copy of the previously submitted offshore voluntary disclosure letter; (4) a completed foreign account or asset statement for each previously undisclosed OVDP asset during the voluntary disclosure period; (5) a penalty calculation; (6) signed agreements to extend the period of time to assess tax, tax penalties, and FBAR penalties; (7) copies of filed FBARs; and (8) copies of statements for all financial accounts for each tax year covered by the voluntary disclosure.