Offshore Voluntary Disclosure
Offshore Voluntary Disclosur
Offshore Voluntary Disclosur

2014 saw a marked increase in the enforcement efforts of the IRS and Department Of Justice, in pursuing and prosecuting non-compliant US taxpayers who failed to report off-shore bank accounts and assets. The IRS’ efforts have increased even more, in 2015, as serious penalties are leveled at taxpayers who fail to report their overseas holdings on time.

One case, cited by Nossaman Litigation Advocates, a proposed $5 million dollar fine has been brought against one taxpayer, with an estimated $10 – 11 million dollars in overseas holdings.

This could have been greatly reduced had they participated in the Offshore Voluntary Disclosure Program, or OVDP. A maximum of 27.5% of offshore holdings, with an accuracy penalty, are used in lieu of exorbitant fines for not filing the “Report of Foreign Bank and Financial Accounts” or FBAR, on time. Participating in the OVDP also eliminates the risk of criminal prosecution.

Despite this, many taxpayers still remain non-compliant, refusing to claim offshore assets, afraid of the consequences if they were to divulge.

To better decide if the Offshore Voluntary Disclosure Program is right for you, first it helps to understand what it is, and what it does.

What Is the Offshore Voluntary Disclosure Program

The OVDP was developed to allow taxpayers with foreign financial accounts and interests to voluntarily disclose their interests for a reduced penalty. Currently, foreign bank policy requires that taxpayers with offshore assets disclose the amount when it exceeds a certain amount, which is currently $10,000, which is the FBAR. If a taxpayer fails to acknowledge holdings that exceed the FBAR, the IRS will assign penalties. The OVDP is a way to minimize those penalties, which can be severe. The penalty for failing to file an FBAR is $10,000, for each infraction.

The three main benefits of participating in the OVDP:

  • Generally eliminates the risk of criminal prosecution.
  • Reduces the severity of civil penalties.
  • Enables you to calculate, with a reasonable degree of certainty, what it will cost you to become current with your federal tax obligations.

Despite the many advantages of voluntary disclosure, many are still reluctant, choosing instead to opt for “quiet disclosures”. Quiet disclosures are when a taxpayer amends previously filed tax returns to disclose offshore accounts and earnings. This practice is prevalent, despite the fact that it will not clear the taxpayers from criminal prosecution and the IRS are increasingly on the lookout for them.

Some possible drawbacks of the OVDP include:

  • Depending on amount owed, the penalties could be worse than the taxes
  • Many OVDP participants are viewed under one umbrella category, despite the severity of what they have done.
  • Doesn’t take into account some extenuating circumstances, such as dual citizenship.

Easing Off: The Future Of OVDP

The OVDP has had many phases, with varying degrees of severity. As of 2014, the IRS began to ease up on their overseas compliance programs, to allow more options for people living overseas, as well as internationals residing in the United States.

According to IRS Commissioner John Koskinen, “This opens a new pathway for people with offshore assets to come into tax compliance. The new versions of our offshore programs reflect a carefully balanced approach to ensure everyone pays their fair share of taxes owed. Through the changes we are announcing today, we provide additional flexibility in key respects while maintaining the central components of our voluntary programs.”

This is the third amendment to the Overseas Voluntary Disclosure Act since its first iteration in 2009. The IRS made changes in response to taxpayer feedback, who felt the program was too harsh and restrictive to take advantage of it. These were people with too small of infractions to warrant any criminal prosecution, but with penalties higher than what their taxes would be.

Some of the changes in the 2012 version of the OVDP include:

  • Eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year;
  • Eliminating the required risk questionnaire;
  • Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

This version of the OVDP promises to be more open, permissible, and understanding, which should not only help bolster openness and communication with taxpayers, it also embraces the new global future we are living in.

Since 2011, over 45,000 disclosures have come forward. With the IRS making the OVDP more accessible and desirable for taxpayers, that number is sure to skyrocket. The re-launch of the OVDP in 2012 has helped to raise public awareness of the program, with many previously non-compliant tax payers eager to come forward and get things squared away.

Need help filing for the Offshore Voluntary Disclosure Program, or want to know more about international finance? Contact us today!