Offshore Voluntary Disclosure

IRS Offshore Voluntary Tax Disclosure Attorney

The Department of Treasury and the Department of Justice have a new mandate – stop offshore tax cheating and bring in billions of dollars of additional tax revenue from non-disclosed foreign accounts. 

The Internal Revenue Services’ Offshore Voluntary Tax Disclosure Program is designed to encourage non-compliant taxpayers to come clean and bring their tax liabilities current.  The IRS began this initiative in 2009 with the Offshore Voluntary Disclosure Program.  The Service has now sponsored three voluntary programs.

The IRS reports that the efforts have yielded $6.5 billion in back taxes and brought 45,000 tax payers back into the law abiding fold.  It is estimated that this represents only a fraction of funds held offshore by U.S. citizens and other required U.S. income tax filers.

The approach is classic carrot-and-stick.  The carrot is possible criminal amnesty for a voluntary report along with a reduction in civil penalties.  The stick is the Foreign Account Tax Compliance Act (FATCA).  FATCA became law in March of 2010.

Loopholes previously enjoyed by noncompliant taxpayers will soon become nooses which will tighten as the United States demands and bullies foreign countries and financial institutions into complying with reporting requirements.

OVDP 2009

The process started when the IRS announced the Offshore Voluntary Disclosure Program (OVDP) in March 2009.  It was a two pronged attack.

  • In the first prong of attack, it offered taxpayers a chance to avoid criminal and enhanced civil penalties in the form of a single diminished penalty for previous failure to report offshore income. The IRS based the program upon existing voluntary disclosure processes used by the IRS Criminal Investigative Unit.
    • The offshore penalty was 20% of the highest aggregate value of the unreported offshore account from 2003 until 2008.
    • Anyone electing to participate also had to file amended or late Report of Foreign Bank and Financial Accounts (FBAR) returns for those years.
  • In the second prong of attack, the U.S. sought enforcement against foreign banks for failure to report the offshore income of U.S. citizens and required reporters.
    • Under OVDP, the IRS reports it received 15,000 disclosures. The result was the collection $3.4 billion dollars of back taxes, interest and penalties.
    • An additional 3,000 disclosures came in after October 15 closing date of the program.

The IRS used much of the information it accumulated under the 2009 OVDP to continue investigations into individuals and financial institutions that facilitated the non-compliance with U.S. tax laws.  With the investigations ongoing, many tax practitioners pressed the IRS on behalf of concerned non-complaint clients to continue the voluntary disclosure program.

In February of 2011 the IRS responded.

OVDI 2011

It announced the 2011 Offshore Voluntary Disclosure Initiative (OVDI).  The program lasted from February 2011 until September 9, 2011.

The terms of the 2011 OVDI differed from that of the 2009 OVDP.

  • Participants now paid a 25% miscellaneous offshore penalty on the highest aggregate value of the unreported offshore accounts from 2003 until 2010.
  • Depending on the severity of their noncompliance, they were also exposed to a 5% or 12.5% penalty. 
  • The IRS was able to close 70% of the voluntary disclosed cases that year which resulted in 15,000 additional disclosures and the collection of $1.6 billion dollars in back taxes, penalties, and interest.

Tax professionals and taxpayers continued to show a strong interest in the voluntary disclosure programs after the end of the OVDI on September 9, 2011.  As a result, the IRS revised the terms of the 2011 OVDI program and made it permanent until further notice.

OVDI 2012

The 2012 Offshore Voluntary Disclosure Program (OVDP) requires participants to pay:

  • A penalty of 27.5% of the highest aggregate balance or value of the offshore assets during the previous eight years.
  • Depending upon the severity of the noncompliance, certain taxpayers still face a 5% or a 12.5% percent enhanced penalty.

The IRS expanded the program in June of 2012 and added an option which enabled some U.S. citizens and other mandatory filers living abroad to catch up on their delinquent filings and avoid penalties if they owed little or no back taxes by using its Streamlined Filing Compliance Procedures.

Since this option took effect in September of 2012, the program has received 12,000 voluntary disclosures. As the program has proved popular among non-compliant tax payers and profitable to the IRS, it has continued to change and develop.

OVDI Continues to Evolve

In June of 2014, the IRS announced additional major changes to the 2012 programs.  The new options help taxpayers both domestically and abroad come into compliance with their tax obligations.   The IRS has devised new streamlined procedures for non-willful taxpayers.  They have also adjusted the terms for taxpayers participating in the OVDP whose conduct rises to the level of willful non-compliance.

Even with the modifications to the OVDP program, it remains attractive for taxpayers seeking protection from possible criminal prosecution and penalties.

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