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Changes Coming to the Offshore Voluntary Disclosure Program (OVDP)

Changes Coming to the Offshore Voluntary Disclosure Program (OVDP)

If you have bank, brokerage or retirement accounts held in financial institutions outside of the United States, you are required to report them to the IRS for tax purposes. In the interest of encouraging American taxpayers who have failed in this responsibility to come forward voluntarily, the IRS has offered the OVDP, or Offshore Voluntary Disclosure Program, which has offered the opportunity to come into compliance by filing all the appropriate paperwork that they missed for up to 8 years, as well as all taxes owed with interest and any penalties having to do with either delinquency or miscalculations.  Effective September 28, 2018, this program is being discontinued. 

The announcement that the OVDP program, which in its current iteration was established in 2014, was made this past March, with the reasons cited including improved third-party reporting as a result of FATCA and the fact that increased education of taxpayers has resulted in fewer such disclosures being required. Where the program once saw as many as 18,000 OVDP forms being submitted, the tax year 2017 saw only 600 disclosures filed.

What this means for those who are not in compliance is the loss of a significant opportunity for relief from penalties. When the government discovers unreported foreign accounts and files an IRS Criminal Investigation, the penalty that is applied once a public disclosure of the account is made is a punishing 50% of the highest aggregate balance in the accounts (or value of foreign assets) over the eight years prior. The significant difference provided taxpayers with considerable reason to come forward voluntarily.

Streamlined Voluntary Filing Compliance Program

The good news for taxpayers is that those who have failed to file the appropriate taxes and paperwork (and pay the appropriate taxes) as a result of an innocent mistake are still able to use a process under the Streamlined Filing Compliance Procedures Program. This requires certification that the noncompliance was not due to willful conduct, which is accomplished by following a specific procedure, including:

  • Filing amended tax returns with all required information returns (such as Forms 5471, 3520, 3520-A, 4572, 8938, 926, and/or 8621) for each of the most recent three years (also known as the covered tax return period).
  • Filing delinquent FBAR returns (FinCEN Form 114) for each of the most recent six years (or “covered FBAR period”) for which the taxpayer was not in compliance and the deadline has passed.
  • Remitting all taxes, interest, and a 5% miscellaneous offshore penalty plus any additional miscellaneous offshore penalty that may be owed with the appropriate paperwork. 

The miscellaneous offshore penalty is calculated based on the highest aggregate balance or value of the foreign financial assets during the years in either the covered FBAR period and the covered tax return period, for which 5% is assessed as a penalty. Determining these amounts is done by collecting all the applicable years’ year-end account balances and year-end asset values, and using the highest dollar figure from all of the years.

The ability to take advantage of the streamlined filing compliance procedures assumes that the taxpayer will only use the program once, and that going forward will remain in compliance. Filing these forms does not trigger an audit, though taxpayers may find themselves the subject of an audit in the same way that any other taxpayer can be. An audit review subjects the return and forms to a review for errors or omissions, and if any are found will leave the taxpayer vulnerable to whatever penalties are prescribed, including fines, civil penalties and criminal liability where applicable. 

If you have questions about offshore accounts and the IRS, contact an international tax expert for more guidance.

Bret Willoughby writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Bret Willoughby

Bret Willoughby

Bret Willoughby is a practicing tax preparer for expats throughout the world. He created Providence Payroll to meet the needs of Churches, not-for-profit organizations and businesses with remote workers. His web-based payroll processing service benefits both employers and remote workers with an easy way to access payroll information. Clergy have unique payroll and tax-related issues, one that Providence Payroll is qualified to manage.

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