From 2009-2018, the IRS offered various versions of its Offshore Voluntary Disclosure Program (OVDP), which allowed taxpayers with previously undisclosed foreign assets and income to avoid criminal prosecution by coming forward voluntarily and paying any taxes they owe with interest and penalties.
More than 56,000 taxpayers participated in the various OVDP programs, resulting in the Treasury receiving $11.1 billion in back taxes, interest, and penalties.
End of OVDP
Last year, the IRS announced that the OVDP would close effective September 28, 2018. However, the closure of the OVDP does not mean that you are no longer able to make a voluntary disclosure related to your offshore issues.
The IRS has issued an Interim Guidance Memo updating its longstanding Domestic Voluntary Disclosure practice, and individuals with undisclosed offshore income or assets are now eligible to participate. Domestic Voluntary Disclosures have a lot of similarities to the OVDP, but there are also some key differences.
OVDP vs. Domestic Voluntary Disclosures
One benefit of the Domestic Voluntary Disclosures is that the voluntary disclosures will typically cover a six-year period, rather than the eight-year period covered by the OVDP. In other words, tax forms submitted during the previous six years will be subject to examination. This means taxpayers pay less in back taxes.
The major downside concerns the assessment of penalties. Under the OVDP, the IRS assessed a one-time 27.5% offshore penalty in lieu of FBAR penalties, which was based on the highest aggregate value of the offshore accounts during the compliance period. The Civil Fraud Penalty under I.R.C. § 6663 did not apply.
For those coming forward under the traditional Domestic Voluntary Disclosure procedures, the Civil Fraud Penalty will apply to the one year with the highest tax liability. Additionally, willful civil FBAR penalties will generally be assessed in accordance with the provisions of IRM 4.26.16 and IRM 4.26.17. These penalties can be quite substantial.
Voluntary Disclosures are not for everyone. Because the requirements (and penalties) are so onerous, only those who face the risk of criminal prosecution should use these procedures. Those who face the risk of criminal prosecution are people who willfully failed to comply with the law, rather than simply being unaware of the reporting requirements.
For those whose noncompliance was non-willful, a much better option is the Streamlined Filing Compliance Procedures, which have been available since 2014.
Goldin Peiser & Peiser is a full-service CPA firm with a dedicated IRS Defense Service group. If you want more information about your options for resolving undisclosed offshore issues, please contact Naveid Jahansouz at 972-818-5300 or fill out the contact form below.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.