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A Look at the History of OVDP

The Offshore Voluntary Disclosure Program (OVDP) is a program that is aimed at encouraging taxpayers with offshore financial accounts to come forward and report their previously undisclosed offshore accounts.  The Internal Revenue Service (IRS) hopes to incentivize taxpayers to make voluntary disclosures by promising lesser financial penalties than taxpayers would face if they did not make a voluntary disclosure but if the IRS instead discovered their offshore financial accounts through other means. 

While OVDP has helped the IRS to collect substantial amounts of money from taxpayers, it is not without risk for those who wish to participate.  Participants in OVDP still must pay significant penalties, although they can remove the risk of greater financial consequences through their participation.

It is important for taxpayers with foreign financial accounts who are considering participation in OVDP to talk with Kevin Thorn, a Virginia IRS voluntary disclosure attorney. Taxpayers should work with an attorney to find about their options for participation and to find out about the likelihood they will be able to successfully resolve their tax issues through participation. An attorney can also assist with submission of appropriate forms and documentation necessary for participate in OVDP and can help taxpayers to understand the possible penalties they could be facing for participation.

Thorn Law Group has helped more than 500 clients with legal issues related to undeclared offshore funds. As former IRS attorneys with extensive experience working for both the IRS and for clients with cases before U.S. tax courts, our legal team has unparalleled insight into how the Offshore Voluntary Disclosure Program works and into how the IRS operates when pursuing claims against taxpayers.  We can offer you the help you need to make fully informed choices as you consider OVDP participation or explore your options for resolving potential legal problems with undeclared offshore accounts.

How Does the OVDP Work?

In 2009, the IRS created the first Offshore Voluntary Disclosure Program as part of a widespread effort to fight tax evasion occurring by investors with funds in foreign financial institutions.  The U.S. efforts at fighting tax evasion also included the passage of the Foreign Account Tax Compliance Act (FATCA), which was passed in 2010 and which imposed new reporting requirements on both investors with foreign funds as well as new requirements on individual taxpayers.

OVDP was intended to prompt U.S. affiliated taxpayers to essentially “come clean” and admit to the IRS that they hadn't followed the rules for making reports about offshore funds. Taxpayers must do more than just report their income from offshore accounts as investment income on their tax returns. They also must file an annual Report of Foreign Bank and Financial Accounts (FBARs) using Form 114. FBARs must be submitted to the Financial Crimes Enforcement Network (FinCEN) by U.S. affiliated taxpayers in any year where the aggregate balance of their offshore funds exceeds $10,000.  After the passage of FATCA and beginning in tax year 2011, investors with offshore funds are also required to submit Form 8938 to the IRS to make a report of their foreign financial accounts.

Taxpayers who do not make required reports can be subject to very substantial financial penalties. Criminal prosecution is also a possibility if the IRS believes that a taxpayer has willfully evaded obligations to pay the taxes that are owed. Taxpayers face a substantial risk their accounts will be discovered by the IRS and their failure to report will result in financial consequences, as FATCA also imposes obligations on their banks. The IRS also incentivized banks to come forward and provide accountholder information through the Swiss Bank Program, which is an amnesty program relieving foreign financial institutions of the threat of criminal prosecution in exchange for the payment of a fine and the provision of accountholder information. 

With such a substantial risk that their non-reporting of foreign financial accounts would be discovered, many US individuals with foreign financial accounts opted to participate in the Offshore Voluntary Disclosure Program after the IRS started the program back in 2009.

The IRS has modified the Offshore Voluntary Disclosure Program several times since it began in 2009 and has launched several related initiatives. The original OVDP program, which ran from March to October of 2009, allowed the IRS to collect $3.4 billion from 15,000 disclosures. Because of the success of this program, the Offshore Voluntary Disclosure Initiative was launched in September of 2011 and aimed to demonstrate to taxpayers the value of making voluntary reports of undeclared offshore accounts.  An estimated 12,000 disclosures were made under this 2011 program.

The IRS then announced an open-ended OVDP program in 2012. This open-ended program did impose a substantial 27.5 percent penalty on the highest aggregate balance of accounts, which was a more substantial penalty than prior versions of the OVDP.  Still, the penalty is less than the penalties if the IRS discovers the violations on its own and initiates civil and criminal action. Some taxpayers are also eligible for a streamlined OVDP process which can carry lesser penalties than the full OVDP program. 

Who Qualifies for the Voluntary Disclosure Program?

Taxpayers who failed to comply with reporting requirements for offshore financial accounts can participate in OVDP if they are not already under investigation by the IRS. If the IRS has already learned of the taxpayers’ violation though information provided by a foreign financial institution or because of an investigation conducted by the IRS, the taxpayer is not eligible to participate in OVDP. 

There are different processes for offshore investors who are considered to be willful violators versus for those who are considered to be nonwillful violators. A nonwillful violator is an individual who simply did not fully understand all of the different reporting obligations imposed upon him as a result of his investments in a foreign financial institution. A willful violator, of course, is someone who intentionally failed to follow IRS rules for reporting offshore investments. 

To be considered nonwillful, the taxpayer with the undeclared foreign offshore investments must have failed to comply with reporting rules for offshore accounts as a result of negligence, a mistake, or a good faith misunderstanding of the requirements of the law. In other words, the failure to comply with U.S. tax rules for the reporting of offshore accounts must have been inadvertent, rather than a deliberate attempt to evade tax obligations.  A taxpayer who believes he is a nonwillful violator can choose to participate in a streamlined OVDP submission process and face lesser penalties compared with a willful violator.

Taxpayers who participate in the streamlined OVDP must attest under penalty of perjury that their conduct was not willful conduct.  There is, however, a risk that the IRS will determine that a violator did actually act willfully, which would result in the taxpayer being subject to the more substantial penalties imposed upon willful violators. 

What do You Need to Disclose?

Nonwillful violators who opt to participate in a streamlined OVDP process must fulfill requirements including the submission of appropriate IRS paperwork.  However, the streamlined process does not eliminate the risk of criminal prosecution as participation in the full Offshore Voluntary Disclosure Program would, so it is important to talk with an attorney before submitting any forms or paperwork to the IRS.

Taxpayers who participate in the streamlined OVDP program should submit information returns as well as original or amended tax returns. The forms required can include IRS Forms 2926, 3520, 3520-A, 5471, 5472, 8621 and 8938.  Thorn Law Group can provide assistance with a determination of the forms that should be filed and can provide help with the completion of amended and information returns. 

Original or amended Reports of Foreign Bank and Financial Accounts should also be filed as a part of the streamlined disclosure process, and the taxpayer will have to pay appropriate penalties. For U.S. affiliated taxpayers with IRS obligations but who are living abroad as non-residents of the United States, there is a version of the streamlined OVDP process that does not require any penalties to be paid.

For taxpayers who participate in the full Offshore Voluntary Disclosure Program, copies of previously filed and amended returns must also be submitted to the IRS.  Taxpayers must also cooperate in the voluntary disclosure process, which the IRS indicates means doing things like offering detailed information on offshore accounts and signing agreements for extending the IRS time period for assessments. Penalties will also need to be paid. 

What are the Benefits of OVDP?

 Participation in OVDP makes it possible for you to become compliant with IRS rules so you can reduce penalties that you face if the IRS identifies your offshore funds before you have disclosed. Since many banks have participated in the Swiss Bank Program and since other foreign financial institutions must submit account information in compliance with FATCA, there is a substantial chance that taxpayers could become the target of an investigation, which has prompted many investors with undeclared foreign funds to determine OVDP participation is the best choice.

What Civil and Criminal Penalties Do You Face?

If you do not participate in OVDP, you face a long list of penalties, which could include but which are not limited to:

  • A civil penalty for willfully failing to file FBARs, which could be as much as the greater of $100,000 or 50 percent of the total balance of the undeclared offshore account for each violation.
  • A civil penalty for failure to file FATCA starting in the 2011 tax year, which could total $10,000 for the initial failure to file and an additional $10,000 for each month the failure continues after the taxpayer is notified of the delinquency. The penalties can add up to a maximum of $50,000 per return.
  • A civil penalty of the greater of $10,000 or 35% of the gross reportable amount for failure to file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts.
  • A civil penalty of the greater of $10,000 or five percent of the gross value of trust assets for failure to file Form 3520-A, Information Return of Foreign Trust.
  • Criminal charges for tax evasion under Internal Revenue Code section 7201.
  • Criminal charges for failure to file an income return under IRC section 7201(1).
  • Criminal charges for willful failure to file FBARs or willful filing false information on FBARs under 31 U.S. Code section 5322.

These are just a few of many possible penalties that could be imposed if you do not participate in the Offshore Voluntary Disclosure Program. If you participate, your penalties will be much more limited.  

Those who take advantage of streamlined filing will pay a 5 percent penalty, and unpaid taxes and interest for undeclared foreign income. Those who participate in the full OVDP program could owe penalties calculated at either 27.5 percent or 50 percent of the highest years aggregate balance of offshore accounts during the period of time which is covered by the voluntary disclosure. The IRS has a table on its website which shows  how the potential penalties are calculated for OVDP participants.

Thorn Law Group can provide you with assistance in making a determination as to what penalties you will face if you attempt to submit a streamlined submission or if you participate in the full OVDP program.  OVDP participation also means you will no longer need to worry about the possibility of facing criminal charges which could carry the potential for a lengthy jail sentence as well as substantial financial consequences. 

Need an IRS Voluntary Disclosure Attorney?

A Virginia IRS voluntary disclosure attorney at Thorn Law Group will provide you with advice on whether you can qualify for the streamlined filing procedure or whether your disclosure will be considered willful. We can assist you in all steps of the process of participating in OVDP, and can help you to weigh the pros and cons of participation.

We bring to your case more than 30 years of collective experience in helping clients to resolve a wide variety of tax compliance issues. Our goal is always to help you keep as much of your money as possible while minimizing any risk of serious consequences for failure to comply with IRS mandates. To find out about the ways in which we can help you with any problems related to undeclared offshore funds, give us a call today.


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