Understanding the Offshore Voluntary Disclosure Program

Have you been omitting offshore assets when you are filing business taxes, estate taxes, or your personal taxes? You may have been trying to avoid paying more on your taxes, but if the IRS finds out, you’re going to find yourself in a lot of legal trouble with hefty fines and jail time. If you want to correct your omission with more reasonable fines applied and no jail sentence, then you’ll want to understand how the Offshore Voluntary Disclosure Program (OVDP) can help you. The OVDP is a sanctioned IRS program that you must enter voluntarily under your own volition, so long as you aren’t being audited or investigated by the IRS already, and you must do it proactively. Once you have entered the OVDP, you must disclose all your assets, no matter how unlikely it is that the IRS will discover them. Anything undisclosed that is discovered later will result in hefty fines and jail time. The OVDP, in its current form, will be available until September 28, 2018; you can disclose assets beyond that time, but you will not be offered the protection the OVDP provides.

OVDP Eligibility Requirements

You are eligible to take part in the Offshore Voluntary Disclosure Program as long as you have invested legal sourced funds (funds not gained through illegal means) in undisclosed offshore assets. You also must not have made a submission to the Streamlined Filing Compliance Procedures (SFCP), which is for unwilfully undisclosed offshore assets omissions. Finally, you also must not be under current examination by the IRS or be currently being audited. OVDP is a proactive program; you must start the process before the IRS discovers any undisclosed offshore assets for the program to be any use for you.

Why Use the OVDP

You may be wondering why you would willfully disclose offshore foreign assets if the IRS has not discovered them or may not ever discover them. The number one reason to use the Offshore Voluntary Disclosure Program is the fact that, if the IRS ever does discover your undisclosed assets, you will be facing hefty penalties and jail time. You could do other disclosure methods, such as a “quiet disclosure,” where you attempt to make your current year’s taxes fully offshore and foreign compliant, or a “qualified quiet disclosure,” by amending all your previous years’ returns as well. However, at any point during your amendments, the IRS could decide to investigate the new numbers, and if they discover you had undisclosed foreign assets for even a single year, they can start an investigation and levy fines and jail time against you. The OVDP helps by protecting you from excessive penalties, and it keeps you out of jail.

The Three Phase Application Process for OVDP

The Offshore Voluntary Disclosure Program is a three-phase process:

1. You start by first submitting a preclearance letter to the IRS that gives them notice of your attempt to correct your taxes. You should expect a response to this letter in 30 to 45 days. They will deny your entry into the program if they have discovered undisclosed assets by the time the letter arrives.

2. In response, the IRS will inform you of the steps you must take to amend your tax returns, including a questionnaire that must be filled out. You will have 90 days to comply (although you can file for an extension), and in exchange for full compliance, they will recommend to the Department of Justice to forgo any criminal prosecution.

3. Once everything is submitted and cleared by the IRS, they will contact you to propose a closing agreement (IRS Form 906), which you can agree to by signing it, or you can opt out of the OVDP.

Penalties Related to the OVDP

Becoming fully compliant through the Offshore Voluntary Disclosure Program means you will still have to face some form of monetary penalty. The first of these penalties will be the mandatory “Miscellaneous Title 26 Offshore Penalty,” which will amount to 27.5% of the highest account balance, but it will ensure that you are not criminally prosecuted. However, if any of your accounts are with a foreign financial institute that is on the IRS’s “Foreign Financial Institutions or Facilitators List”, they are an exception to the mandatory penalty and will face a 50% fine. Further fines include:

– 20% accuracy-related penalties under IRC § 6662(a) on the full amount of your offshore-related underpayments of tax for all years;

– failure-to-file penalties under IRC § 6651(a)(1), if applicable;

– failure-to-pay penalties under IRC § 6651(a)(2), if applicable.

Of course, the penalties for not using the OVDP can vary wildly; the IRS has extreme discretion when it comes to penalizing undisclosed foreign assets. Penalties can amount to up to 100% of the value of your foreign accounts in a multi-year audit situation.

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