IRS Amnesty Program for Foreign Bank Accounts: The IRS Offshore Voluntary Disclosure Program and the Streamlined Program are the two main IRS Tax Amnesty Programs for reporting Foreign Accounts, Investments, Assets, and Income. At Golding & Golding, we limit our entire tax law practice to IRS Offshore Tax Amnesty, including:
- Streamlined Program
- Reasonable Cause
- FBAR Willful and Non-Willful Penalties
- FATCA Penalty Negotiation
- Offshore Tax Evasion, Fraud and Structuring
This summary will focus on the difference between the Streamlined Program, and Offshore Voluntary Disclosure Program.
Offshore Voluntary Disclosure Program (OVDP) vs. Streamlined Program
The following is a summary of the elements (aka requirements) for individuals, estates, and businesses that would like to apply for the traditional OVDP program.
Offshore does not mean you should be conjuring up visions of resting easy in the Bahamas, or stashing millions in the Caymans. Essentially, from an international IRS tax perspective, it simply means you have money overseas. Whether the money is in a foreign account, overseas, or abroad — it is being held “offshore.”
Therefore, in order to qualify for OVDP you must have unreported assets, income or investments abroad. If you do have offshore assets, income or investments, then you can report them with OVDP — and you can include domestic undisclosed money as well.
But, it is important to keep in mind that you do not get the same protection for your domestic undisclosed money that you receive for your offshore undisclosed money. Moreover, if you do not have any undisclosed offshore money, and all of your unreported money is domestic (located in the United States), you can submit to the IRS Domestic Voluntary Disclosure Program, but not OVDP.
Unfortunately, the IRS Domestic Voluntary Disclosure Program does not provide the same protections and reduced penalty structure as the Offshore Voluntary Disclosure Program.
Voluntary means you are entering the program on your own volition.
Usually, it means that you are not under audit or under examination with the IRS. That is because if you are already under IRS audit or examination and then submit to the program, you are not technically doing so voluntarily. Rather, you are entering the program in response to being audited or examined.
The reason the IRS does not allow you to enter OVDP once you are under audit is because you have a proactive responsibility during an audit or examination to bring these issues to the forefront and explain them to the auditor — even if the auditor did not ask about offshore accounts specifically – but assuming he or she asks about additional income, assets, etc.
When you are under audit or examination you can be subject to excessively high fines and penalties which are somewhat mitigated through traditional OVDP. The IRS will not let you out of those penalties, once you are audited, by submitting to OVDP at that time.
By disclosure, the IRS is referring to full disclosure. If you want to voluntarily disclose offshore money, then you have to do a full disclosure and report all of the information you have regarding all of your offshore money abroad.
It does not matter if the money was held in an account within a branch or institution that went out of business. It also does not matter that your money is being held in an anonymous account that you firmly and wholeheartedly believe can never be discovered.
Rather, from the IRS’ perspective, when it is time to disclose you must perform a full disclosure and report all of the information — no matter how low the chances that the IRS could ever discover the information, account information, investments or income otherwise.
OVDP is an approved IRS program. There are specific time requirements and reporting disclosures that must be done according to OVDP milestones. If you fail to meet these milestones timely, the IRS can remove you from the program, which now means the IRS has at least some specific information regarding your offshore finances, and can now enforce incredibly high fines and penalties against you.
Worse yet, you no longer have the protection of OVDP.
How Does an OVDP Case Work?
OVDP Phase 1
The person submits a preclearance letter. It typically takes the IRS 30 to 35 days to respond to the letter, wherein you will learn whether you have been accepted or rejected into OVDP. Despite what some inexperienced attorneys will tell you online, not everyone gets accepted. And if an attorney has told you that everyone always gets accepted, than they have not been practicing in this area of law long enough.
OVDP Phase 2
The applicant has 45 days to submit the initial disclosure to the IRS. It is a relatively detailed breakdown of the different accounts, transfers, opening and closing of the accounts, and related information. It is not as detailed as preparing and submitting IRS forms and schedules such as general FATCA Reporting, FBAR, 3520, 5471, 8621, 8865, 8938 — but it is still relatively comprehensive, and more detailed than it had been in years past, especially pre-FATCA.
OVDP Phase 3
Presuming that the applicant is accepted, the applicant then has 90 days to submit the full disclosure, including all necessary FBARs, schedules, penalty competitions, legal arguments for mitigation of penalties, etc. Depending on the specific facts and circumstances of your case (numerous PFICs, Foreign Mutual Funds, ETFs, etc.), it may take longer for you to compile the information or prepare the necessary documents. The IRS routinely grants extensions to file.
We know…it seems nuts to acquiesce to the IRS before they have even found you, audited you, or examined you — and allow the IRS to issue penalties against. You may instead also consider submitting an IRS Quiet Disclosure in hopes that you can fly below the radar without getting caught.
These are two horrible ideas, here’s why:
First, a quiet disclosure may lead you to jail or prison. For a comprehensive case study on how IRS required disclosure of offshore money can go wrong, please refer to our prior blog page on Quiet Disclosure, Criminal Investigations & Prison.
Second, if the IRS audits or examines you before you enter the program, you may be subject to incredibly high fines and penalties, which are detailed below:
The reason why it is so important to disclose before the IRS finds you, is because the IRS has taken to issuing gargantuan penalties against individuals whose issues seem relatively minor (Read: is the world going to explode because Marty didn’t report his foreign account?)
When it comes to penalties, the IRS has extreme leeway. On the one hand, if a person can show reasonable cause, then often times penalties will be waived. On the other hand, the IRS has the right to issue penalties which can reach 100% value of the foreign account in a multi-year audit scenario (noting, that up until recently the IRS issued 300% penalties for unreported FBARs, when a person was found to be willful and penalized at 50% within the 6-year SOL).
Streamlined Program is a great option for individuals who were non-willful in their non-compliance with U.S. Tax Law and Reporting of Foreign Assets, Investments and Income. Streamlined Voluntary Disclosure goes by many different names:
- Streamlined Program
- Streamlined OVDP
- Streamlined Filing Compliance Procedures
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
Streamlined Program Basics
Streamlined compliance is more “streamlined” than the traditional Offshore Voluntary Disclosure Program (OVDP) and requires significantly less paperwork than OVDP.
While the streamlined voluntary disclosure program has risks, for the most part, as long as you are non-willful (and are confident in your non-willfulness), the program may be a good fit.
Other issues such as Mark-to-Market elections, and elimination of nearly any risk of Audit on Unreported Income may still make OVDP a better option — so it is important to speak with an experienced Offshore Voluntary Disclosure Lawyer before making an affirmative representation to the IRS.
Since we receive so many inquiries about the Streamlined Voluntary Disclosure Program, we wanted to take an opportunity to provide some clarification for individuals and estates that are interested in the program.
You MUST Be Non-Willful
We cannot stress this fact enough. Yes, the chances of being audited in general are low and the chances don’t seem to increase much solely because a person enters the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.
Nevertheless, if a person is audited and the IRS believes that the individual misrepresented the facts within their certification statement and were actually willful – or acted with reckless disregard – the IRS may take them to task. This could result in the individual paying significantly more fines and penalties than they would otherwise have paid in OVDP – especially if they had successfully opted out of the program.
Moreover, it could also lead to charges for Offshore Tax Fraud, Offshore Tax Evasion and Offshore Money Laundering. This is not to scare you, but rather for you to really evaluate your facts and confirm in your own mind that you are non-willful…and to be careful before being led astray by inexperienced counsel trying to make a quick buck off you.
Original Tax Returns
If a person qualifies for the Streamlined Foreign Offshore Procedures, which is the same as the domestic procedures (e.g. both programs are designed to facilitate the voluntary reporting of offshore/foreign money) except that the person resided outside of the United States for at least 330 days in any year, the person can file original tax returns through the program.
The rationale seems to be that if a person resides outside of the United States for 11 out of 12 months in a year, the IRS will cut them a break as tax filing.
If a person does not qualify for the Streamlined Foreign Offshore Procedures (e.g., they do not qualify as a “Foreign Resident”) then they must submit under the Streamlined Domestic Offshore Procedures. Under the Streamlined Domestic Offshore Procedures, a person cannot file original returns through the program.
Moreover, the person must have filed timely returns — although in our experience in working with the IRS, there may be some wiggle room as to that threshold (aka how untimely were the original returns)
5% Penalty is Based on the Year-End Value
The 5% penalty under the streamlined domestic offshore procedures is not paid on the Maximum balance of the FBAR and FATCA assets as some people incorrectly believe, and it is only based on the highest year-end balance — not every year.
Specifically, there is only one 5% penalty, and it is only paid for one year’s worth of unreported accounts and asset value — for the year tat has the highest 12/31 annual aggregate value.
In other words, a person will aggregate the total value of their accounts and assets on December 31 for each year individually. Then, the person will pick the highest December 31 annual aggregate total, and use that total only as the penalty base.
As stated above, the penalty is limited to 5%.
There is No Penalty on the Tax
Under traditional OVDP, there is a 20% penalty for each year of unpaid tax liability. Under the Streamlined Voluntary Disclosure Program, there is no penalty on the taxes that are due – although interest is due for each year of tax liability.
You Can Still be Audited
Under the streamlined program, a person can still be audited. Unlike traditional OVDP, in which the IRS pretty much states that as long as a person fully discloses and fully cooperates with the IRS, he or she will not be audited — under the streamlined program the IRS can still audit the applicant.
For many individuals, depending on the facts and circumstances of their case, they may still choose to enter traditional OVDP in order to avoid the unknown of whether they will be audited or examined under the streamlined program.
This is important, because the IRS is not required to provide a clear-cut definition/analysis of how a person is to determine whether they are willful or not. Therefore, while a person may believe they are non-willful – the IRS may differ.
Moreover, even if a person is audited for an issue outside the Streamlined Program, they may still be questioned and examined about the Offshore Disclosure (usually up to 6 Years).