- 1 OVDP (Offshore Voluntary Disclosure)
- 2 Important Changes to OVDP
- 3 Preclearance Letter for New OVDP
- 4 Processing the Offshore Disclosure
- 5 Time Period of Disclosure
- 6 Civil Resolution Framework
- 7 Penalties on Taxes Due
- 8 OVDP Penalties for FBAR
- 9 Failure to File International Information Returns
- 10 Other Penalties
- 11 Appeal
- 12 Golding & Golding: About Our International Tax Law Firm
OVDP (Offshore Voluntary Disclosure)
OVDP (Offshore Voluntary Disclosure): The IRS developed the OVDP (Offshore Voluntary Disclosure) back in 2009 when it was first referred to as OVDI. The purpose of the initiative is to help U.S. Taxpayers disclose previously unreported offshore accounts, assets, investments and income. In 2018, the IRS closed OVDP, but updated the traditional voluntary disclosure (VDP) in order to expand the offshore reporting procedures. The IRS also recently issued a memorandum detailing the revised OVDP procedures.
We have summarized the new procedures for you below (and provided some comparisons to the prior version, in order to provide some context to the new procedures.
Revised OVDP Offshore Account Procedures
The IRS has announced a new set of rules involving OVDP and the IRS Voluntary Disclosure practices.
While the general practice of IRS OVDP and Offshore/Voluntary Disclosure is similar to what it was before, there have been some significant changes (some better, some worse).
The IRS will be providing future updates, modifications, and revisions – but for now here are the key takeaways from the memorandum the IRS issued on 11/29 (memo dated 11/20).
Important Changes to OVDP
Here are some of the key changes to OVDP
Previously, OVDP (Offshore Voluntary Disclosure) required that applicants had at least some offshore (aka foreign or international) income in order to apply.
If a person had offshore income, they could also have domestic income as well – but could not apply to OVDP unless they had some offshore income. Otherwise, the IRM 18.104.22.168 disclosure rules would apply.
Now. with the updated voluntary disclosure procedures, IRM 22.214.171.124 will be the only disclosure option for willful applicants (or those not applying for reasonable cause/delinquency proceedings)
Preclearance Letter for New OVDP
The IRS released an updated form 14457 (which was a form previously used in OVDP, but not for preclearance). It is unclear at this time whether the Preclearance will be required or voluntary.
“To accomplish this, CI will require all taxpayers wishing to make a voluntary disclosure to submit a preclearance request on a forthcoming revision of Form 14457. IRM 126.96.36.199 will continue to serve as the basis for determining taxpayer eligibility. Taxpayers must request preclearance from CI via fax or mail.”
Processing the Offshore Disclosure
This aspect of the disclosure is more for aligning the civil and criminal factions of the IRS in order to coordinate effective case processing, than something you really care about. Just know, the IRS is “doing their best” to make case coordination as easy as possible.
Time Period of Disclosure
Under OVDP, the period of disclosure was 8 years.
Typically, under the new procedures, the disclosures will be for 6 years (which is less than the 8 years required under OVDP). BUT, if a person wants to submit for prior years beyond the 6 years, that may be a possibility.
“With the IRS’ review and consent, cooperative taxpayers may be allowed to expand the disclosure period.
Taxpayers may wish to include additional tax years in the disclosure period for various reasons (e.g., correcting tax issues with other governments that require additional tax periods, correcting tax issues before a sale or acquisition of an entity, correcting tax issues relating to unreported taxable gifts in prior tax periods).”
Civil Resolution Framework
The penalty is all you really care about, right?
The penalty situation may be better, or worse, depending on the amount of your tax liability and FBAR penalties vs. your non-filing of informational returns.
Penalties on Taxes Due
With the prior OVDP, there was a 20% annual penalty on the unreported taxes due. For example: You owed $25,000 in tax for Year 1, you paid a $5,000 penalty (plus estimated interest) in addition to the taxes due. Then, for Year 2, if you owed $50,000 in tax, then you had to pay another $10,000 penalty (plus estimated interest), and so on for all eight years.
Now, Taxpayer will pay a 75% penalty on the amount of tax due (for the highest year only). If the taxpayer never filed taxes, a similar framework applies IRC 6651(f).
“Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memorandum, both penalties are referred to as the civil fraud penalty.
In limited circumstances, examiners may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability. iii. Examiners may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.”
*Taxpayer can try to argue for a reduced penalty under IRC 6662 (aka 20%), but the IRS has stated that it is unlikely the reduced penalty would be granted.
OVDP Penalties for FBAR
The IRS issued a 27.5% penalty (or 50% if a bad bank) for the year with the highest unreported foreign account balance. For example, if you had $2,000,000 in unreported balances for the highest year in the compliance period (no bad banks involved), your penalty would be $550,000.
Under the updated procedures, the IRS will refer to the IRM 4.26.16 and 4.26.17. That generally means that the penalty is $100,000 or 50% maximum value of the account, whichever is GREATER.
If there are multiple years of unreported FBARs, then the procedures do generally cap the penalty at 50% for all unreported accounts within the compliance period, BUT the IRS is not limited to that amount.
“After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.
In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year.
Note: Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate
Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. The examiner’s workpapers must support all willful penalty determinations and document the group manager’s approval.
Failure to File International Information Returns
Under prior OVDP rules, informational returns did not receive preferential treatment.
This is a pleasant surprise. The IRS will NOT automatically issue penalties against applicants who failed to file informational returns.
Informational returns typically include:
- Form 5471 (Corporation)
- Form 5472 (Corporation)
- Form 8865 (Partnership)
- Form 3520-A (Trust)
Rather, the IRS Agent will look at the totality of the circumstances. In other words, if no FBAR penalties were issued since there were no foreign accounts per se, then some penalties may be warranted. Conversely, if significant FBAR penalties were issued, then the applicant may get a break on informational return penalties.
“Penalties for the failure to file information returns will not be automatically imposed. Examiner discretion will take into account the application of other penalties (such as civil fraud penalty and willful FBAR penalty) and resolve the examination by agreement.”
Penalties relating to excise taxes, employment taxes, estate and gift tax, etc. will be handled based upon the facts and circumstances with examiners coordinating with appropriate subject matter experts.
Taxpayers retain the right to request an appeal with the Office of Appeals.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.