Summary of OVDP/OVDI Process – Timeline for Submission in 2016-2017
For Individuals, Estates, and Businesses, that do not qualify for the Streamlined Program because they were willful, but want to make an IRS Voluntary Disclosure, they are limited to submitting under OVDP in order to get into U.S. tax compliance for their unreported offshore and foreign accounts, retirement funds, investments, assets, and money.
Why? Because they were willful. They knew there was a reporting requirement, and intentionally sought not to comply with the reporting requirement.
The mere fact that a person believed they wouldn’t get caught does not make a person non-willful. It is important to distinguish between willfulness and non-willfulness; here is a common example we find:
– If a person has $3 million overseas from before they came to the United States and then learned about the reporting requirements after coming to the United States but chose not to report because the money was earned before they came to the United States — that is willful.
– If a person has $3 million overseas from before they came to the United States and continue filing returns in the United States without disclosing the money because they did not know they were supposed to report money they earned before they came to the United States – and have not filed subsequent returns after learning of these facts – chances are they will qualify as non-willful.
If you unfortunately fall into the former (willful) category and not the latter, your best that is to enter Traditional OVDP (Offshore Voluntary Disclosure Program) and not the IRS Streamlined Program. That is because if you enter the streamlined program when you know you were willful, not only will the IRS penalize you heavily, but you may be prosecuted by the IRS/DOJ for International tax fraud or tax evasion.
Once a person determines that they were willful, and are determined to submit to OVDP, the next question is usually what is the process?
What is the OVDP Process?
This is a simplified version (non-comprehensive) of how the OVDP process works. It is important to keep in mind that each person’s case is different and that depending on the specific facts and circumstances of your case, there may be additional nuances to consider.
If you are going to submit to OVDP, we highly recommend that you obtain experienced counsel:
First – Preclearance Letter
Preclearance is the process of being “ approved” by the IRS for submission into the program. It is not actually submitting to the program. The fact that Preclearance is actually a “request” to submit to OVDP is an important nuance to keep in mind,because it may impact your decision later if you determine that you were misinformed about OVDP and want to go Streamlined instead.
The Preclearance submission letter has become more in-depth and substantial from years prior — when the letter did not request much in the way of specific information.
The Preclearance Letter is still relatively brief. It asks that you provide information such as your name, address, Social Security, and telephone number, along with the name of each of your foreign financial institutions, and corresponding account or identification number — and whether there are any entities associated with the accounts.
Next: You Wait for Preclearance Acceptance
Unless there is a criminal case pending by the IRS or other government agency investigating you, obtaining acceptance is not very difficult. The IRS wants to accept you because you are proactively agreeing to make a relatively large payment, as well as report your foreign money.
Usually, you will receive notice of your acceptance letter within 30 days of your Preclearance Letter. The acceptance will usually come by fax, and it is a brief letter that basically states that your Preclearance was approved and now you may submit under the first phase of OVDP.
Note: Can I still Go Streamlined?
The IRS has not at this time specifically stated that after you submit an OVDP Preclearance Letter, that you must continue your OVDP application. In addition, after receiving acceptance (or during the time the acceptance is pending) you may have conducted additional research, and learned that you would be better off going streamlined — since you are non-willful.
To that end, until you submit the first phase of OVDP (see below), the Preclearance is still just a request to see whether you may qualify for OVDP, Therefore until the IRS specifically says you may not submit to OVDP after the acceptance of the Preclearance letter you may still be allowed to do so – but each case is different and you should retain experience offshore disclosure counsel before making any representation to the IRS.
In other words, you should be allowed to still go streamlined if all you did was submit an OVDP Preclearance Letter, but the IRS plays by its own rules and may result in you being rejected from the streamlined program after submitting an OVDP Preclearance (The IRS may believe you know you are willful, but are scared of the penalty amount)
Phase 2: Forms 14457 and 14454
This is the first substantive phase of OVDP. During this phase, the IRS asks you to provide specific information regarding your foreign offshore accounts/money. In recent years, the IRS has intensified reporting in this part of the process, and requires significantly more information than it did in years past (chances are it is only going to get worse in future years)
For example, beyond just the account information and general amount of money you have in these accounts, the IRS will want to know:
- Who helped to open these accounts?
- Did the person meet you in the United States?
- Did the person tell you you could avoid FATCA reporting?
- Was money transferred into, or out of the accounts?
- The name of all the entities/financial institutions you transferred money to and from?
The form 14457 is a more general form asking about general information involving the foreign accounts. On the other hand, the form 14454 is used for each financial account that you have foreign money in, and requires you provide specific information regarding each account.
*If you happen to have your money in a country such as India and have numerous fixed deposits, then you may contact the IRS directly, and speak with an agent who may authorize you to limit the form 14454 to each institution.
Once you have prepared this information, you have 45-days to submit it from the date you receive the Preclearance Letter. Only the form 14457 is actually signed by the client, whereas the form 14454 is an attachment which does not require a client signature at this time.
You Submit and Wait…
After submitting this phase of the OVDP, you have to wait. Depending on how many forms you submitted in support of your application, it could take many months to hear that the IRS has accepted this phase of the submission.
Usually within a few months, you will receive a second facsimile from the IRS acknowledging receipt, accepting the submission, and authorizing you to make the full submission in the next phase of OVDP
The Final Part of the Submission – FBAR & Tax Returns
The final part of the submission is essentially the majority of the submission, and it is usually due within 90-days of receiving the letter. It is important to note that the IRS will generally grant extension requests, especially when the facts show that you are diligently attempting to obtain information or just have not been able to do so yet.
Some of the documentation which you must submit during this phase is as follows:
Original or Amended Returns
Depending on whether you have previously filed tax returns during the compliance, you must submit original or amended returns for the last eight years. It is important to note that there are numerous forms which you may have to file, depending on the type of foreign money/investments you maintain. For example, you may have to file a form 5471 Re: your foreign corporation, you may have to file form 8621 for your passive foreign company, you may have to file form 3520 for receipt of foreign gifts or trust distributions; and you may need to file form 3520-A if you own a foreign trust.
*The failure to have filed these forms timely in years past (aka filing an original return as opposed to an amended return) may lead to other fines and penalties.
The penalty computation is not very difficult, although the final calculation is probably enough to make your head a bit queasy when you come to realize just how much money you owe. If you are willful, then you can at least take solace in the fact that the IRS generally does not prosecute individuals who submit to the program (Read: avoid doing 10 years of hard prison time).
The penalty is generally 27.5%, but may be increased the 50% if you have any money in what is considered a bad bank.
When you submit this phase of OVDP, you will also have to submit proof that you filed your annual FBAR statements for the last eight years. You do this by printing copies of the FBAR, and including it with your submission (or including it on a Disk/Flash Drive).
The IRS now also requests that when you submit this information, that you provide copies of all the bank documents or investment information you have. The IRS did not always request this information up front, but compliance is getting more stringent. You may usually submit these documents either by paper documents or by CD or flash drive; you discuss strategies with your counsel before any submission is made.
*If you have no intention of making the payment penalty but prefer to Opt-Out, you should discuss this with your counsel prior to submitting the FBAR/8938 penalty (and then seeking refund).
**You may also be subject the penalties for failing to file or failing to pay prior year taxes when you did not file returns in prior tax years. It is important to keep in mind that you would be subject to these penalties whether or not you submit to the program, so you should try not to get too upset if the IRS issues additional penalties for failing to file or failing to pay in prior years. Remember, your goal is to avoid even bigger penalties and a possible criminal investigation.
***In addition to these documents, you also have to submit the penalties and taxes due. For each individual tax year, you will submit a separate check to include the taxes, penalties and interest for each year. In addition, you will submit one check to include the entire 27.5% or 50% penalty as well.
Final Phase: Closing Letter
After you submit all this information to the IRS, sometime between six months and 2 to 3 years, you will receive a closing letter — although the IRS may contact you along the way and request additional information and clarifications.
Once your application is accepted, you will receive a closing letter, in which you sign the letter accepting the IRS representations and calculated penalty, and return the letter to the IRS. This will signify the closing the process.
If you do not want to pay the penalty, you may have the opportunity to Opt-Out instead – but before doing so, it is very important to discuss the pros and cons with your counsel. While the IRS may reduce the penalties in certain situations, they may also increase the penalties depending on how your opt-out proceeds.
If you do opt out, the IRS has the opportunity to perform a full-blown audit for you. Depending on the accuracy of your U.S./Domestic Tax Filings, there may be potentially other dangerous landmines to deal with. In these cases, it is probably better off to pay the penalty, close the case, and go on with your life.
Please keep in mind that this is just a general summary of the reporting requirements and is by no means comprehensive. It is intended to inform you, but with said — you cannot rely on this blog Post to make your own submission, and we always recommend that you contact and utilize an experienced offshore disclosure lawyer when making your submission.
While you can also use a CPA, there is no attorney client privilege with the CPA and because OVDP is a quasi-criminal process you will want the attorney-client privilege when moving forward with making affirmative representations to the IRS.
Golding & Golding OVDP FAQ
If you want to learn more about OVDP, we have reproduced our very popular OVDP FAQ from the trenches below:
Golding & Golding – About Us
Golding & Golding is an International Tax Law Firm, and one of the most experienced boutique OVDP (Offshore Voluntary Disclosure Program) and International Tax Law firms around the globe.
We have represented numerous businesses and individuals around the world with international tax law and OVDP submissions, with unreported assets and/or financial accounts exceeding $35,000,000.
The reason why individuals and businesses are getting into trouble with foreign reporting and OVDP is because there are so many aspects to OVDP that an inexperienced attorney, CPA or accountant would not know to look out for, and/or even warn the client about.
Over the last few years, there has been a recent increase in OVDP applications. In addition, our firm has receives numerous referrals from clients who previously sought the help of other tax professionals who steered them in the wrong direction and nearly got them in trouble.
This is a list of the most common questions and/or mistakes made by inexperienced OVDP Attorneys that have negatively impacted our clients:
FAQ – Summary
We have put together a basic summary of key issues applicants should consider when they are considering entering the Offshore Voluntary Disclosure Program. While the IRS has its own set of FAQs, they are focused more on the technicalities of qualifying for the program. Our summary will provide you more of the “ins and outs” of the actual application for individuals who are unsure of which accounts should be reported, and how entering OVDP can impact their legal status — and freedom.
In the end, if you were willful and you have foreign accounts that are unreported (especially if you are in a FATCA Agreement Country) or bank with a FFI (Foreign Financial Institution) that is reporting (and even more so if your money is in a Bad Bank), you should consider retaining an experienced OVDP lawyer and entering the program.
Can My Immigration Status Be Impacted by OVDP?
Yes, depending on your current status and future intended U.S. legal status, an OVDP application may have an impact. Under some circumstances it may hurt your status, and under other circumstances it may actually benefit your status.
Applying for Citizenship
Your immigration status can be impacted for several reasons. As a general answer, your immigration status can be impacted due to the “willfulness” presumed by applying for OVDP. When a person enters OVDP (as opposed to the IRS Streamlined Program), they are acknowledging that they were willful and/or intended to evade tax.
Therefore, if you are a Legal Permanent Resident or other Visa holder, there is the concern that if you want to apply for Legal Permanent Residence Status (“Green Card”) or U.S. Citizenship, when you are completing your N-400 form and it asks whether you have ever committed a crime, you would have to include the tax issues as a crime. Technically, willfully and/or knowingly not reporting your foreign accounts is a form of tax fraud and tax evasion.
Deportation or Removal
If you are applying for OVDP and you are granted admission into the program, chances are you will not be criminally prosecuted and therefore you would not be deported or removed if your Foreign Bank reports you and the information makes it way to the USCIS. Moreover, once your OVDP application is complete and you are approved (and you submit the OVDP closing letter) it may facilitate obtaining citizenship if that is the endgame you are seeking.
*If you are rejected for OVDP, it could lead to Deportation or Removal, but that is a fact-based analysis depending on the specific circumstances of your case.
My Spouse Does not Want to Enter OVDP
It does not take two to tango when it involves OVDP. The IRS is more than willing to accept a one person OVDP application. Even if your prior tax returns were submitted married filing jointly MFJ, it does not change the fact that one spouse (or one former spouse) has the ability to submit to the program, even if the other spouse will not comply.
It is a much more complicated process, but if you happen to be married to a tax fraud then it is probably in your best interest to consider entering the program while making a dual application for Innocent Spouse as opposed to playing the wait-and-see game for two reasons:
- You never know when the IRS is going to strike – and that can have a major impact on your financial status; and
- You never know how sneaky your spouse, and especially a prior spouse may be – and the first person to go to the IRS usually gets the best deal (aka “first to squeal, gets the deal“)
We are Divorced, Not on Speaking terms and filed Tax Returns Jointly
Again, the IRS does not care if you are no longer married and the prior spouse will not cooperate. If you want to go into the IRS and disclose these accounts — then you have every right to do so.
If you were unaware of your spouse’s foreign assets during the marriage, and/or were unaware of the requirement to report the assets, and/or the money was not yours, then there are other options you may consider before making a full OVDP application.
**Before making any affirmative representation to the IRS you should consider speaking with an experienced OVDP Lawyer.
There is No Passive Income Tax in The Country with My Accounts
Unlike nearly every other country on the planet, the United States taxes US citizens, Legal Permanent Residents and Foreign Nationals Subject to U.S. Tax (Substantial Presence Test) on their worldwide income – despite where they are residing when the income is earned. Thus, merely because you may have your money in Singapore, Taiwan, Hong Kong or another country that does not tax interest income, it does not mean that the United States loses its chance to tax your money.
The Unreported Money does not belong to me?
In many countries, it is not uncommon to have children listed on the financial accounts of the parents – even though the children ”really” have no right to the money. The United States understands this concept and therefore created a different program for non-willful individuals, which is called the Streamlined Program. Moreover, since none of the money belongs to you, you should be able to waive any penalty that would otherwise have been levied against you.
My Business Never Reported Foreign Accounts
Under U.S. law, as long as the business accounts meet certain threshold requirements (more than $10,000), you are required to report these accounts on your annual FBAR (Report of Foreign Bank and Financial Account Statements). It does not matter that the accounts are being held under business account name. If you are an owner of the business and have access to the money, then technically you are supposed to report these accounts to the United States.
My Business is Held as a Foreign Holding Corporation
The IRS knows all of your tricks. Whether your money is being held in a foreign corporation, a foreign holding Corporation, a British Virgin Islands company (BVI), a Cayman Islands company, a Maltese company – it does not matter. If the foreign financial institution where you hold the bank accounts has a US address or any information regarding the US owner on the account on file, chances are that under FATCA, the financial institution is going to err on the side of caution and report the account.
The Business is not Under my Name
Depending on how sophisticated your foreign business and tax planning was, you may have foreign corporations that are not under your name, but to which you have signature or other authority over accounts at the bank – which are under the name of the business. Due to the global priority of promoting “financial transparency” in accordance with FATCA and CRS (Common Reporting Standards), there is a significanrtly increased chance that the corporate veil will be lifted and you will be exposed.
I did not report my Foreign Retirement Account
You are required to report your foreign retirement accounts (some restrictions apply, but it is better to not leave anything to chance). When it comes to foreign retirement accounts, it can get a little more tricky because if the retirement account was a US 401(k) then chances are you would receive deferred tax treatment. Thus, if you did not receive any benefits from the foreign retirement account (especially any withdrawals) then you may not have been willful by not reporting the account. This is because it is understandable to think you would not have to report a foreign retirement account until any distributions were made to you.
***You should speak with an experienced OVDP lawyer on this issue.
I received a FATCA Letter, What Should I do?
If you received a FATCA letter from your foreign bank, then you really need to take action. That is because the bank is waiting for you to reply to both confirm compliance with IRS tax law, as well as indicate whether you qualify for a W-9 or W-8 BEN.
If you are a US taxpayer then you will have to complete the W-9, which means you will be subject to IRS tax reporting, And, if the bank or foreign financial institution sends the information to the IRS and they contact you before you have a chance to enter the program, the chances of you being subject the very stiff penalties skyrockets.
Only a Small Amount of money is in a Bad Bank, is All my Money subject to a 50% Penalty
Yes. At the current time, the IRS will not distinguish between the money you have in “Safe Banks” versus the money you have in banks identified as “facilitator banks” aka “Bad Banks.” Therefore, if you have any of your money in one of these bad banks, then before entering OVDP it is important that you determine whether you were actually willful (50% penalty applies) for non-willful (50% penalty does not apply).
Stated another way, just because you have money in a bad bank does not mean your entire offshore balance is subject to the 50% penalty; you must also be willful. Why? Because a person could be non-willful and still have their money in one of these bad banks — and that should not make them subject to a 50% penalty.
I Sold Foreign Property and Transferred Money into a Foreign Bank Account
The money that resulted from the sale will be included in the penalty calculation, if after you sold the home and placed the funds into a foreign bank account — you did not report the account.
Unreported Income from a Foreign Rental Property
If you have unreported foreign rental income from a home or property and you enter OVDP vs. the Streamlined Program, the value of the home is included in the penalty structure – subject to any mortgage that is due and owing on the home. The same rule does not apply to streamlined program applications (e.g., the value of the unreported income generating real estate is not included in the penalty computation).
What if I have an Unreported Foreign Gift (Form 3520)?
If you failed to report a gift from a foreign person, foreign business or trust distribution, it may be subject to a penalty unless you properly disclose it in accordance with amending your tax returns under OVDP. For more information about Foreign Gifts, please Click Here.
What if I Failed to Report a Foreign Trust (Form 3520-A)?
The U.S. Tax Code is stacked against Foreign Trusts. In other words, the failure to properly your foreign trust on a form 3520-A can lead to significant fines and penalties (as the U.S. Government may see it as your attempt to shelter money offshore in a Foreign Trust). To learn more about Foreign Trust Reporting, Please Click Here.
What if I Never Reported my Foreign Business Interest (Form 5471)
In order to avoid the problem of U.S. Taxpayers sheltering money offshore in foreign business (and not reporting the earnings), the IRS takes a hardline against individuals with unreported Foreign Business Interest. For individuals required to file form 5471, the failure to filing the form can lead to penalties upwards of $50,000 per return and the returns are due annually. To learn more about reporting your Interest in a Foreign Business, please Click Here.
I have a PFIC and/or Foreign Mutual Fund that I never Reported (Form 8621)?
The IRS reserves the most complicated and complex tax computation for the infamous “PFIC aka Passive Foreign Investment Company.” Moreover, the IRS essentially deemed that all Foreign Mutual Funds fall under the PFIC umbrella. Therefore, that Foreign Mutual Fund you purchased offshore that is accruing and/or distributing Interest or Dividends may be subject to a monster tax analysis — especially if it qualifies as issuing an “Excess Distribution.” For a comprehensive analysis of PFIC 8621 reporting, please Click Here.
I Opened and Closed Accounts Several Bank Accounts
The most important thing to keep in mind is that the same money is not counted twice. Thus, it is very important to make sure the duplicity of account money issue is properly vetted on the application, so that the IRS is aware and understands the transfers.
I Submitted a Previous Quiet Disclosure, Can I Really Still Enter OVDP?
Yes. There are some people who may have submitted a “Quiet Disclosure” because they were unaware of the whole OVDP process, or though they could just amend the tax return late and file late FBAR statements.
What is GATCA/CRS?
CRS is the Common Reporting Standard, which is otherwise known as GATCA (Global Account Tax Compliance). The OECD has developed a new reporting standard in the shadow of FATCA to facilitate global tax compliance on an international scale. Therefore, chances are no matter how you set up your foreign accounts and in which country you are operating in — at some point or another one of the foreign financial institutions is going to report you.
What does “Under Examination” mean?
Leave it to the IRS to keep one of the most important aspects of qualifying for OVDP a nebulous uncertainty. Under examination generally means that you are either in an audit, or otherwise being questioned about your financial information by the IRS. To that end, depending on when you were contacted, how you were contacted, what information the auditor did or did not ask, the facts and circumstances surrounding your particular case, and many other concepts that can make your head spin – you may still be able to enter the program (depending on what stage of inquiry you received from the IRS).
Can I enter the Streamlined Program First to See if I am Willful/Non-Willful?
No. You only get one chance at this, so it is important that you really evaluate the facts and circumstances around your failure to report, in order to determine whether you were willful or non-willful. While technically, there is no way to know whether you are willful – you just have to know.
By speaking with an experienced OVDP Lawyer you may be able to get a better idea of whether you were willful or non-willful.
Streamlined Program FAQ
The streamlined program is an alternative for individuals who were non-willful. The parameters of the program are different, with less reporting requirements, less financial exposure, and less protection. It is important to keep in mind that the program is relatively new but if you were not willful then you do not require criminal protection and therefore submitting to OVDP could be considered “overkill”
Do I Receive Criminal Protection?
No. The reason is that people enter the streamlined program because they were non-willful. That means that they did not intentionally attempt to avoid paying US tax or reporting the accounts – they simply did not know of the requirement. This is common for individuals who were merely earning passive income on a foreign account in the country they previously worked in or resided in, are new to the United States, or their only foreign accounts are from an inheritance.
What is Non-Willful?
There is no definition of the term non-willful beyond the fact that it is a totality of the circumstances application in which the government will look at all of the factors and determine whether they agree that the person was not willful.
What if my Application is Rejected?
If your application is rejected, you would not be accepted into the program and probably subject to an IRS audit. This also means that you have now disclosed all of your financial information to the IRS (there is no pre-clearance for the streamlined program).
*This is another reason why it is absolutely crucial to have an experienced OVDP/Streamlined Program Lawyer. Even if you are rejected form the program, if you have competent counsel you should be able to fight the issue and work to avoid more serious penalties.
My CPA/Accountant/Attorney told me I was low risk
There is no way to know what your risk level is. By that, we mean that at any time the Internal Revenue Service may get wind of information regarding your case, whether it be from a Foreign Bank, FATCA reporting, Former Spouse, Jealous Lover, Angry Business Partner, etc…Trust us, we have seen it before on many occasions.
We hope this helps give you a better understanding of OVDP and the Streamlined Programs. The following is a summary of the difference between OVDP and the Streamlined Program.
OVDP vs. Streamlined
At Golding & Golding we have successfully handled numerous OVDP (Offshore Voluntary Disclosure Program) and IRS Streamlined Program applications for individuals and businesses around the globe. Click Here to learn about some of our more recent OVDP and Streamlined accomplishments.
In order to assist you better understand the distinction between the two different IRS foreign account disclosure programs, we are providing the following summary for your reference:
If you or your business has unreported or undisclosed foreign accounts, offshore assets, or foreign income then you may be considering whether you should enter the Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program, and what the definition of “Willful” is.
Whether or not you enter Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program will depend on the facts and circumstances of each taxpayer’s situation. Not two tax situations are identical, and the failure to properly submit to the correct program can have serious consequences for the unsuspecting taxpayer.
Why Comply with IRS Foreign Disclosure Laws?
Because if you fail to comply with FATCA (Foreign Account Tax Compliance Act) as well as general IRS Foreign Disclosure Laws, the IRS has the authority to penalize you upwards of 100% of the value of your offshore assets and accounts as well as:
- Collect Taxes for prior tax years
- Collect Interest on outstanding tax liability for prior years
- Penalize you for the failure to report foreign accounts on the tax return (Schedule B and 8938)
- Penalize you for the failure to report foreign gifts (3520)
- Penalize you for the failure to report foreign Trusts (3520 and 3520A)
- Penalize you for the failure to report ownership in Foreign Corporations (5471 and 5472)
- Penalize you for the failure to report ownership in a PFIC (8621)
- General Negligence and Fraud Penalties
- Investigate you for Criminal Tax Fraud & Criminal Tax Evasion if you willfully failed to report your assets & foreign income.
The reason why international tax law compliance has taken center stage is because under the new FATCA (Foreign Account Tax Compliance Act) laws, foreign countries are actively reporting the bank and financial accounts of US citizens and US legal permanent residents. If a foreign country is interested in working with the United States, the foreign country will enter into an “ Intergovernmental Agreement” (IGA) with the United States. These agreements are reciprocity agreements, which means that not only will the foreign country report the information to the IRS, but the IRS will also reciprocate by providing the same information to foreign country tax authorities.
Why Enter either OVDP or the Modified Streamlined Program?
Individuals and businesses who are trying to avoid 100% FBAR penalties and/or Criminal Prosecution may seek to voluntary disclose, pay a penalty (unless abated), and avoid criminal prosecution.
There are the only two approved programs by the Internal Revenue Service that can bring a taxpayer into compliance. Instead of entering the programs, a taxpayer may qualify to directly report under the reasonable cause exception, in which the taxpayer directly submits the forms with a statement explaining why they were not properly filed instead of paying a penalty.
*The IRS is not known to be sympathetic, and if the IRS does not believe you and audits you and/or you are under examination, you are disqualified from entering either the OVDP or Streamlined Program AND the IRS is now informed regarding all of your undisclosed accounts.
**If the taxpayer submits the forms to the IRS without submitting to the IRS Disclosure Programs, it can be considered “silent disclosure” or “quiet disclosure.” If the IRS learns of the Quiet or Silent Disclosure, he IRS will penalize you heavily as well as consider initiating criminal proceedings against you. In this scenario, not only will the IRS seek to take all of your money and assets through the implementation of penalties and levies, but you may be spending the next 2 to 20 years in prison for tax evasion or tax fraud.
What is the Difference between OVDP and the Streamlined Program?
Before making a decision regarding voluntary disclosure, it is important to understand the difference between the two main programs.
OVDP (Offshore Voluntary Disclosure Program Requirements)
In accordance with OVDP filing requirements, The Applicant will then be required to pay the outstanding tax, along with estimated interest, a 20% penalty on the outstanding tax, as well as an “FBAR” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank”) on the highest year’s “annual aggregate total” of unreported accounts (Accounts which were previously reported are not calculated into the penalty amount).
For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.
Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe, and remember that by entering the program the applicant is seeking to avoid CRIMINAL PROSECUTION!
When it comes to the Streamlined Program, the penalty is limited to 5% on the highest “year-end” balance for the last 6-years. The reason is that if the person was non-willful, they should not be overly-penalized if there was an artificial increase in the value of the bank accounts – such as from the sale of a home during the tax year.
(A complete breakdown of OVDP requirements can be found on our OVDP Page, by Clicking Here)
OVDP is Unfair for Non-Willful Taxpayers
Before the implementation of the modified streamlined program, it was difficult for individuals who were non-willful (no specific definition, but generally without intent to deceive or defraud) to become compliant. Why? Because if you are non-willful, you still had to go through the filing procedures as if you were willful, and then opt-out of the penalty structure — and open yourself up for audit.
Not such a big deal, except for the fact that you also had to pay 20% penalty on the outstanding taxes that you owed along with a 27.5% penalty on the highest year’s annual aggregate (unless you successfully “opted out” from the penalty structure – which came with a whole other set of headaches). As you can imagine, for individuals who simply inherited some money overseas, had no international dealings, and had no idea that they were required to report foreign passive income (Interest income), sometimes in a country that does not tax its own citizens on passive income earnings — providing this information to the IRS was a huge burden.
What is the Modified Streamlined Program?
In order to avoid “non-willful” applicants from having to go through the entire OVDP process before opting out, the IRS and Department of the Treasury modified a small program in existence, called the streamlined program, which was very limited. The IRS expanded the program to basically allow anyone who was non-willful to enter the program.
The program reduced the amount of documentation that applicants were required to file to only three (3) years of amended tax returns and six (6) years of FBAR (Foreign Account Reporting Statements). In addition, there was no penalty on the tax amount that was due and no penalty on the value of income generating foreign real estate that was not previously disclosed. Moreover, the 27.5% penalty was reduced down to 5%, or completely waived if the foreign residence requirements are met.
Penalty Waiver: there is a small facet of the modified streamlined program called the Modified Foreign Offshore Program. If a person qualifies for the modified stream of program (which means they acted non willfully) and they can prove they lived overseas for a total of 330 days out of the tax year in any year within the last three years, then they may qualify to have the penalty waived.
The Streamlined Programs sounds great, right? Well it is, unless you are attempting to wrongfully evade the 27.5% penalty by entering the program when you knew you were willful.
What if you are caught trying to sneak into the Streamlined Program?
I cannot stress to you enough the dangers and serious repercussion of submitting to the Streamlined Program if you were willful. If you knowingly enter the streamlined program and it is found that you acted willfully in your failure to disclose and report your overseas and foreign assets and income — you will most likely be investigated and prosecuted by the IRS and DOJ.
The IRS made this fact known in a recent public relations statement. From the IRS’ perspective, if you wrongfully enter this program in order to avoid paying the full penalty amount what you have done is stolen 27.5% or 50% of the penalty amount due to the IRS – and this does not make the IRS very happy.
Even worse, is that you may be subject to criminal prosecution. And, since you have already disclosed all your foreign financial information in your Streamlined Program application, you will be in a tough position to try and defend yourself.
Why is the Modified Streamlined program in Jeopardy?
Just like in everything in life, a few bad apples spoil the whole bunch. The IRS has identified several applicants who were Willful in their failure to report undisclosed foreign tax and bank information, and have been caught trying to sneak into the modified streamlined program in order to pay a reduced penalty – or avoid the penalty altogether This contradicts the IRS’ intention, which was to modify and expand the Streamlined Offshore Disclosure Program to assist taxpayers who otherwise would be overburdened by having to enter the OVDP, and have to undergo a comprehensive opt-out of the penalty structure.
There is No Reason to be Scared of the OVDP or the Streamlined Programs
The goal of this article is not to scare you. Rather, it is to warn you to just be cautious if you are entering one of the Voluntary Offshore Disclosure Programs. There are an inordinate number of inexperienced and unscrupulous attorneys, CPAs and enrolled agents who try to use these programs as a way to scare individuals, and take advantage of the “fear factor.”
If You are going to enter a Foreign Disclosure Program, use an Attorney
While CPAs and enrolled agents (who are not also attorneys) may charge less than an attorney, it is important to note that you do not have any attorney-client privilege with CPAs and enrolled agents. That means that if the IRS rejects your streamlined program and the IRS wants to speak with your representative, unless your representative is an attorney, there is no attorney-client confidentiality privilege between a CPA and Taxpayer when a Criminal Matter is at issue.