Offshore Voluntary Disclosure Program
Welcome to our IRS Offshore Voluntary Disclosure Initiative (OVDI) overview page. This program called IRS Offshore Voluntary Disclosure Program allows people with undisclosed foreign bank accounts to volunteer this information to the IRS and receive tax amnesty in return. Reporting this information to the IRS voluntarily usually prevents any criminal charges when the unpaid taxes are finally paid, allowing you to avoid severe financial and criminal penalties. There are often many questions involved with the OVDI program, so we compiled a list of the most frequently asked questions about the OVDI program and listed them below. As always, the experienced staff at RJS LAW is available to help you come into compliance with your offshore accounts. Feel free to call us at 619-595-1655 to set up a free consultation specific to the IRS Offshore Voluntary Disclosure Program.
Why should I make a voluntary disclosure?
Taxpayers or entities who have undisclosed foreign bank accounts should make a voluntary disclosure because the IRS Offshore Voluntary Disclosure Program enables them to come in to compliance with all American tax laws and avoid substantial penalties or criminal prosecution. IRS Offshore Voluntary Disclosure Program also gives you the opportunity to calculate the total costs of resolving any offshore tax problems.
What are some of the civil penalties that might apply if I don’t come in under the OVPD and the IRS examines me? How do they work?
The penalties you might face depend on your particular circumstances.
– If you have willfully failed to file your Foreign Bank and Financial Accounts (FBAR), you could face a civil penalty as high as $100,000 or 50% of the total balance of your foreign account, per violation.
– The penalty for failing to file Form 8938, Statement of Specified Foreign Financial Assets, reporting your interest in certain foreign financial assets, including financial accounts, carries a $10,000 penalty for failing to file each of these returns with an additional $10,000 for each month you continue failing to file.
– If you have failed to file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, you face a penalty of either $10,000 or 35% of the gross reportable amount, whichever is higher. In the case of gifts, the penalty is five percent of the gift, per month, up to a maximum of 25% of the gift.
– If you fail to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner, each unfiled return carries a penalty of either $10,000 or 5% of the gross value of the trust assets determined to be owned by the U.S. person, whichever is greater.
– If you have failed to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, you face a penalty of $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after you were notified, up to a maximum of $50,000 per return.
– Failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or Foreign Corporation Engaged in a U.S. Trade or Business carries a penalty of $10,000, with an additional $10,000 penalty for every month you fail to file beginning 90 days after you were notified.
– Failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation carries a penalty of 10% of the value of the property transferred up to a maximum of $100,000 per return with no limit if the failure to report was intentional.
– The penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships includes $10,000 for failing to file each return, with an additional $10,000 penalty for every month you fail to file beginning 90 days after you were notified, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, up to $100,000.
– Fraud penalties are imposed by the IRS where an underpayment of tax or a failure to file a tax return is due to fraud, and this penalty will essentially amount to 75% of the unpaid taxes.
– A penalty for failing to file a tax return carries a 5% penalty on the balance due, with an additional 5% for each month or fraction thereof, up to 25%.
– A penalty for failing to pay the amount of tax shown on your return carries a penalty of .5% of the amount shown on the return, plus an additional .5% for each month or fraction thereof, not to exceed 25%.
-An accuracy-related penalty on underpayments leaves taxpayers subject to a 20% or 40% penalty.
What are some of the criminal charges I might face if I don’t come in under OVDP and the IRS examines me?
Possible criminal charges include tax evasion, filing a false return, and failure to file an income tax return. Willful failure to file an FBAR and willfully falsifying an FBAR are both violations that are subject to criminal penalties as well. If you are convicted of tax evasion, you are subject to a prison term of up to 5 years and a fine of up to $250,000. A taxpayer convicted of filing false returns is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a taxpayer to a prison term of up to 10 years and criminal penalties of up to $500,000.
What are the requirements of the Offshore Voluntary Disclosure Program?
There are many requirements in order to be a part of the OVDP, most are listed below.
– You must provide copies of filed original federal income tax returns for the years covered by the voluntary disclosure.
– You must provide complete and accurate amended federal income tax returns for all years covered by the voluntary disclosure, including any applicable schedules which detail the amount and type of unreported income from your account or entity.
– You must file completely accurate or amended offshore-related information returns and an FBAR form for the tax years covered in the voluntary disclosure.
– You must cooperate in the voluntary disclosure process, including providing all pertinent documentation, including information on offshore financial accounts, and signing agreements to extend the period of time for assessing Title 26 liabilities and FBAR penalties.
– You must pay 20% in accuracy-related penalties on the full amount of the underpayments of taxes on all your offshore accounts for all tax years.
– If applicable, you must pay failure to file penalties or failure to pay penalties.
– In lieu of all other penalties that may apply to your undisclosed foreign assets and entities, you may be faced with a 27.5% (or 12.5% in some cases) penalty on the highest aggregate balance in your foreign bank accounts or value of foreign assets during the process covered by the voluntary disclosure.
– You must submit a full payment of any Title 26 tax liabilities which are included in the program, including failure to file or failure to pay penalties, if applicable. You may also be able to make good faith arrangements with the IRS to pay the tax, interest, and penalties in full.
– You must execute a Closing Agreement on Final Determination Covering Specific Matters, Form 906.
– Agree to cooperate with the IRS by providing them with current, factual information about your financial institutions located offshore, offshore service providers, and other facilitators, should any of this information be requested.
How does the Offshore Penalty framework work
– The value of your foreign accounts and assets are aggregated for each year, and the penalty is 27.5% of your highest year’s aggregate balance during the period covered in the voluntary disclosure program. If you have multiple offshore accounts, one penalty of 27.5% is assessed on the highest value.
What years are included in the OVDP disclosure period?
– If you are considered a calendar year taxpayer, the voluntary disclosure period is the most recent eight years, but this does not include current years where there has not yet been non-compliance. Fiscal year taxpayers must include the most recent eight fiscal years. All disclosures must be made before the filing deadline for that tax year (April 15th or later, if on extension). For all disclosures made in successive years, the additional years for which the due date has passed must be included, but the corresponding number of years at the beginning of the period will be excluded so the period covers only eight years.
What if the taxpayer has already filed amended returns reporting the additional unreported offshore income, without making a voluntary disclosure (i.e. quiet disclosure)?
– A quiet disclosure is when a taxpayer amends their returns and pays any related taxes and interest for previously unreported offshore income, without the IRS being notified. If you have made a quiet disclosure, you are still eligible for this program and need to submit an application, copies of your original tax return(s), and copies of the amended return(s) to the IRS’s Voluntary Disclosure Coordinator. Taxpayers who have made quiet disclosures must be aware of the risk of being examined and possibly criminally prosecuted for all applicable years.
How do I make an offshore voluntary disclosure and where should I submit my offshore voluntary disclosure to determine whether I am preliminarily accepted under this program?
– Either you or your representative should mail your Offshore Voluntary Disclosure Letter and attachment, both found on the IRS website to:
Internal Revenue Service
Voluntary Disclosure Coordinator
1-D04-100
2970 Market Street
Philadelphia, PA 19104
After you have mailed your paperwork, the Criminal Investigation Department (CID) of the IRS will review your documents and notify you by mail or facsimile whether your disclosure has been preliminarily accepted or declined. You will likely be notified within 45 days of the CID has receiving your documents. Preliminary acceptance into the IRS Offshore Voluntary Disclosure Program OVDP is conditional upon the information you provided being complete, accurate, and timely. Taxpayers who happen to be making both an offshore voluntary disclosure and a domestic voluntary disclosure should indicate so on their OVDP paperwork.
What should I do if my spouse also wishes to make a voluntary disclosure under OVDP?
– In this situation, you are able to make either a joint disclosure or you can do so separately. If you choose to disclose jointly, both spouses must include all required information and documentation for each spouse and indicate clearly that you intent to disclose jointly. If you decide to disclose separately, you should complete and submit all required information and documentation separately.
When determining the highest amount in each undisclosed foreign account for each year or the highest asset balance of all undisclosed foreign entities for each year, what exchange rate should be used?
– To convert foreign exchange currency, use the foreign currency exchange rate from the end of the year, regardless of when the highest balance was reached. If the country where your account(s) are located uses multiple exchange rates, please use whichever rate would apply if you were to exchange the currency into U.S. dollars at the end of that calendar year. It’s also important to note that each offshore account should be valued separately.
What kinds of assets does the 27.5 percent offshore penalty apply to?
– This penalty will be assessed on all of a taxpayer’s offshore holdings which are in any way not compliant with IRS laws, regardless of the form of the character or taxpayer’s ownership of said asset. This includes financial accounts holding cash, securities or other custodial assets; tangible assets like art or real estate (both commercial and residential), intangible assets such as patents or stock or other interests in either a U.S. or foreign company. If these assets are indirectly held by the taxpayer through their entity, the penalty might be applied to the interest in the entity or underlying assets.
If multiple taxpayers are co-owners of an offshore account, who will be liable for the offshore penalty?
– In this circumstance, each taxpayer that makes a voluntary disclosure will be liable for the penalty on their percentage of the highest aggregate balance on the account. The tax burden will be placed on whichever taxpayer claims ownership of less than 100% of the account in order to show the extent of their ownership of the account. This taxpayer’s voluntary disclosure is effective as to their liability only and does not cover any co-owners on the account, and the IRS may examine any co-owners who do not make a voluntary disclosure.
If a taxpayer is uncertain about whether he is required to file an FBAR with respect to a particular foreign account, how can the taxpayer get help with this question?
– You can obtain FBAR filing help by telephone (toll free:1-866-270-0733) from 8 a.m. to 4:30 p.m. Eastern time, or by emailing [email protected]. Do not call the IRS OVDP IRS Offshore Voluntary Disclosure Program Hotline with questions regarding your FBAR filing requirements, this hotline only offers questions about how to make a voluntary disclosure and what penalties may apply.
If, after making a voluntary disclosure, a taxpayer disagrees with the application of the offshore penalty, what can the taxpayer do?
– In this case, the disagreeing taxpayer must indicate, in writing, their decision to withdraw from (or opt out of) the program, and this decision is irrevocable. If you choose to opt out, this means your case will be handled under the IRS’s standard audit process. Sometimes this is a preferred approach, as in some cases when the results under the voluntary disclosure program appear to be too severe when the facts of the case are taken into consideration. There will always be cases where this is less clear, and in these circumstances the IRS will do everything in its power to be sure the integrity of the voluntary disclosure program remains intact. Opting out will be the best option for a small minority of cases, and if there are more issues uncovered under the full scope examination of the case, the taxpayer may be subject to review by the Criminal Investigation Department (CID). There is a specific protocol in place for those taxpayers who wish to opt out, which can be found in the Opt Out and Removal Guide. It is also very important to note that even if you have opted out of the program, you still are within the Criminal Investigation’s Voluntary Disclosure Practice, and must cooperate with any examiner and their request for documentation or penalties applicable.
Under what circumstances would a taxpayer making a voluntary disclosure under this initiative qualify for a reduced 5 percent offshore penalty?
– If a taxpayer falls into one of the three categories described below, they will qualify for a 5% offshore penalty percentage:
– If you meet all of the following conditions: a) you did not open or did not cause the account to be opened (for instance, if the bank required a new account be opened instead of allowing a change of ownership of an existing account); b) their contact with the account has been infrequent and minimal, for reasons like checking account balance or updating accountholder information; c) have not withdrawn over $1,000 from the account, other than a withdrawal to close the account; d) can establish that any applicable taxes due to the U.S. have been paid on any funds which were deposited to the account. For funds deposited before January 1, 1991, if no information is available on whether or not taxes were properly paid, the IRS will assume they were.
– Taxpayers who are foreign residents and were not aware that they also held U.S. citizenship.
– Taxpayers who are foreign residents and meet all of the following conditions: a) they reside in a foreign country; b) they have continued to make a good faith, showing they have complied with all tax reporting and payments which are required in their country of residence; c) the taxpayer has less than $10,000 of U.S. source income per year. For these specific taxpayers, the offshore penalty will NOT be applied to non-financial assets such as property or artworks which were purchased with funds that were properly taxed in either the U.S. or the foreign country.
I have a retirement or pension plan in a foreign country (other than a plan described in previous FAQ) that I do not believe should be included in the offshore penalty base. What should I do?
– If this pertains to you, you should contact the OVDI hotline at (267) 941-0020.