The OVDI program allows taxpayers to receive tax amnesty with the IRS.
If you happen to have money in a foreign bank account, you must disclose the account and its balance to the IRS on your tax return each year. If you do not, you face certain penalties and possibly even criminal prosecution. The IRS has reinstated the Offshore Voluntary Disclosure Initiative (OVDI), a program which provides taxpayers an umbrella of amnesty to declare their taxes and bring them back into compliance with the United States tax laws.
What is OVDI?
OVDI is a program the IRS had offered in 2009 and 2011, and because of the strong interest, they began offering it again in 2012 with an undisclosed end date, leaving the program open-ended for the first time. This initiative 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. Participation in the OVDI program will result in a Foreign Bank Account Reporting (FBAR) penalty, but this penalty will be much lower than if you were to not report your foreign income and the IRS found out about your account(s) on their own. You must report your foreign accounts on both your tax return and on a Report of Foreign Bank and Financial Account each year.
Why should I make a Voluntary Disclosure?
Taxpayers should take advantage of OVDI program because it allows you to come into compliance with all applicable tax laws and avoid larger tax penalties and criminal prosecution. This also gives you the opportunity to assess what your total cost may be to resolve all offshore tax issues. If you decide not to participate in the program and the IRS catches you, they will penalize you heavily. In this case, a few of the penalties can include fraud and foreign information return penalties, and can amount to $100,000 or more per year. Also, the IRS is able to assess a penalty of up to 50% of the balance of your foreign account for each year you failed to report it.
In the case of willful violations, a penalty of 50% of your foreign account balances will be exercised, per year. This means if you had $2 million in an account abroad and did not disclose it for 4 years, you could now be facing a penalty of $4 million, double what you had offshore in the first place.
For non-willful violations, the maximum penalty is $10,000 per unreported account, each year you failed to report it. The revenue agent who is handling your matter has full discretion as to how much they decide to charge in penalties.
The penalty amounts in the OVDI program are fixed, but there are different levels, with the maximum being 27.5% of the highest balance in your account when you failed to report it. There are no exemptions and the revenue agent has no discretion with regards to penalties.
No amount of money offshore is too little for the IRS and no tax amnesty case is too small. If you happen to have offshore funds, it would be very wise to obtain a tax attorney.
When to Opt Out
If you decide to opt out of the OVDI tax amnesty program, this decision cannot be reversed and can be a huge gamble. You should only choose to do this if you are sure this option will produce a better result than staying in the program. If you are already enrolled in the OVDP, you can opt out at any time before you sign the final agreement with the IRS. It’s also worth mentioning that opting out of this program leaves you with no protection from criminal prosecution.
If you opt out of the program, the IRS will generally not tell you exactly how much you will be penalized, but you may be able to get a general idea of what you might be facing. If you are thinking of choosing this option, ensure you are properly educated on the specifics and consider obtaining the advice of a tax attorney.
If you are interested in joining the OVDI program, want to explore what your options are, or want advice on opting out, you should contact a qualified tax attorney that could help guide you through the process. The RJS LAW team has helped clients through this process numerous times, and we would be happy to help you, too! We always provide a free consultation with our expert attorneys, all of which have stellar reputations. We are steadfast advocates on behalf of our clients and will give you the attention you deserve. Contact or call RJS LAW at (619) 595-1655 to schedule your consultation today.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.