Important news for U.S. taxpayers with foreign accounts and assets: The IRS has modified its current Offshore Voluntary Disclosure Program (OVDP) to enable more taxpayers to participate in the streamlined procedures, but has increased the penalties and requirements associated with the OVDP itself.
The OVDP has seen great success in eliciting voluntary disclosures from U.S. taxpayers who have unreported offshore assets. The draw of the OVDP is the promise of avoiding criminal prosecution and the possibility of paying lower penalties than if you were found out by the IRS. With the U.S.’s increased enforcement of foreign account and asset reporting, most notably through FBAR enforcement and the enactment of FATCA, taxpayers are understandably fearful that the U.S. will find out about their unreported offshore accounts and assets. The OVDP allows these people to come forward and rewards those who do so with lower penalties and the peace of mind that closure brings.
The IRS also allows for a streamlined procedures for certain eligible taxpayers. Previously, the streamlined procedures were limited to U.S. taxpayers who lived abroad and presented a low compliance risk. To be considered a low compliance risk and eligible for the program, the taxpayer needed to owe less than $1,500 of unpaid tax per year.
Thankfully, the IRS has expanded the streamlined procedures to include U.S. residents and has done away with this $1,500 cap. Now, a taxpayer must just show that the failure to file was not willful. If a U.S. resident is approved for the streamlined procedures, she will be assessed a miscellaneous offshore penalty on top of the tax owed. This penalty is 5% of the foreign financial assets that gave rise to the tax compliance issue. If a U.S. taxpayer residing abroad is approved, she will be assessed no miscellaneous offshore penalty at all. This is in stark contrast to the penalties one would face in the OVDP that is not streamlined.
The regular OVDP’s changes are not so clearly beneficial, and actually look to be quite detrimental to certain taxpayers. The OVDP now requires payment of the offshore penalty at the time of application, and this penalty, while typically 27.5% of the highest aggregate value of OVDP assets during the period covered by the voluntary disclosure, now increases to 50% if it is public knowledge that the taxpayer’s financial instituion is under investigation by the IRS or DOJ. In other words, it’s not really voluntary disclosure if you were motivated to disclose because your bank was being investigated and your account was likely to be found out anyway.