What You Can Learn from Six OVDP “Seasons”
Welcome to the sixth “season” of the Offshore Voluntary Disclosure Program (OVDP) for those who have not disclosed their foreign assets, a real-life procedural drama brought to you by the IRS. Launched in 2009, it went by a different title (Offshore Voluntary Disclosure Initiative) in 2010, took a year off in 2011, and has been running continuously in the current format since 2012. The OVDP is not a TV show, of course, and the compliance issues at stake are far from entertaining. On the other hand, one of the best ways to think about the OVDP in 2016 – especially in terms of evaluating whether it makes sense for you right now – is to take a look at its backstory. That’s how you can put it in context.
How You Can Put the 2016 OVDP in Context
One way you can think about the OVDP is that it gets a new “theme” about once a year. Here’s what I would say those themes are.
2009 – 2010: Testing the Concept
The 2009 OVDP and 2010 OVDI were designed to be limited time offers. If a taxpayer had undeclared foreign financial assets, he or she should have come clean under these programs to receive lower penalties, or they risked higher penalties if they were caught (even if they disclosed the assets willingly) in the future after the time window had expired. Like a TV show, the 2009 and 2010 versions of the OVDP were something like a pilot for the IRS. They were gauging responses and seeing what was working and what wasn’t.
2012: Setting the Scene for an Extended Run
2012 was the first year of the OVDP format we have today. It was designed to last longer, and regulators can change rules and procedures on the fly without having to go back to the drawing board each time. Remember that the 2009 and 2010 versions had specific time windows. In order to extend, it was necessary to get getting legislative approval all over again.
2014: The SFOP and SDOP
The OVDP itself carries a 30% penalty on unreported foreign assets. In 2014, the IRS introduced the Streamlined Foreign Offshore Procedures (SFOP) and the Streamlined Domestic Offshore Procedures (SDOP), which carry only a 5% penalty if you live in the US (that’s the “Domestic” in SDOP) or even 0% if you live overseas (that’s the “Foreign” in SFOP). The condition is that your asset disclosure violations needed to have been “non-willful,” that is, unintentional and due to ignorance or confusion about the rules, but in good faith nonetheless.
The Foreign Account Tax Compliance Act (FATCA), which became law in late 2014, is not technically associated with the OVDP. In 2015, however, as it started reaching out and touching US citizens around the world (mainly with bank account closures and other financial hassles), it caused a spike in interest in the OVDP, SFOP and SDOP. Many Americans had not known about the requirement to disclose foreign assets, and FATCA put it on their radar.
The 2016 OVDP is About the IRS’ Helping Taxpayers Become Compliant
Maybe I’m going a little too far in suggesting that the IRS is helping people. I will say, though, that they are making efforts to treat taxpayers fairly and taking pragmatic steps to get the job done. Getting the job done, of course, may involve assessing penalties, but at the end of the day, it means getting OVDP, SFOP and SDOP filers compliant. Let me explain. In 2016, the IRS updated the FAQs for both the SFOP and SDOP. Just to summarize, the examiners at the IRS are
- Paying attention to information from applicants and
- Asking for more information from applicants
Applicants appear to be having trouble convincing spouses and (especially, we imagine) ex-spouses to sign SFOP and SDOP documentation. The IRS updated one Frequently Asked Question to allow an applicant to file without the spouse’s signature when the filing will result in a higher tax bill. If the tax bill will be lower, both signatures are still needed. The IRS has also requested that applicants provide more information, or “the complete story” as it is described in the FAQ, when drafting their narrative statements of facts that should accompany their application paperwork. Both FAQ updates demonstrate that the IRS is paying attention to how the OVDP is progressing and making adjustments to make it run more efficiently for both sides.
Choosing the Right Foreign Asset Disclosure Route Will Save You Time and Money in 2016
If you think you may have not have met foreign asset disclosure obligations in 2016, we recommend that you start by speaking to a professional who can tell you for certain. To get you started thinking about it though, you have essentially six disclosure options moving forward. To help clarify what each option entails, we’ll title each option like a TV episode.
SFOP: The One Where Honesty Pays Off
If you live overseas and disclose your non-US assets under the SFOP, you will owe no penalty at all.
SDOP: The One Where the Truth Hurts a Little
If you live in the US and disclose your non-US assets under the SDOP, you will owe a 5% penalty on them. Note: if you entered the current format of the OVDP in 2012 or 2013, before the SFOP / SDOP came into effect, and have not signed a closing agreement, you can apply for transitional treatment. The penalty is 5%, the same as in the SDOP.
OVDP: The One Where the Truth Hurts a Lot
Regardless of where you live, if you disclose your non-US assets under the OVDP, you will owe a 30% penalty on them.
Quiet Disclosure: The One Where Nobody is Supposed to Notice
This option is the regulatory equivalent of finishing a term paper late and putting it into the middle of the stack waiting to be graded on the teacher’s desk. In this case the term paper is an IRS form and the teacher is the IRS. Highly risky? You bet. You may not get caught, but your chances look worse than ever, and we really can’t say what the penalty will be.
Qualified Quiet Disclosure: The One with Alternate Reality
This option makes use of the fact the IRS has an “alternate reality” of offshore disclosure practices that have been running since long before 2009. In this alternate reality, examiners have the discretion to (and have been known to) skip imposing penalties if a violator came forward in good faith. The individual examiner’s discretion and potential penalties are not formalized in procedures as in the OVDP, SDOP or SFOP though. In this scenario, a violator may enter the OVDP and then, before the process is complete, withdraw from it citing “qualified,” that is, valid or credible reasons. The violator’s rationale would be that the IRS examiner outside the OVDP may choose to skip penalties, while in the OVDP the penalties are locked in as part of the formal program. This option is for gamblers, especially gamblers with a lot of money at stake. Other violators with less money at stake would probably prefer to stay in the OVDP, pay the penalty, and have peace of mind.
Do Nothing: The One with the Time Bomb
Even if you ignore your foreign disclosure requirements, they probably won’t ignore you. Not for much longer, anyway, thanks to FATCA. Don’t wait for the explosion. Acting now may cause financial pain, but waiting will likely cause even more eventually.
For Peace of Mind, Don’t Wait. Make the Most of the 2016 OVDP Today
As should be clear from the above outline, deciding on a foreign asset disclosure in 2016 takes time, knowledge and maybe even a little courage. Seeking professional advice is highly recommended.