OVDI: Tax Amnesty Within the IRS
For Americans with more than $10,000 in one or more undisclosed foreign bank accounts, entering the IRS OVDI (OVDP) program may be the best way to come into compliance, and avoid the possibility of criminal tax fraud charges, while minimizing exposure to penalties. Otherwise, taxpayers caught with these undisclosed foreign accounts will face certain penalties and possibly even felony tax evasion charges. OVDI (or OVDP), short for the Offshore Voluntary Disclosure Initiative (or Program), is a procedure by which American taxpayers with unreported foreign bank accounts are given an opportunity to come clean and report their accounts, in exchange for reduced penalties and virtually eliminating the possibility of criminal tax fraud charges. Here’s some guidance from our Michigan tax lawyer, Venar R. Ayar on the OVDI program.
IMPORTANT UPDATE: Effective July 1, 2014, major changes took effect to the OVDI program. Read our articles about the changes:
What is OVDI (OVDP)?
The Offshore Voluntary Disclosure Initiative is the program through which people holding undisclosed foreign bank accounts volunteer that information to the IRS- a tax amnesty program. Doing so usually prevents criminal charges when unpaid taxes are paid, avoiding heavy financial penalties. The reason for this is to bring taxpayers that have used undisclosed offshore bank accounts and foreign entities to avoid or evade tax into compliance with U.S. tax laws. When taxes are paid, the IRS has no further reason to come after you.
The OVDI program will result in FBAR (Foreign Bank Account Reporting) penalties, which are consequences for failing to report a foreign bank account. Along with reporting accounts on your tax return, they must also be reported each year on a Report of Foreign Bank and Financial Account.
Why Should I Enter OVDI?
Taxpayers should enter the OVDI program and make a disclosure because it enables them to become compliant and avoid large penalties in order to eliminate the risk of criminal prosecution. Also, doing so gives the opportunity to calculate roughly the total cost of resolving all offshore tax issues.
If you do not enter OVDI by submitting a voluntary disclosure, there is a higher chance that the IRS will catch you, and assess hefty FBAR penalties. Penalties include fraud and foreign information return penalties as well. If the IRS does catch you, there is a penalty of up to 50% of the balance of the account for each year that you fail to report it. For as many years as you do not report the balance through the OVDI program, the penalty fees will multiply.
When it comes to willful violations, for example: if you have $1 million overseas that you failed to disclose for 6 years in a row, then maximum penalty outside of the OVDI (OVDP) program is $3 million… triple how much you hid in the first place! This is only in addition to any penalties associated with filing to report all of your income and pay the full tax amount.
For non-willful violations, the maximum penalty is $10,000 per unreported account– per year that you failed to report. The revenue agent assigned to the case has much discretion as to how much they can decide to charge in penalties, so it could go anywhere between 0 and the maximum penalty.
For those taxpayers accepted into the OVDI / OVDP tax amnesty program, the penalty amounts are set in stone. There are different levels, the maximum being 27.5% (50% for some taxpayers, as of July 1, 2014) of the highest balance that was in your account when you failed to report them. There are no exceptions, and the agent who is in charge of your case has no discretion in how much to penalize you. Whatever the statute says your penalties should be, that’s exactly what they are.
The IRS stays active in searching for such people with undisclosed accounts. No FBAR case is too small for the IRS. If you have accounts overseas, legal council is absolutely necessary to assist you in the proper steps to take.
For more information on the IRS OVDI, click here.
When To Opt Out of OVDI
If you are a U.S. citizen living abroad who has entered into the OVDI tax amnesty program, you should consider opting out and entering into the IRS streamlined OVDP program. The IRS has modified its filing procedure which specifically targets U.S. citizens living abroad to come into compliance with their U.S. tax obligations. In order to qualify for the new streamlined procedure, the taxpayer must not have filed U.S. tax returns for the 2009, 2010 and 2011 tax years.
UPDATE: Effective July 1, 2014, the Streamlined OVDI / OVDP program was changed and now includes two sub-programs:
Opting out of the OVDI tax amnesty program cannot be reversed. This is a final decision, which is a huge gamble. Taxpayers should only do so when it is clear that this alternative will produce a better result, considering the facts. If you are currently participating in the OVDI program, you may opt out ant time before signing the final closing agreement with the IRS. The IRS will deliberate with the agent assigned to a submission made under OVDP, and will be in a position to measure the strength of the taxpayer’s reasonable cause argument—influencing the taxpayer’s decision to stay in or opt out of OVDI. Keep in mind that opting out will result in no protection from the risk of criminal prosecution. This process could produce beneficial results for those already in these programs, although this is not the case for all taxpayers.
If you plan to opt-out of OVDI / OVDP, it is important to try for your case and how much penalties the revenue agent feel your case deserves. Generally, they won’t give you a definite answer as to whether or not they will assess penalties if you opt-out, and how much they will be, but you can often get a good idea as to what the consequences will likely be if you decide to opt-out. To ensure the right decision, it’s best to have as much information as possible on the tax amnesty program, along with the advice of a trained professional.
For a more in-depth discussion on opting out and its consequences, read our article: Where Did all the Quiet Disclosures Go? Opting-Out of OVDI
If you are in the OVDI program and are considering opting out, or are not in the program and want to weigh your options regarding your foreign bank accounts, you should contact a qualified tax attorney that could help guide you through the process. Ayar Law will give its best efforts to work your case to aim the benefits of the Offshore Voluntary Disclosure Program with the lowest liability possible. Feel free to give us a call, or send us e-mail.