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Willful on Non-Willful? What Happens Next in the 2015 SFCP or OVDP

The Difference Between Streamlined and full OVDP

sign showing innocent one way and guilty another
Think for a second about the Dakar Rally, the world famous off-road endurance race. Challenging terrain, customized vehicles, and long distances are all part of the show. It is obvious to any spectator that it is not an easy race. Drivers need years of experience to compete and maybe even a little luck to win.

The IRS’ Offshore Voluntary Disclosure Program (OVDP) is the tax disclosure version of the Dakar Rally. It is a harsh obstacle course of financial penalties, rules, and restrictions. And just like the Dakar Rally, the route can change from year to year. For example, in 2014 the Streamlined Filing Compliance Procedures (SFCP) “shortcut” was introduced.

If you’ve read some of the articles on this site you are familiar with the basic workings of the OVDP in 2015 and whether you may need to worry about it in the first place.

So what happens if you do believe you need to worry about it? What happens next? There are three steps we recommend.

  1. Talk to an attorney with SFCP and OVDP expertise.

    He or she will confirm whether you may, in fact, benefit from either and if doing so is a wise choice for your particular situation. It will also be necessary to gather background information for the next step. Remember that the Dakar Rally is not for amateurs and neither is the OVDP. The IRS has conveniently prepared a Power of Attorney document specifically for this purpose.

  1. Decide on whether to take the “streamlined” SFCP or “full” OVDP routes.

    The key question to ask here is:

            “Did I know, at the time, that what I was doing (or not doing) was against the rules?

Or, in other words, were you a willful or non-willful violator. Non-willful violators may enroll in the SFCP, willful violators can choose only the OVDP. Here is a quick summary of both options:

What you get from the SFCP. A relatively short process that involves calculating outstanding liabilities, bringing disclosures up to date, and paying a 5% penalty if you are resident in the US. If you are resident overseas, you pay a 0% penalty.

Note 1: You need to make a narrative statement that your violation was non-willful i.e. write a “story” describing the circumstances surrounding why you accidentally wound up in violation.

Note 2: If the IRS reviews your case in the future and finds discrepancies or other problems, you may be subject to investigation or prosecution. You don’t get a settlement letter after using the SFCP.

What you get from the OVDP. A relatively longer process both to be accepted into the program and also to complete the program, with penalties assessed at 27.5% or even 50%.

Note: When the process is finished and you have settled the bill, however, the matter is considered officially settled. You get a settlement letter after using the OVDP.

  1. Check whether the SFCP or OVDP will take you.

    Being non-willful is the #1 requirement for entering the SFCP and if you are not non-willful, i.e. you are willful, then you must choose the OVDP. Or bury your head in the sand and not disclose at all.

There are, however, a secondary set of requirements that you need to fulfill before taking either route. Here are the official guidelines on the SFCP and OVDP, and below we will outline some of the key issues as of 2015. (Please note that they are subject to change.)

For the SFCP, you need to:

  • Have “no priors” with the IRS. In other words, you have not crossed their radar for another matter in the past.
  • Have settled any outstanding tax or penalty payments for previous years.
  • Have a Taxpayer Identification Number. That would mean a Social Security Number for US citizens.

 For the OVDP, you:

  • May choose to seek pre-clearance to enter the OVDP. To do that, you need to summarize everything about the situation (names, places, registration numbers, in no specific format) and fax the document to the IRS Criminal Investigation Lead Development Center in Philadelphia.

(This step is designed as a choice to be a way to save time on going through OVDP procedures if it will not ultimately make sense to do so. If you are already under investigation because your foreign bank reported you under FATCA, for example, the IRS will proceed with that investigation rather than allow you to go into the OVDP.)

After you get pre-clearance you need to be “timely” (i.e. do it within 45 days) in moving to the next step. Or you can choose not to obtain pre-clearance at all and skip to the next step directly.

  • Have to seek preliminary acceptance by mailing forms 14457 and 14454, aka the Offshore Voluntary Disclosure Letter and its Attachment, to the IRS Voluntary Disclosure Coordinator also in Philadelphia. Here you are making similar disclosures as in the previous, optional step except now in the specific formats of these forms.

The IRS will endeavor to confirm preliminary acceptance within 45 days. Note that at this point, even if you have pre-clearance and preliminary acceptance, you are not yet officially enrolled in the OVDP. In order to be enrolled officially, you will need to complete the next step outlined below.

  1. Submit full documentation for the SFCP or OVDP.

 For the SFCP you will need to submit, depending on whether you are a US resident or US non-resident, a US Resident Cerification Form or a US Non-Resident Cerification Form.

Here is where you will make that narrative statement about non-willfulness as outlined earlier. The instructions on the form look like this:

As you can see there is a lot riding on your narrative statement. It is wise to seek professional advice on drafting yours. Apart from taking care of any outstanding back payments and penalties, simply enclose a check for the the 5% SFCP penalty (if applicable), and that’s it.

For the OVDP you will need to to make a full OVDP submission to the IRS Campus in Austin within t90 days of receiving your preliminary acceptance from IRS Criminal Investigations in Philadelphia. Full submission involves a laundry list of just about any disclosure and tax forms that may possibly have applied to you over the last 8 years.

Just to review the OVDP timeline, if you sought and received pre-clearance,

  • you have 45 days to apply for preliminary acceptance,
  • the IRS tries to approve your application for preliminary acceptance within 45 days,
  • and when they do so you have 90 days to make a full OVDP submission.

So you’re looking at a timeframe of about 6 months just to get into the program after you have popped up on the IRS’ radar as a “lead.” You won’t be a “case” until you are accepted formally. That is one of the reasons it is imperative to obtain legal advice while working through the OVDP. Simply look at where you submit the initial OVDP documentation: the Criminal Investigation Lead Development Center. The program is a real-world procedural drama.

After making a full submission and formally entering the OVDP, you can expect to have a personal interview with an IRS agent examining your case. The main purpose of the interview is to ensure the completeness of your submission and potentially uncover more information about other US Persons holding foreign accounts where you do or did.

Conclusion

The SFCP and OVDP are no laughing matters, however a sense of humor (or irony) helps to put them in perspective. Here’s how I like to think about it:

‘Tis far better to have disclosed than never to have disclosed at all, and exponentially better to disclose a non-willful violation than a willful violation.

In practical terms, don’t bury your head in the sand don’t automatically jump to the conclusion that you fall into the “willful violator” category because, in fact, the category does not have hard-and-fast definitions. You may have a valid case for arguing that you are non-willful. For example, just because you “heard something” about FBAR’s but never had the time figure it out may be enough to argue non-willfulness, however the situation is a lot like a legal desert with no clearly defined roads.

Rally drivers get through deserts by looking for tire tracks or from previous drivers and any other information they can use to their advantage – but a lot of it boils down to experience. That’s essentially what lawyers can help you do if you’re attempting the OVDP except that they will look for case law and legal precedent instead of tire tracks.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.