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Offshore Voluntary Disclosure Program

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The IRS has closed the 2014 OVDP effective September 28, 2018.

Offshore Voluntary Disclosure Program

Are you a US taxpayer with undisclosed income from offshore accounts? The IRS is offering an opportunity for you to get current with your income tax returns. On July 1, 2014, the IRS began an modified the open-ended offshore voluntary disclosure program (OVDP) that offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution.  The IRS may end the program at any time in the future so it is important to get started now.

Can I participate in the program?

The first step to participate in the program is to submit a “Pre-Clearance” letter to the IRS Criminal Investigation Lead Development Center requesting to join the program. Generally within 30 days of receiving the pre-clearance letter, the IRS will notify the taxpayer or their representative whether or not they are cleared to make the offshore voluntary disclosure. Clearance can be denied if the taxpayer is already on the IRS’s list of known owners of undeclared foreign assets. If accepted, they have 90 days to submit all required documents. Pre-clearance does not automatically guarantee a taxpayer acceptance into the program.

What are the terms of the program?

To be accepted into the program, an applicant must submit in two separate parts the following items to the IRS for the eight year voluntary disclosure period.

·       Payment to the Department of Treasury in the total amount of tax, interest, offshore penalty, accuracy-related penalty, and, if applicable, the failure-to-file and failure-to-pay penalties, for the voluntary disclosure period must be sent with information identifying the taxpayer name, taxpayer identification number, and years to which the payments relate.  To ensure payments are properly posted to the taxpayer’s account, separate checks should be made for each tax year which would include all applicable tax, interest, accuracy-related penalties, and failure-to-file and failure-to-pay penalties.  The offshore penalty should be paid by a separate check.  These payments are advance payments; consequently, any credit or refund of the payments is subject to the limitations of IRC § 6511.  If you cannot pay the total amount of tax, interest, offshore penalty, and other penalties as described above, submit your proposed payment arrangement and a completed Collection Information Statement (Form 433-A, Collection Information Statement for Wage Earners and Self-employed Individuals, or Form 433-B, Collection Information Statement for Businesses, as appropriate) (see FAQ 20).  Send letters containing the taxpayer’s identifying information and all checks in a single envelope to:

Internal Revenue Service
3651 S. I H 35
Stop 1919 AUSC
Austin, TX 78741
ATTN: Offshore Voluntary Disclosure Program

All other required items listed below must be sent to:

Internal Revenue Service
3651 S. I H 35
Stop 4301 AUSC
Austin, TX 78741
ATTN: Offshore Voluntary Disclosure Program

·       All applicants: Copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure;

·       All applicants: Complete and accurate amended federal income tax returns (for individuals, Form 1040X) or original Form 1040 (if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from foreign financial accounts or domestic sources (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts and, for years after 2010, Form 8938, Statement of Specified Foreign Financial Assets). For taxpayers who began filing timely, original, compliant returns that fully reported previously undisclosed foreign financial accounts before making the voluntary disclosure for certain years of the offshore disclosure period, copies of the previously filed returns for the compliant years.  If you are submitting a copy of a previously filed return, write “COPY” on the top of the first page of the return.

·       All applicants: Copy of your completed and signed Offshore Voluntary Disclosure Letter (including enclosures and attachments) submitted to Criminal Investigation.

·       All applicants: A completed Foreign Account or Asset Statement for each previously undisclosed OVDP asset during the voluntary disclosure period.

·       All applicants: A completed and signed Taxpayer Account Summary With Penalty Calculation.

·       All applicants: Properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties. The agreements to extend the period of time to assess tax and FBAR penalties must follow the instructions provided. Failure to extend the period of time to assess tax and assess FBAR penalties according to the instructions will render your OVDP submission incomplete.

·       All applicants disclosing foreign financial accounts: Copies of filed Reports of Foreign Bank and Financial Accounts (commonly known as FBARs reported on FinCEN Form 114, previously Form TD F 90-22.1) for foreign financial accounts maintained during the period of your voluntary disclosure. See FAQs 44-46 for further information on FBAR filing requirements, including the requirement that FBARs be filed electronically.

·       All applicants: Copies of statements for all financial accounts reflecting all account activity for each of the tax years covered by your voluntary disclosure. For OVDP assets (see FAQ 35) other than foreign financial accounts, provide all relevant documents pertaining to the asset. For example, if a taxpayer has foreign issued life insurance with cash value, provide all documents governing the policy and, if any, all legal and tax opinions issued to the taxpayer relating to the policy.

·       All applicants disclosing foreign entities: A statement identifying all foreign entities, whether held directly or indirectly, for the tax years included in the voluntary disclosure, and a statement concerning ownership or control of such entities.

·       All applicants disclosing foreign entities: If foreign entities held OVDP assets (see FAQ 35), provide complete and accurate information returns (or amended returns, if applicable) required to be filed, including but not limited to Forms 3520, 3520-A, 5471, 5472, 926, 8865, and 8938 for all tax years included in the voluntary disclosure. If the taxpayer requests that the Service waive information reporting requirements, the taxpayer must submit a completed and signed “Statement on Abandoned Entities” form. See FAQ 29.

·       Applicants with estate and gift tax issues: If the taxpayer is a decedent’s estate, or is an individual who participated in the failure to report an OVDP asset (see FAQ 35) in a required gift or estate tax return, either as executor or advisor, provide complete and accurate amended estate or gift tax returns (original estate or gift tax returns if not previously filed) for tax years included in the voluntary disclosure correcting the underreporting or omission of OVDP assets (see FAQ 35).

·       Applicants with Passive Foreign Investment Company (PFIC) issues: A statement whether the amended or delinquent returns involve PFIC issues during the tax years covered by the OVDP period, and if so, whether the taxpayer chooses to elect the alternative to the statutory PFIC computation that resolves PFIC issues on a basis that is consistent with the mark to market (MTM) methodology authorized in IRC § 1296 but does not require complete reconstruction of historical data.  See FAQ 10.

·       Applicants with Canadian registered retirement savings plans (RRSPs) or registered retirement income funds (RRIFs) who wish to make late elections to defer U.S. tax on earnings: Provide the documents required in FAQ 54.

You may also be contacted by an examiner for specific additional information to process your voluntary disclosure. The examiner will certify that your voluntary disclosure is correct, accurate, and complete by reviewing your records along with your amended or delinquent income tax returns. The examiner will also verify the tax, interest, and civil penalties you owe.

A complete submission is required for acceptance into the program.

Are there penalties that I have to pay with the OVDI program?

Yes. In addition to any tax owed on the unreported income, penalties are imposed.

27.5% offshore penalty - the penalty will be calculated using your highest aggregate balance for the eight year period.

20% accuracy related penalty – bases on the total underpayment for the eight year period

Failure to pay and failure to file penalties may also be imposed, if appropriate.

What if I do not agree with the IRS conclusions?

If you find the offshore penalty unacceptable, you can opt out of the program. This means that you reject the IRS penalty proposal. When you have opted out, the election is irrevocable. Your case will then be handled under the standard audit process. A full audit for the eight years will occur and if any information is discovered that is inconsistent with your OVDI submission, criminal proceedings could be started. Additionally, civil FBAR penalties can be assessed. The FBAR penalties can greatly exceed any OVDI penalties.

Disclaimer of Liability: This publication is intended to provide general information to our clients, friends and readers. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.