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Understanding the Offshore Voluntary Disclosure Program

January 19, 2012


Because of continued strong interest from taxpayers and tax practitioners alike, the IRS has reopened its Offshore Voluntary Disclosure Program (OVDP) for a third time. (The OVDP sometimes is referred to as the “Offshore Voluntary Disclosure Initiative.”) The two previous OVDPs, offered in 2009 and 2011, resulted in the collection of $4.4 billion. The IRS says the current program will be open for an indefinite period; thus, there isn’t a set deadline for taxpayers to apply.

The OVDP allows taxpayers to disclose unreported income from undisclosed foreign accounts and other foreign assets. The program isn’t just for “tax evaders.” Many taxpayers unknowingly violate federal tax laws by failing to report income from foreign accounts or assets.

What the law requires

As a general rule, U.S. citizens and residents are subject to federal tax on all of their income, regardless of the source. This includes foreign income, subject to certain exemptions and exclusions.
Whether foreign income is taxable or not, you’re required to file annual information returns reporting the existence of foreign bank and investment accounts if their aggregate value exceeds $10,000, as well as the existence of certain interests in and transactions with foreign trusts, corporations and partnerships.

Failure to comply with these requirements can result in substantial civil penalties and even criminal charges.

The benefits of coming clean

Voluntary disclosure provides three significant benefits:

1.    It generally eliminates the risk of criminal prosecution.
2.    It reduces the severity of civil penalties.
3.    It enables you to calculate, with a reasonable degree of certainty, what it will cost you to become current with your federal tax obligations.

Even if your failure to comply was inadvertent, taking your chances with an IRS civil or criminal investigation can be risky.

Key difference in the 2012 OVDP

The overall penalty structure for the 2012 program remains the same as that for the 2011 program, except for the highest penalty category. If you qualify for the OVDP, you can settle your tax obligations by paying your unpaid taxes, interest and accuracy-related penalties, plus a penalty equal to 27.5% of the highest aggregate balance or value of foreign accounts and assets during the eight full tax years prior to the disclosure. The highest penalty category for the 2011 program was 25%.

The OVDP imposes smaller penalties under certain mitigating circumstances. For example, if the highest aggregate balance or value of foreign accounts and assets is less than $75,000, you’ll qualify for a 12.5% penalty instead of the 27.5% penalty. And a 5% penalty is available under certain circumstances, such as inheritance of a foreign account with minimal account activity.

To take advantage of the OVDP, you must provide copies of previous federal income tax returns; provide amended returns for tax years covered by the voluntary disclosure; file required information returns; and pay all required taxes, interest and penalties.

Making the next move

If you have undisclosed foreign accounts or assets, you may participate in the OVDP to preclude criminal prosecution and keep monetary penalties to a predictable minimum. You may want to act soon, because the IRS has cautioned that the program’s terms could change at any time. This might include increasing the penalties for some or all taxpayers. The IRS can also terminate the program at any time as the agency continues to work with the Justice Department to pursue criminal prosecution of international tax evasion.

For more information on foreign account disclosure requirements and the ins and outs of the OVDP, please give us a call. We can also help you determine whether you should enroll.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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