History of the Offshore Voluntary Disclosure Programs
The IRS’s various Offshore Voluntary Disclosure Programs (OVDP) began with the 2003 Offshore Voluntary Compliance Initiative. The initiative was a pseudo-amnesty program which allowed taxpayers to voluntarily amend their tax returns to include offshore income in exchange for a waiver of certain penalties and a guarantee of no criminal prosecution. The program brought in $75 million in taxes, at a cost of approximately $2 million. Six years later, the 2009 Offshore Voluntary Disclosure Program (2009 OVDP) was put into place, running in conjunction with a crackdown on offshore tax evasion that focused on the international banking giant UBS. UBS ultimately agreed to a penalty of $78 million, and to release the names of over 4,000 American account holders.
The 2009 OVDP required taxpayers to amend or file six years of tax returns and FBARs, and pay any resulting increase in tax, along with penalties and interest. Additionally, participants in the program had to pay a penalty equal to 20% of the highest aggregate balance in foreign accounts during the six-year period.
A couple of years later the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI) was introduced. The program was similar to the 2009 OVDP, with three key differences: the look-back period was extended to eight years, the penalty imposed on the highest aggregate offshore account balances was increased from 20% to 25% — although some taxpayers qualified for a reduced penalty of 5% or 12.5% in certain narrow circumstances — and the program provided participants with an option to opt out of the penalty. However, taxpayers choosing to opt out were subjected to a complete examination and could be referred to Criminal Investigation. The IRS reported that it received a total of 33,000 voluntary disclosures under the 2009 and 2011 programs combined and collected $4.4 billion.
The next year, the IRS announced the 2012 Offshore Voluntary Disclosure Program, which was similar to the 2011 OVDI; but at that time, the offshore penalty was increased to 27.5%.
Problems With the One-Size-Fits-All Approach
Although the IRS was content with the results of these programs, there was a large outcry of unfairness, including from the Taxpayer Advocate. The perception was that the IRS was threatening taxpayers with extreme penalties, and forced many taxpayers into the one-size-fits-all program regardless of individual taxpayer circumstances. Due to this perception, many taxpayers decided to remain noncompliant, rather than hand over a large chunk of their savings.
Streamlined Procedures and the 2014 Offshore Voluntary Disclosure Program
Perhaps in response to this outcry, the IRS updated the program in June 2014, and now refers to it as the 2014 Offshore Voluntary Disclosure Program (2014 OVDP). As part of the update, the IRS provides for Streamlined Filing Compliance Procedures for taxpayers whose failure to report their foreign accounts and pay tax on foreign income was non-willful. Under the new guidelines, many taxpayers who do not have a history of willful non-compliance qualify for a reduced 5% penalty, and only have to amend three years of tax returns. Compared to prior programs, and the massive penalties that could apply outside of the program, taxpayers who fit into this Streamlined Procedure should seriously consider entering the program.
The 2009 OVDP required taxpayers to amend or file six years of tax returns and FBARs and pay any resulting increase in tax with interest. Taxpayers were assessed either an accuracy or delinquency penalty for all six years, with no possibility for a reasonable cause exception. Additionally, in lieu of all other penalties, including the statutory FBAR penalties, participants in the program had to pay a penalty equal to 20% of the amount in foreign accounts in the year with the highest aggregate balance during the six-year period. The IRS warned that taxpayers who did not come forward through the program could be subject to additional penalties, with agents instructed to pursue both civil and criminal avenues. They were to consider all available penalties, including the maximum penalty for the willful failure to file the FBAR report and the fraud penalty. The IRS believed the program was a huge success, bringing in more than 15,000 taxpayers and an estimated $3.4 billion of tax revenue.
Let an Experienced Tax Attorney from the Sacramento Area Help You
If you have unreported foreign accounts, contact NewPoint Law Group, LLP, to find out more about the 2014 Offshore Voluntary Disclosure Program. To schedule a free consultation, call 800-358-0305 or contact us online today.