The streamlined ‘Offshore Voluntary Disclosure Program’ (OVDP) introduced by the U.S. Internal Revenue Service (IRS) in 2012 allows U.S. Persons holding foreign financial accounts to disclose these details to the IRS if they did not file the FBAR, 1040, or other qualifying forms as required by the IRS. If accepted, the taxpayer would be eligible for reduced penalties. The program can also eliminate or reduce any criminal punishment which may apply if the IRS finds out about the foreign assets first.
The OVDP has been one of the most successful foreign asset information disclosure programs developed by the IRS. More than 50,000 U.S Persons have provided information on their foreign assets and investments, leading to a collection of more than $7 billion of additional taxes (plus interest and penalties).
Many Foreign Financial Institutions (FFIs) and foreign tax authorities have entered into an inter-government agreement (IGA) with the U.S. government to comply with the U.S. Foreign Account Tax Compliance Act (FATCA) regulation. It is bound to be more successful since the IRS believes that there are many more taxpayers who need to disclose their foreign assets. Self-disclosure is the better alternative for the taxpayer as opposed to the FFI providing the information to the IRS, and having the IRS find the delinquent taxpayer first.
However, based on the issues faced in past years by both the OVDP and the 2012 Streamlined Filing Procedure, the IRS has updated the Streamlined Filing Procedure, and modified the OVDP program, calling it the 2014 OVDP, and extended it for an indefinite period. However, note that the IRS may end this program at any time.
Here is a brief overview of FATCA, the filing procedures available, and the 2014 OVDP prepared by A.G. Tax cross-border analysts.
IRS Streamlined Program & OVDP for Foreign Assets Disclosure
Depending on the U.S. person’s situation, one of two disclosure programs may apply:
Streamlined Program: The streamlined program varies for non-compliant U.S. persons residing abroad and within the U.S.
- Non-resident U.S. persons may avoid any penalties on their foreign assets by filing their U.S. tax returns for the past 3 years, and FBARs for 6 years, provided they are able to prove that the failure to disclose was not willful.
- Qualifying U.S. persons would need to file their amended tax return for 3 previous years, and the FBAR for the last 6 years. In this scenario the taxpayer would be responsible for any back dated taxes (along with any interest assessed), and a 5% penalty on the highest balance of the foreign accounts in the years reported.
Offshore Voluntary Disclosure Program (OVDP): The OVDP, on the other hand, is for U.S. persons who knowingly avoided filing FBARs and reporting income from foreign assets on the required forms. The participants are required to file FBARs for 6 years, and 1040s for the past 8 years. They are responsible for any taxes plus interest and any applicable penalties assessed, along with the additional penalty of 27.5% of their highest offshore account balance during the 8-year period for which such willful non-compliance was also reported.
The Modified ‘2014 OVDP’
In July, 2014 along with having FFIs and foreign tax authorities signing the IGA with the U.S., the IRS introduced a modified version of the OVDP, which is an improved version of the 2012 OVDP, as it covers a larger population and without a filing deadline: the 2014 OVDP.
Important changes as follows:
- The OVDP participant would be subject to a 50% offshore penalty instead of the 27.5% penalty if either the FFI or foreign account handler/facilitator discloses the information first (because of the IGA required disclosure), or if the FFI or facilitator is already under investigation by the IRS. This penalty would apply on all the foreign accounts/investments held by the U.S. person.
- Delinquent FBAR or other international information return(s) filing will not be covered under OVDP program but under the modified streamlined filing procedure.
- Reduced penalty rates of 12.5% or 5%, which were part of the 2012 OVDP, do not apply to the 2014 OVDP as the situations which resulted in these reduced rates are now part of the broadened streamlined filing compliance procedures.
- All account statements should be provided for all foreign financial accounts regardless of account balance.
Other changes made to the OVDP filing procedure involved clarification around the following topics:
- Currency conversion rates
- Penalty calculation base
- Co-ownership
- Accounts to which the taxpayer has only signatory authority, direct, or indirect ownership
- Accounts in which children who are U.S. persons have equal ownership;
- Non-Income producing foreign assets
- Gain realized on a foreign transaction before the voluntary disclosure period, and whether it was maintained offshore or sent to the U.S. and reflected on the tax return
- Valuation Discounts and transfer of funds from one foreign account to another (owned or not owned by the taxpayer)
- Pre-clearance process
In Conclusion
With the IRS actively engaged in eradicating tax evasion through foreign accounts/investments by partnering with FFIs, foreign tax authorities, and whistleblower programs, it is only a matter of time before the IRS discovers taxpayers in noncompliance.
Taxpayers should act now, and submit a voluntary disclosure of their foreign financial accounts and assets (if required) to avoid the risk of paying extremely high penalties and possible criminal punishment.
That being said, a taxpayer may not necessarily be subject to OVDP, depending upon their tax situation. Filing amended tax returns (quiet disclosures), or using the current streamlined disclosure procedure may also work. Therefore, it is highly recommended that anyone contemplating disclosure should consult their tax advisor for advice based on their personal situation as soon as possible.
AG Tax LLP Can Help
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws, and can provide you with the right guidance to handle your unique tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts who are highly-qualified and experienced in handling situations related to U.S., Canadian, and other international tax laws.
We can assist with:
- Canadian Personal and Corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
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