U.S. taxpayers, who have still not reported their foreign assets and income to the U.S. Internal Revenue Service (IRS), should immediately consider consulting with their tax practitioner to discuss the possibilities of becoming compliant through the IRS Offshore Voluntary Disclosure Program (OVDP). As taxpayers have had several years to become compliant, the IRS has announced that it will discontinue the OVDP program effective September 28, 2018.
U.S. Taxes & OVDP Compliance
The U.S. government taxes individuals based on citizenship and residency. Furthermore, U.S. citizenship can be acquired. For example, even if a person has never been to the United States, they could be U.S. citizens if either of their parents or grandparents is a U.S. citizen thereby, qualifying them as U.S. taxpayers.
Many such accidental Americans do not realize they are subject to U.S. taxes, and fail to comply with the required tax laws and filing requirements. In addition, some U.S. taxpayers deliberately avoid disclosing their non-U.S. assets and income to avoid paying U.S. taxes.
To help these taxpayers be tax-compliant, the IRS introduced the ‘Streamlined Filing’ and ‘Offshore Voluntary Disclosure’ programs.
Streamlined Filing Procedure is beneficial for those domestic and foreign-resident U.S. taxpayers, who have non-willingly failed to comply with the U.S. taxes or report their foreign assets or income.
The OVDP program works for taxpayers, who willingly failed to report their foreign assets and/or income, or file the required information disclosure forms, such as the FinCEN FBAR Form 114, Form 8938.
The Streamlined Filing Compliance Procedures will remain in place and available to eligible taxpayers. As with OVDP, the IRS has said it may end the Streamlined Filing Compliance Procedures at some point.
Overview of the IRS OVDP Program
The Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.
The OVDP program was launched in 2009. Thereafter, many versions of the OVDP have been introduced. The current OVDP program is the version introduced in 2014.
Some of the following activities qualify as wilful non-disclosure:
- Reporting some accounts maintained at certain foreign financial institutions (FFI), while excluding the ones with low balance, etc.
- Well-planned ownership structuring (layering), i.e. ownership of foreign assets and accounts through foreign trusts, and corporations
- U.S. citizens with dual citizenship using the second passport as identity proof
- Disconnecting from the foreign financial institution after the account is created and amount transferred
- Cash-based transactions of significant amount
- Multiple low dollar inter-bank transfers
- Unclear or ambiguous explanation on failure to report assets and income
Taxpayers, who fit any of the above category, could apply for the OVDP to be tax compliant. However, it is not necessary that the IRS will accept and approve the application, which could further complicate the tax situation. Therefore, it is important to consult a tax practitioner, with expertise in OVDP program to verify your tax situation before proceeding with the OVDP application process.
(Learn more about the IRS OVDP Application Process)
Availing the OVDP program to be tax-compliant has significant advantages. Firstly, the taxpayer is required to pay an “offshore penalty” equal to 27.5% of the highest year’s aggregate value of “OVDP assets” during the period covered by the OVDP, along with any applicable failure-to-file, failure-to-pay, and accuracy-related penalties. Regular penalties could far exceed $10,000 per form not filed.
Note that, if an already identified and under investigation foreign financial institution or facilitator assisted the taxpayer in setting up the offshore accounts/assets, the above 27.5% penalty does not apply. Instead, this is increased to 50% offshore penalty, along with penalties applicable on failure to file the particular U.S. tax form(s).
A planned end to the OVDP program means that the IRS has already identified new and improved ways to track non-compliant taxpayers. The FATCA agreement between IRS and foreign tax authorities and foreign financial institutions to exchange financial data of the partnering country’s citizen or resident being one of them.
Learn more about IRS CI’s New Measures to Prevent Tax Evasion
Once the OVDP program ends, non-compliant taxpayers will have no alternative method to be tax-compliant unless the circumstances of a taxpayer qualify them for compliance under other programs, such as:
- IRS-Criminal Investigation Voluntary Disclosure Program;
- Streamlined Filing Compliance Procedures;
- Delinquent FBAR submission procedures; and
- Delinquent international information return submission procedures.
Having said that, if the IRS catches the non-compliant taxpayer first (before or while they apply for the OVDP program), they will need to pay all the penalties that apply to the undisclosed foreign accounts, assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period.
OVDP is one of the best ways to be tax compliant with lower penalties, and no imprisonment punishment. Since its introduction in 2009, more than 56,000 taxpayers have used the Streamlined Filing Procedure, and OVDP programs to comply voluntarily with the IRS.
If you still wish to come forward and utilize the OVDP program, you have time to do so, however, it is highly recommended that you consult with a professional regarding the IRS OVDP program.
AG TAX LLP CAN HELP
If you have any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your 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., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
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