The Offshore Voluntary Disclosure Program (OVDP) is a sanctioned IRS program which allows persons that have been omitting offshore assets to correct their tax returns and bring them into offshore and foreign compliance with minimal penalties and no jail time. The program is voluntary ( www.EsquireGroup.com/Offshore-Voluntary-D
Eligibility for OVDP
Offshore Voluntary Disclosure Program eligibility is dependent on the fact that a person has willfully chosen not to disclose offshore assets that are funded by legal sources; assets funded by criminal activities are not eligible. Any assets that were not willfully undisclosed will require the use of the Streamlined Filing Compliance Procedures instead. Eligibility is also dependent on the person not being under any current civil examination or criminal investigation by the IRS.
How the OVDP is Helpful
The Offshore Voluntary Disclosure Program gives persons a means of bringing their taxes into offshore and foreign compliance in a way that reduces the number of penalties they would have to pay and enables them to avoid the jail time that would result from the IRS discovering the undisclosed assets themselves. Persons could attempt a “quiet disclosure” by filing taxes for the current year that are fully offshore and foreign compliant, or a “qualified quiet disclosure” by filing an amended return for every year that they were not compliant, but if an IRS examiner does not accept them, it can lead to heavy fines and criminal prosecution.
How to Apply for the OVDP
There is a three step process for applying to the Offshore Voluntary Disclosure Program:
Step 1. File a preclearance letter to the IRS. Waiting times are typically 30 to 45 days to get a response.
Step 2. If approved, the submitter will have 90 days (extensions can be requested) to fully comply with requirements that have been laid out in the approval letter. They must submit all amended tax forms and complete all questionnaires. In exchange, the IRS will recommend the Department of Justice not prosecute.
Step 3. After the IRS approves any submissions, they will propose a closing agreement (IRS Form 906), which must either be signed by the submitter or they can opt out of the OVDP.
OVDP Related Penalties
While the IRS does have extreme leeway when it comes to penalties, if a person does not use the Offshore Voluntary Disclosure Program to become offshore and foreign compliant and the IRS discovers their assets, then the IRS can enact penalties that reach as high as 100% of the value of the foreign accounts in a multi-year audit situation. By using the OVDP, a person will be assessed an given a mandatory penalty, the “Miscellaneous Title 26 Offshore Penalty,” in the amount of 27.5% of the highest account balance ( www.EsquireGroup.com/About ) in exchange for avoiding criminal prosecution. However, if the foreign financial institute is on the IRS “Foreign Financial Institutions or Facilitators List,” then that penalty becomes 50%.
Additional Penalties for failing to disclose through the Offshore Voluntary Disclosure Program include:
- 20% accuracy-related penalties under IRC § 6662(a) on the full amount of the persons offshore-related underpayments of tax for all years;
- failure-to-file penalties under IRC § 6651(a)(1), if applicable; and
- failure-to-pay penalties under IRC § 6651(a)(2), if applicable.