It's been more than five years now since the IRS first offered a limited amnesty program for U.S. taxpayers with undisclosed foreign accounts. The program has actually consisted of several closely related programs with similar acronyms.
In this post, we will discuss how the program has evolved and call attention to the role it can serve in avoiding possible criminal prosecution.
The source of the filing requirement for foreign accounts that are worth $10,000 or more is a federal law called the Bank Secrecy Act. Reporting is due by June 30 of each year and is now done on FinCEN Form 114. This report is commonly called the Report of Foreign Bank and Financial Accounts (FBAR). Taxpayers who do not report applicable foreign accounts on this form may face both civil and criminal penalties.
The first acronym for the program was OVDP, for Offshore Voluntary Disclosure Program. In 2011, this changed slightly to OVDI, for Offshore Voluntary Disclosure Initiative. The current acronym is again OVDP, but the program is by no means identical to the 2009 program. Earlier this year, the IRS tweaked the program again.
If you did not file a required FBAR and the failure was "willful," you could be criminally charged. The same is true of willfully submitting a false FBAR. Other possible criminal charges for unreported foreign accounts include tax evasion and conspiracy to defraud the U.S.
But what is a "willful" violation? After all, offshore account disclosure laws are exceedingly complex. According to the IRS, a person acts willfully if the person knew that the offshore account had to be reported. There are many factors that the IRS looks at to make this determination. Two common factors are whether the account is a numbered account and if the taxpayer filed the income tax return and checked "no" to the question about whether there was an offshore account. This question is on Schedule B which reports interest.
The IRS offered the amnesty program to allow people to become compliant with the tax laws. At the same time, the IRS is vigorously pursuing those who are discovered to have not reported offshore accounts. The offshore disclosure programs, including the current program, are designed to allow people who willfully failed to report the offshore accounts to avoid criminal prosecution and become tax compliant. In order to successfully complete the program, there are several steps that must be taken. Failure to successfully complete the program can result in criminal prosecution.
The current program allows a taxpayer to apply for the Offshore Voluntary Disclosure Program which is subject to a 27.5% penalty. This percentage is applied to the highest value of the account during the last eight years. There is currently an alternative to the Offshore Voluntary Disclosure Program offered by the IRS. This alternative is called the Streamlined Program. The Streamlined Program provides for a 5% penalty. This penalty is assessed against the highest value of the account during the previous three years. Under the Streamlined Program, a person must submit a sworn statement that he/she did not act willfully. Under the Streamlined Program there is no immunity from prosecution as there is under the Offshore Voluntary Disclosure Program. This results in a potential dangerous situation because it is the ultimate decision of the IRS as to whether the person acted willfully. Because the IRS decides who acts willfully, it is important to obtain advice from an attorney experienced in the Offshore Voluntary Disclosure Programs. An experienced attorney will be able to analyze the likelihood that the IRS will accept from the person, the reasons for not reporting the offshore account. This will allow the person to make an informed decision as to which of the two programs to enter.
In short, the obligations of offshore account compliance are often onerous. It makes sense to seek out the advice of an experienced tax attorney to handle them effectively. If you have undisclosed accounts, you need to be clear on which iteration or iterations of the voluntary disclosure program are in play.
Source: The IRS explains these changes in its FAQ on the OVDP program.