What is The Offshore Voluntary Disclosure Program and How Does it Help?

When you have been doing your taxes, whether for your business, an estate, or for your personal taxes, have you been omitting offshore assets to try to avoid having to pay more? Well, it can catch up to you someday, and it’ll cost you big. The IRS has set up a program just for people like you: to bring your taxes into Offshore and Foreign Compliance without huge penalties or possible jail time. The Offshore Voluntary Disclosure Program (OVDP) is a sanctioned IRS program that you can voluntarily enter on your own volition, as long as you aren’t currently being audited or under examination; thus, you must do it proactively. And when you enter the program you must fully disclosure all offshore assets, even if you think the IRS will not discover some of them. The OVDP is available until September 28, 2018, after which you can still disclose assets, but you won’t be given the same leniency as offered by the OVDP.

How Can the OVDP Help You?

Your first thought may be, “Why should I disclose all my offshore assets to the IRS if they haven’t discovered them yet?” Well, you should know that the penalties for withholding tax-relevant information from the IRS can be met by heavy penalties and possibly criminal prosecution if you are willfully not disclosing offshore assets. You could attempt to do a “quiet disclosure,” which consists of just filing taxes for the current year that are fully offshore and foreign compliant. Or you could even attempt to filing amended returns for every year you were not compliant, known as a “qualified quiet disclosure”. However, both methods are very risky; quiet disclosures could result in criminal prosecution if the facts and the amounts are not accepted by an IRS examiner. The Offshore Voluntary Disclosure Program gives you the ability to limit the penalties you incur for willfully hiding offshore assets and accounts.

How Do You Know You are Eligible?

Eligibility for the Offshore Voluntary Disclosure Program is dependent on whether you have willfully undisclosed assets overseas that are funded by legal sources—not by criminal activities. If your failure to disclose was not willful, you’ll want to use the Streamlined Filing Compliance Procedures. Finally, you must not be under any civil examination or criminal investigation by the IRS.

How Can You Proceed with Applying for the OVDP?

Application for the Offshore Voluntary Disclosure Program is a three-phase process, beginning with a preclearance letter to the IRS. You will typically wait 30 to 45 days after you submit your first letter to the IRS for a response; however, if they have already discovered previously undisclosed accounts by the time they get the letter, they will deny your preclearance and start their own investigation. If you are successful at obtaining a preclearance letter from the IRS, then you will have 90 days to comply fully with any requirements that they have laid out in their response, such as a submission of all amended tax forms and possible questionnaires (you can request an extension if required). The IRS will recommend the Department of Justice does not prosecute you for noncompliance if you comply with their requirements. Once everything has been submitted and cleared away, the IRS will contact you to propose a closing agreement (IRS Form 906), and you can either sign the agreement or opt out of the OVDP.

How Hefty are the Penalties Related to the OVDP?

First off, the penalty for not using the Offshore Voluntary Disclosure Program can be extremely high if the IRS discovers your offshore assets, and it can reach as high as 100% of the value of your foreign accounts in a multi-year audit situation. With that in mind, the IRS has extreme leeway when it comes to penalties; they can even waive penalties entirely, but you are taking a huge risk by not using the OVDP to become Offshore and Foreign Compliant. When using the OVDP, you will be assessed a mandatory penalty, known as the “Miscellaneous Title 26 Offshore Penalty,” in the amount of 27.5% of the highest account balance in exchange for not being criminally prosecuted. An exception to this penalty: if the foreign financial institute is on the IRS’ “Foreign Financial Institutions or Facilitators List,” you will face a 50% penalty. In addition to this mandatory penalty, you’ll also be required to pay.

– 20% accuracy-related penalties under IRC § 6662(a) on the full amount of your offshore-related underpayments of tax for all years.

– failure-to-file penalties under IRC § 6651(a)(1), if applicable.

– failure-to-pay penalties under IRC § 6651(a)(2), if applicable.

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