OVDI AND ODVP Tax Amnesty Programs

ODVI or OVDP – The Offshore Voluntary Disclosure Initiative/Program

In today’s globalized economy many individuals are much more mobile than in previous decades.  It is common for people to have assets such as rental properties, stocks and securities, bank accounts, etc. spread out globally because of this mobility.  However, it is important to consider how this affects you as a U.S. citizen, or resident taxpayer.

The United States taxes its citizens and residents on their worldwide income and imposes annual reporting of certain foreign assets.  This can be problematic for members of global families with these world-wide assets as many individuals for one reason of another inadvertently have left one or more of these assets off of their U.S. income tax returns.  Failure to come into U.S. tax compliance can result in severe financial penalties, prosecution, and even mandatory jail time. There are tax compliance programs that have been put into place via the IRS to help avoid this issue. The Offshore Voluntary Disclosure Program is a structured settlement program available to help noncompliant taxpayers come into compliance.

Review Disclosure Obligations

The Objective of OVDP

Historically, some wealthy individuals have sheltered assets in offshore bank accounts and investments to avoid paying U.S. taxes.  But the IRS considers (and has always considered) these assets taxable, but before legislation like Foreign Account Tax Compliance Act (“FATCA”) it was difficult to find international assets.  The objective of OVDP is to bring noncompliant taxpayers, who have undisclosed foreign accounts and entities, into compliance with U.S. tax laws.

Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure, because it enables them to become compliant, avoid substantial civil penalties, and can eliminate the risk of criminal prosecution.  Voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.

Taxpayers who choose not to disclosure foreign assets to the IRS face increased risks of detection by the IRS.  In light of offering structured settlement programs, the IRS may impose substantial penalties on those who do not take advantage of the programs, such as the fraud penalty, foreign information return penalties, and criminal prosecution.

The End Of Offshore Tax Shelters?

The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts.  Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistle blowers, and will become more available under FATCA  and Foreign Financial Asset Reporting (new IRC § 6038D).

Who is eligible for ODVP?

Taxpayers who have undisclosed offshore accounts or assets and meet the requirements of IRM 9.5.11.9 are eligible to apply for IRS Criminal Investigation’s Voluntary Disclosure Practice and the OVDP penalty regime.

How can a taxpayer become ineligible for ODVP?

If a taxpayer appeals a foreign tax administrator’s decision authorizing the providing of account information to the IRS and fails to serve the notice as required under existing law, see 18 U.S.C. 3506, of any such appeal and/or other documents relating to the appeal on the Attorney General of the United States at the time such notice of appeal or other document is submitted, the taxpayer will be ineligible to participate.

How long do I have to apply for ODVP?

The IRS can close the program at any time and has made no pronouncements as to how long these programs will stay active.

What Happens If I Fail to Declare My Foreign Assets?

Increased enforcement activity by the IRS and the Justice Department means a higher risk the IRS will discover these undisclosed foreign assets.  If caught, civil and or criminal penalties may be imposed.

Civil Penalties for Holding Undeclared Foreign Assets

Depending on a taxpayer’s particular facts and circumstances, the following penalties may apply:

  • A penalty for failing to file the Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”). U.S. citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000 at any time during the year.  Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance of the foreign account per violation.  See 31 U.S.C. § 5321(a)(5).  Non-willful violations as high as $10,000 penalty per violation.
  • Beginning with the 2011 tax year, a penalty for failing to file form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities and interests in foreign entities, as required by I.R.C. §6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
  • A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a U.S. person, transfers of property from a U.S. person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048.This return also reports the receipt of gifts from foreign entities under section 6039F.  The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35% of the gross reportable amount, except for returns reporting gifts, where the penalty is 5% of the gift per month, up to a maximum penalty of 25% of the gift.
  • A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by U.S. persons with various interests in and powers over those trusts under IRC § 6048(b).The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5% of the gross value of trust assets determined to be owned by the U.S. person.
  • A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain U.S. persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046.The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
  • A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25% foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C.  The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
  • A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B.  The penalty for failing to file each one of these information returns is 10% of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
  • A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. U.S. persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A.  Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and 10% of the value of any transferred property that is not reported, subject to a $100,000 limit.
  • Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75% of the unpaid tax.
  • A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns.  If a taxpayer fails to do so, a penalty of 5$ of the balance due, plus an additional 5% for each month or fraction thereof during which the failure continues may be imposed.  The penalty shall not exceed 25%.
  • A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of ½% of the amount of tax shown on the return, plus an additional ½% for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25%.
  • An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20% or 40% penalty.

Criminal Penalties for Failing to Declare Foreign Assets

Possible criminal charges related to tax returns include tax evasion (26 U.S.C. § 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income tax return (26 U.S.C. § 7203).  Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.

A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000.  Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.  A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000.  Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

Will proper OVDP Filing Allow Me To Save Or Eliminate My International Tax Obligation?

Proper filing will not save or eliminate your international tax obligation; however failure to file can result in the imposition of civil and criminal penalties.

For more information about the Offshore Voluntary Disclosure Program, contact Christopher Byrne.  Bringing over 20 years of experience, you know that you are working with a team who knows exactly how to help you properly file your international tax returns.