On March 13, 2018, The Internal Revenue Service (IRS) announced that the OVDP will be ending September 28, 2018, and that any submissions not fully completed by that date will be rejected from the program. This means that anyone who has started but not fully complied with the documentation requirements by then will not be able to take advantage of the program and will instead be required to use the standard voluntary disclosure submission rules, which are not as friendly. As a refresher, the OVDP program rules require taxpayers to comply with the following procedures:
- Confirm you are not under audit or examination for any issues.
- Check your foreign financial institutions and advisers against the IRS blacklist, available on the IRS website. If they are on the list, then you may be subject to the 50% penalty.
- Make sure to get your Pre-Clearance Letter, OVDP Letter, and Required Attachments all completed well before the September 28 deadline.
- Provide full copies of the last 8 years’ worth of your tax returns.
- Provide amended tax returns for the last 8 years that include all the unreported foreign financial income and international informational reports including but not limited to Forms 5471, 8865, 926, 8621, 3520, 3520-A, and 8938.
- Provide amended or delinquent FinCEN Forms 114, Foreign Bank Account Report, (also known as the FBAR) for the last 8 years.
- Provide copies of all foreign financial statements for the last 8 years.
- Complete the IRS OVDP Penalty Calculation form.
There are significant penalty provisions related to the FBAR and any tax due on unreported income. Since the program started in 2009 these penalty provisions have been progressively more punitive. The OVDP program is also geared toward taxpayers who intentionally or knowingly failed to report or hid income. But what about taxpayers who unwittingly failed to report income or were given advice by a professional that was incorrect? What do these taxpayers do and how does the end of the OVDP impact them?
For the seriously delinquent taxpayers or those who we might classify as “bad actors,” the end of the OVDP could be a serious issue. However, for the rest of the taxpayers who did not intentionally fail to report income for one reason or another, there is still a safe way back into compliance. It is called the Streamlined Filing Compliance Program (SFCP), and it is much more forgiving. More importantly, it is not ending in September (as of this writing). This program is broken into two parts: one for those residing in the U.S. and one for those residing outside the U.S. during the years of noncompliance. The main difference between the two are the penalty provisions, with taxpayers residing in the U.S. facing a 27.5% penalty on the highest balance of the foreign accounts vs. 5% for those residing offshore. More information about the streamlined program can be found on the website.
So, while the OVDP is ending there is still a process for coming clean and getting caught up to date if you have been noncompliant. Depending on your situation one of these programs may be a viable solution for correcting past filing errors, but it is important to discuss your options with a tax professional. Please contact us for further details and to discuss which of these options, if any, would be appropriate for your situation.