Offshore Voluntary Disclosure Program vs. Streamlined Procedures

If you’ve discovered that you should have reported foreign income or offshore assets and are now worried about what to do next, you’re not alone. Many U.S. taxpayers end up in this situation due to misunderstandings or not knowing the full scope of their tax obligations. Fortunately, the IRS has seen it before and offers programs to help you set things right.

Though the agency’s Offshore Voluntary Disclosure Program (OVDP) was discontinued in 2018, the streamlined version is still in place. Consulting a skilled tax attorney who understands the differences between streamlined filing compliance procedures and what came before will help you avoid steep penalties or even a potential criminal investigation.

This article will provide key insights on this topic, comparing the current and past programs.

What Was the Purpose of OVDP?

The Offshore Voluntary Disclosure Program was an IRS initiative aimed at encouraging taxpayers with previously unreported foreign financial assets to come forward and disclose them. This program allowed participants to avoid criminal prosecution and minimize substantial civil penalties by voluntarily revealing their offshore income and assets.

The OVDP was designed to promote compliance with U.S. tax laws by providing a structured path for non-compliant taxpayers to amend past tax returns and report unreported offshore income. It targeted individuals who had willfully failed to disclose foreign accounts or offshore assets, protecting them from the risk of more severe penalties or IRS investigation.

The OVDP was officially closed on September 28, 2018.

Benefits of the OVDP

Taxpayers who came forward under the OVDP were shielded from potential criminal charges related to tax evasion. Although the miscellaneous offshore penalty could be steep, it was often less than what could result from full civil fraud penalties.

After taking the necessary steps to amend their past returns, participants signed a closing agreement with the IRS, ensuring that their tax matters related to disclosed offshore assets were resolved.

Downsides of the OVDP

The OVDP came with some fairly hefty financial penalties, typically 27.5% (or higher in some cases) of the highest aggregate balance of offshore accounts and foreign assets during the disclosure period. Completing the process could also take a significant amount of time due to the thorough civil examination.

What Are the Streamlined Filing Compliance Procedures?

The IRS’s streamlined filing compliance procedures are a more taxpayer-friendly option compared to the OVDP. Introduced to encourage non-willful taxpayers to report their foreign financial assets, this program is intended for those whose failure to comply was due to negligence, oversight, or a good-faith misunderstanding of tax obligations.

There are two types of streamlined procedures:

Streamlined Foreign Offshore Procedures

This option is for non-residents living outside the U.S. who have foreign financial accounts and meet the eligibility requirements to demonstrate that their non-compliance was non-willful. Eligible participants can file amended or late tax returns with a streamlined certification form. Generally, no penalties are imposed.

Streamlined Domestic Offshore Procedures

This option is for U.S. residents who meet the criteria for non-willful conduct but still need to report foreign financial assets. This set of procedures makes it easy for eligible taxpayers to submit amended returns and pay any additional tax owed. It comes with a penalty of 5% of the highest aggregate balance of unreported offshore accounts.

Comparing OVDP and Streamlined Procedures

Let’s take a look at the key differences between the Offshore Voluntary Disclosure Program and the IRS’s streamlined procedures:

Eligibility Requirements

• OVDP: Geared toward taxpayers who may have engaged in willful violations of tax law.
• Streamlined procedures: Meant for those who acted in a non-willful manner, such as through oversight.

Penalties

• OVDP: Includes a high miscellaneous offshore penalty.
• Streamlined procedures: Lower penalties or no penalties for qualified individuals under streamlined foreign offshore.

Complexity and Time Involved

• OVDP: More complex, involving extensive paperwork and a longer review by the IRS.
• Streamlined procedures: Simplified and faster process due to fewer requirements.

Risk of Criminal Prosecution

• OVDP: Offers protection from criminal prosecution.
• Streamlined procedures: Only for non-willful taxpayers, so criminal risks generally aren’t relevant.

Are Streamlined Procedures That Much Better?

With the closure of the OVDP in 2018, taxpayers lost a program that provided clear-cut protection from IRS criminal investigation, especially for those with significant offshore assets and willful non-compliance. While the penalties were substantial, the certainty and legal safety net the program offered made it a preferred option for many.

Although the OVDP is no longer available, the practice of voluntary disclosure remains active, though it isn’t a direct substitute for OVDP.

This practice offers a framework for taxpayers to come forward of their own free will, potentially reducing penalties and mitigating the risk of criminal prosecution. The penalty structure under the current Voluntary Disclosure Practice can be higher and less predictable compared to the OVDP.

On the other hand, the new streamlined procedures provide several advantages, including offering a simpler, less punitive path to rectifying past errors.

If your non-compliance stemmed from a misunderstanding of foreign reporting or ignorance of your obligations to report foreign investment income, the streamlined options are a welcome change. They come with reduced or no penalties, making compliance more accessible for those who have made honest mistakes.

While the protection against IRS criminal investigation the OVDP provided is no longer available, taxpayers with non-willful conduct benefit from a more forgiving process that emphasizes transparency and encourages voluntary correction.

Common Mistakes to Avoid

Accurately reporting foreign accounts and offshore income ensures compliance and reduces the risk of significant penalties or potential criminal investigation. Here are some common mistakes to avoid:

• Quiet disclosure: Filing amended returns without notifying the IRS can trigger a criminal investigation.
• Incomplete documentation: Make sure to correctly report all foreign financial and bank account details.
• Underestimating the process: Even the streamlined approach requires accurate and comprehensive reporting.

If you have questions or concerns about how to take advantage of the IRS’s streamlined procedures, a tax attorney can be a helpful resource.

Get Help Making Use of Streamlined Filing Procedures

If you failed to report your foreign income or bank accounts non-willfully, the IRS’s streamlined procedures offer a path to compliance. For cases involving potential willfulness, the curren Voluntary Disclosure Practice will be your best option for avoiding criminal prosecution and stiff penalties.

A qualified offshore disclosure tax attorney can provide valuable assistance with the streamlined procedures. With their knowledge and insight, they can protect your rights and ensure that you submit the appropriate documentation properly and on time.

Tax Relief Counsel is here to extend reliable legal guidance and support to all taxpayers in need of aid. Contact us today to schedule a free consultation. We’ll help you find the best path forward.