Ultimate Guide to OVDP IRS Program
We serve as external Counsel on all types of IRS Tax Audit defense and compliance matters.Steven Dillon – Former IRS Tax Attorney and Local Counsel
Voluntary disclosure provides U.S. taxpayers with an opportunity to mitigate the consequences of failing to timely and accurately disclose their foreign financial assets or accounts to the IRS. This Ultimate Guide explains what U.S. taxpayers need to know about the Offshore Voluntary Disclosure Program (OVDP) and its alternatives.
U.S. taxpayers that have qualifying foreign financial accounts and other foreign financial assets are required to report these accounts and assets to the federal government on an annual basis. For those who have failed to comply, the Internal Revenue Service’s (IRS) Offshore Voluntary Disclosure Program (OVDP) used to provide a way to avoid the harshest consequences of non-compliance. The OVDP has expired; however, there are now other IRS programs that taxpayers can use to come into compliance before they face scrutiny from the IRS.
Introduction to the OVDP and Voluntary Compliance
Under the Bank Secrecy Act and the Foreign Account Tax Compliance Act (FATCA), U.S. taxpayers have an obligation to disclose their foreign financial assets and accounts to the federal government. Specifically, the Bank Secrecy Act requires taxpayers to disclose their foreign financial accounts to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), while FATCA requires taxpayers to report a broader range of foreign financial assets to the IRS.
The primary means for meeting these disclosure requirements are:
- FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR); and,
- IRS Form 8938, Statement of Specified Foreign Financial Assets
Despite the fact that the Bank Secrecy Act was enacted in 1970 and FATCA has now been around for more than a decade, it is clear that many U.S. taxpayers who own foreign financial assets and accounts are unaware of their disclosure requirements. In fact, non-compliance with these statutes is so common that the IRS established the Offshore Voluntary Disclosure Program as a way for taxpayers to correct their filing mistakes (and for the U.S. Treasury Department to collect tax and penalties) without the need for the IRS to conduct an audit or the IRS’s Criminal Investigations division (IRS CI) to launch an investigation.
But, the most-recent version of the OVDP expired in 2018.
While the OVDP no longer exists, U.S. taxpayers who are required to file FBARs and IRS Form 8938 still have options for voluntarily disclosing filing mistakes—both intentional and unintentional. Today, the primary options available to taxpayers who need to come current on their FBAR and FATCA filing obligations are:
- Streamlined Filing Compliance Procedures (Domestic or International); and,
- IRS CI’s Voluntary Disclosure Practice.
Options for Voluntarily Disclosing FBAR and FATCA Filing Mistakes in 2021
The IRS’s Streamlined Filing Compliance Procedures and IRS CI’s Voluntary Disclosure Practice are two very different programs. They are available to U.S. taxpayers under different circumstances, they present different risks, and they can produce different results. Here is an overview of each of these offshore voluntary disclosure programs:
1. The IRS Streamlined Filing Compliance Procedures (Domestic and International)
As the IRS explains, the Streamlined Filing Compliance Procedures, “are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.” The requirement of certifying to “non-willfulness” is a key aspect of the streamlined procedures—and it is an aspect that distinguishes the streamlined procedures from the Voluntary Disclosure Practice (as discussed in greater detail below).
The Streamlined Filing Compliance Procedures are available to individual taxpayers in the U.S. and abroad. Under this program, individual taxpayers (and estates of individual taxpayers) who have non-willfully failed to timely and accurately file an FBAR and/or IRS Form 8938 in any of the prior six tax years can submit a voluntary filing to correct their mistake. Submitting a streamlined filing does not avoid penalties entirely, but it does avoid the risk of facing an IRS audit or IRS CI investigation—which could lead to substantially greater liability.
Eligibility for the IRS Streamlined Filing Compliance Procedures
In addition to non-willfulness, the other primarily eligibility criteria for using the IRS’s streamlined disclosure practice to establish FBAR and/or FATCA compliance include:
- The taxpayer must not be the subject of a pending IRS audit or IRS CI investigation;
- The taxpayer must have a valid Taxpayer Identification Number (TIN); and,
- If residing in the U.S., the taxpayer must have filed a return (if required) for each of the three most-recent tax years.
Risks of Submitting a Streamlined Disclosure (Domestic or International)
While submitting a streamlined disclosure can significantly mitigate an individual U.S. taxpayer’s liability due to FBAR or FATCA non-compliance, submission carries certain risks as well. The biggest risk associated with submitting a streamlined disclosure is the risk of the IRS not accepting your certification of non-willfulness. If the IRS finds reason to believe that you willfully failed to file an FBAR or IRS Form 8938 (or willfully misrepresented information on either of these forms), then it can reject your filing and pursue an audit or investigation.
2. IRS CI’s Voluntary Disclosure Practice
The Voluntary Disclosure Practice is the primary replacement for the OVDP, and it is available to both individual and corporate taxpayers that, “have committed tax or tax-related crimes and have criminal exposure due to [a] willful violation of the law.” In order to secure protection under the Voluntary Disclosure Practice, a taxpayer must:
- “Cooperate with [the IRS] in determining [its] correct tax liability;” and,
- “Make good faith arrangements . . . to pay – in full – the tax, interest and any applicable penalties . . . .”
Thus, the Voluntary Disclosure Practice is not a way to avoid IRS penalties, but rather to come into compliance with the FBAR and FATCA filing requirements without the additional risks of facing an IRS CI investigation. These risks include substantial criminal fines and federal imprisonment—so submitting a voluntary disclosure can be a good option for individuals and businesses that are delinquent on their FBAR and/or IRS Form 8938 filing obligations.
As with streamlined disclosure, in order to submit a voluntary disclosure, you must not be the subject of a pending IRS audit or IRS CI investigation. If you are already under scrutiny, any disclosure you make will not be considered “voluntary,” and agents will be able to use the information you submit in furtherance of their enforcement efforts.
FAQs: What Do Taxpayers in the U.S. and Abroad Need to Know about Voluntary Disclosure?
Q: When is a taxpayer eligible to voluntarily disclose an FBAR or FATCA filing deficiency to the IRS?
While the IRS’s Streamlined Filing Compliance Procedures and IRS CI’s Voluntary Disclosure Practice have different eligibility criteria, one of the main requirements is that you must submit a voluntary filing before you are contacted by the IRS. Voluntary disclosure is a way to come into compliance before the IRS starts looking into your FBAR or Form 8938 filing history.
Q: What is the benefit of submitting a streamlined filing or voluntary disclosure?
The benefit of submitting a streamlined filing or voluntary disclosure is that it avoids the risk of facing an IRS audit or IRS CI investigation pertaining to your compliance obligations under the Bank Secrecy Act or FATCA. While utilizing one of these programs does not protect you against liability for tax, interest, and penalties entirely, it does allow you to avoid the enhanced penalties that can flow from an audit or investigation.
Q: What are the alternatives to submitting a streamlined filing or voluntary disclosure?
The alternatives to submitting a streamlined filing or voluntary disclosure depend on the specific issues you are facing. In some circumstances, it will be possible to simply submit an amended filing (with appropriate payment). In others, you may be better off negotiating an installment agreement or offer in compromise. An experienced federal tax lawyer can help you thoroughly assess your options and decide which path forward to pursue.
Q: What happens if the IRS (or IRS CI) rejects a streamlined filing or voluntary disclosure?
If the IRS (or IRS CI) rejects your streamlined filing or voluntary disclosure, then it is possible that the information you submitted could be used against you in an ensuing audit or investigation. This could be the case, for example, if (i) the IRS rejects your certification of non-willfulness, or (ii) you are already being targeted in a tax fraud or tax evasion investigation.
Q: Do I need a lawyer to help me submit a streamlined filing or voluntary disclosure?
Prior to submitting a streamlined filing or voluntary disclosure, it is strongly recommended that you consult with federal tax counsel. An experienced federal tax lawyer can help you choose between the options that are available and accurately and appropriately submit all required forms and documentation on your behalf.
Schedule a Free Consultation with a Federal Tax Lawyer at Oberheiden P.C.
If you have questions about voluntary disclosure for possible FBAR or FATCA violations, we encourage you to schedule a free consultation with a senior federal tax lawyer at Oberheiden P.C. To discuss your options in confidence, call 888-680-1745 or request an appointment online today.