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IRS OVDPs Comparison For the Years 2009-2016

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Between the years 2009-2016, the IRS created three different Offshore Voluntary Disclosure Programs (IRS OVDPs) for U.S. taxpayers to voluntarily disclose their undeclared foreign accounts: 2009 Offshore Voluntary Disclosure Program (2009 OVDP), 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI), and 2012 Offshore Voluntary Disclosure Program (2012 OVDP). 2012 OVDP was subsequently profoundly modified in the year 2014 in what, in essence, became the new 2014 Offshore Voluntary Disclosure Program (2014 OVDP). In this article, I will do a comparative analysis of the different IRS OVDPs based on five factors: application period, disclosure period, principal miscellaneous offshore penalty, reduced offshore penalty options and other penalties.

Application Period of the IRS OVDPs

Application period means the period of time during which the IRS must receive the application from the taxpayer in order for the taxpayer to be considered for acceptance into a voluntary disclosure program.

All of the IRS OVDPs until 2012 had a clearly defined application period. The 2009 OVDP application period ran from March 23, 2009 through October 15, 2009. The 2011 OVDI application period was from February 8, 2011 to September 9, 2011 (actually, the original period was supposed to end on August 30, 2011, but the IRS extended the deadline by 9 days during to an East Coast hurricane).

Since January 9, 2012, however, the 2012 OVDP and its 2014 version have operated without a set closing date. Instead, the IRS has reserved the right to end the 2014 OVDP at any time. While this is always a possibility, it is not likely that the IRS will make such a drastic decision for various administrative reasons as well as due to the fact that OVDP is very profitable.

Disclosure Period of the IRS OVDPs

The disclosure period means the number of tax years or specific tax years which are covered by (i.e. included in) the voluntary disclosure. The disclosure period determines the years for which FBARs and amended tax returns need to be submitted as well as the years involved in the calculation of the Offshore Penalty.

The disclosure period varied greatly among the IRS OVDPs. The 2009 OVDP disclosure period included the six-year period between 2003 and 2008 (which is equivalent to the extended statute of limitations). The 2011 OVDI expanded the disclosure period to eight years to cover the years 2003-2010.

The 2012 OVDP differed from the prior programs, because the program did not have a fixed closing date and, hence, no fixed voluntary disclosure years. Instead, the disclosure period for the 2012 OVDP and its 2014 version apply to the most recent eight years for which the due date has already passed – i.e. the last closed tax year plus the previous seven tax years.

This flexibility on the part of the 2012 and 2014 IRS OVDPs may allow for a certain degree of strategy planning where a decision has to be made with respect to which is the eighth year that is more beneficial to be included. The OVDP application is then submitted in accordance with this strategy.

Principal Miscellaneous Offshore Penalty (the Default Penalty of IRS OVDPs)

All of the IRS OVDPs contain the default or “principle” Miscellaneous Offshore Penalty (the “OVDP Penalty”). The OVDP Penalty is calculated based on the assets subject to penalty (so-called “OVDP penalty base”) as a percentage of these assets.

This percentage of the OVDP Penalty has been steadily going up with each program. The 2009 OVDP Penalty rate was 20%; it grew to 25% for 2011 OVDI and 27.5% to 2012 OVDP.

The 2014 version of the 2012 OVDP introduced a dual Principal OVDP Penalty. It kept the 27.5% penalty rate as a default rate, but it introduced a 50% penalty rate for taxpayers with an account in a foreign financial institution (“FFI”) that had or has been publicly identified by the DOJ as being under investigation or as an entity cooperating with a DOJ investigation. The same 50% penalty rate also applied to facilitators who helped the taxpayer establish or maintain an offshore arrangement.

All such FFIs and facilitators are listed separately by the IRS on the OVDP website.

Reduced Offshore Penalty Options under IRS OVDPs

In addition to the Principal OVDP Penalty, almost all IRS OVDPs (except the 2014 OVDP) contained various Reduced OVDP Penalty options.

Already the 2009 OVDP introduced a reduction to a 5% penalty for so-called “passive account holders”. However, the 2009 OVDP’s definition of the 5% penalty category was fairly primitive and this was the only option for a reduced penalty.

The 2011 OVDI was really the program that perfected the concept of the Reduced OVDP Penalty. It contained and expanded the 5% penalty option defining the “passive account holders” as the taxpayers who: (a) did not open the account or cause the account to be opened, (b) exercised minimal, infrequent contact with respect to the account, (c) did not withdraw more than $1,000 from the account in any year covered by the voluntary disclosure, except in the case of a withdrawal closing the account and transferring the funds to an account in the U.S., and (d) could establish that all applicable U.S. taxes had been paid on the funds deposited to the account (i.e., where only account earnings escaped U.S. taxation).

The 5% penalty option also applied to US citizens who resided overseas and did not know that they were US citizens until the 2011 OVDI.

Furthermore, the 2011 OVDI introduced a new Reduced OVDP Penalty of 12.5% available to taxpayers with the highest aggregate account balance (which was really expanded to more than just bank accounts and included various assets) in each of the eight years covered by the OVDI less than $75,000.

The 2012 OVDP was the last program so far to adopt the Reduced OVDP Penalty structure. It borrowed it completely unchanged from the 2011 OVDI with both 5% and 12.5% options available.

In 2014, the OVDP was modified to remove all Reduced OVDP Penalty options. The reason for such a drastic change was the introduction of the Streamlined Compliance Options (both SDOP and SFOP) which operated under the reduced (in the case of SFOP, reduced to zero) penalty structure for non-willful taxpayers.

Indeed, the non-willful taxpayers won more than anyone else from the changes introduced by 2014 OVDP. However, the willful taxpayers with small bank accounts were the biggest losers from these changes. The 2014 OVDP also marked the rise of the “willfulness vs. non-willfulness” concept to the dominant position in the world of offshore voluntary disclosures.

Other Penalties under the IRS OVDPs

With respect to other penalties (such as failure to file, failure to pay and accuracy related penalties), all of the IRS OVDPs were similar in their structure.

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If you have undisclosed accounts or other assets overseas, you are in grave danger of an IRS discovery and the imposition of draconian noncompliance penalties. This is why you need professional help to evaluate your voluntary disclosure options, including the 2014 OVDP and the Streamlined Compliance Procedures.

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Streamlined Domestic Offshore Procedures: Eligibility Requirements

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One of the most significant changes introduced by the 2014 update to the voluntary disclosure structure is the unprecedented introduction of the streamlined voluntary disclosure option to the U.S. taxpayers who reside in the United States – the so called, Streamlined Domestic Offshore Procedures. The introduction of the Streamlined Domestic Offshore Procedures means that the IRS finally recognized that there is a very large number of U.S. taxpayers who were non-willful with respect to their inability to comply with numerous obscure complex requirements of U.S. tax laws. They now have a new official option to deal with their situation.

Since the new option of the participation in the Streamlined Domestic Offshore Procedures is somewhat important to the voluntary disclosure, I would like to focus this short article on the general eligibility requirements for the Streamlined Domestic Offshore Procedures.

There are three eligibility requirements that must be met in order be able to utilize the Streamlined Domestic Offshore Procedures. First, the taxpayer must be a U.S. citizen, U.S. lawful permanent resident, or he must have met the substantial presence test.

The substantial presence test is outlined in 26 U.S.C. 7701(b)(3). Under 26 U.S.C. §7701(b)(3), an individual meets the substantial presence test if the sum of the number of days on which such individual was present in the United States during the current year and the 2 preceding calendar years (when multiplied by the applicable multiplier) equals or exceeds 183 days.

The second requirement is critical to the participation in the Streamlined Domestic Offshore Procedures – taxpayer’s violations of the applicable U.S. tax requirements must be non-willful. The failures to report the income from a foreign financial asset, pay tax as required by U.S. law, file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and file other international information returns (such as Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) should have been non-willful. If the failure to file the FBAR and any other information returns was willful, the participation in the Streamlined Domestic Offshore Procedures is not likely to be possible.

Finally, the third eligibility requirement for the participation in the Streamlined Domestic Offshore Procedure is that the participating taxpayer is not subject to an IRS civil examination or an IRS criminal investigation, irrespective of the examination is related to undisclosed foreign financial assets or involves any of the years subject to the voluntary disclosure. In either case, the taxpayer will not be eligible to use the Streamlined Domestic Offshore Procedure.

Contact Sherayzen Law Office for Legal Help With Your Offshore Voluntary Disclosure

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