Requirements of the IRS Offshore Voluntary Disclosure Program

The IRS Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report and pay taxes on foreign financial assets.

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In addition to individuals, entities, such as corporations, partnerships and trusts are also eligible to make voluntary disclosures.

The key benefits of OVDP include the protection from criminal prosecution, as well as a more favorable penalty structure. Pursuant to the provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice (DOJ) for any issue relating to tax noncompliance or failure to file Report of Foreign Bank and Financial Accounts (FBAR).

However, taxpayers must comply with the following requirements:

• Provide all required documents;
• Cooperate in the voluntary disclosure process, including providing information on foreign accounts and assets, institutions and facilitators, and signing agreements to extend the period of time for assessing liabilities under the Internal Revenue Code (IRC) and FBAR penalties;
• Pay 20-percent accuracy-related penalties under IRC § 6662(a) on the full amount of your offshore-related underpayments of tax for all years;
• Pay all failure-to-file penalties;
• Pay, in lieu of all other penalties that may apply to the undisclosed foreign accounts, assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period, a miscellaneous Title 26 offshore penalty equal to 27.5 percent of the highest aggregate value of OVDP assets during the period covered by the voluntary disclosure. A 50 percent offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation;
• Submit full payment of any Title 26 tax liabilities for years included in the offshore disclosure period, applicable interest, an offshore penalty, accuracy-related penalties for offshore-related underpayments, and, if applicable, the failure-to-file and failure-to-pay penalties;
• Execute a Closing Agreement on Final Determination Covering Specific Matters, Form 906; and
• Agree to cooperate with IRS and DOJ offshore enforcement efforts, if requested, by providing information about financial institutions and other facilitators who helped the taxpayer establish or maintain an offshore arrangement.

Paying Tax Penalties Under OVDP 

It is important to highlight that the ability to pay is not necessarily a condition of the OVDP. The terms of the program generally require the taxpayer to pay the tax, interest, offshore penalty, and accuracy-related penalty, and, if applicable, the failure-to-file and failure-to-pay penalties in connection with the voluntary disclosure submission. However, it is possible for a taxpayer who is unable to make full payment of these amounts to request the IRS to consider other payment arrangements. 

The burden is on the taxpayer to establish the inability to pay, to the satisfaction of the IRS, based on full disclosure of all assets and income sources, domestic and foreign, under the taxpayer’s control. Assuming that the IRS determines that the inability to fully pay is genuine, the taxpayer can often work out other financial arrangements with the IRS to resolve all outstanding liabilities and still participate in the program. 

Message for Taxpayers

Taxpayers should consult with qualified tax and legal advisors when considering and making a voluntary disclosure. Given that the OVDP is closing in September, time is of the essence. If you have questions or concerns, Scarinci Hollenbeck’s experienced tax attorneys stand ready to assist.