How the IRS’ Offshore Voluntary Disclosure Program works

This article looks at the benefits and drawbacks of the Offshore Voluntary Disclosure Program.

The Internal Revenue Service (IRS) has been cracking down on people who hold offshore financial assets. The consequences for getting caught hiding assets and income from the IRS are severe and can include steep financial penalties and even criminal prosecutions. However, the IRS tends to be much more lenient with those who voluntarily disclose previously undisclosed offshore assets as opposed to those whose offshore assets are discovered through an audit. The agency's Offshore Voluntary Disclosure Program (OVDP) is designed to facilitate the voluntary disclosure of offshore assets in exchange for amnesty from criminal prosecution.

What is the purpose of the OVDP?

The OVDP allows those who hold foreign assets and accounts that have not been declared to the IRS to bring their file into compliance with U.S. tax law. Those who have undeclared foreign assets can disclose these assets to the OVDP. In exchange, those who voluntarily disclose such assets will typically be protected from criminal prosecution. Such criminal penalties vary depending on the alleged offense. However, by way of example, failing to file an FBAR (Form 114 - Report of Foreign Bank and Financial Accounts) is punishable by a prison term of up to 10 years and penalties of up to $500,000.

What about civil penalties?

It's important to understand that being accepted into the OVDP doesn't exempt one from civil penalties entirely. There are still substantial fees that will have to be paid, which for offshore assets can range from 27.5 to 50 percent. These are obviously not insignificant penalties and must be taken into consideration when deciding whether to apply for the OVDP.

What is the benefit of OVDP?

With penalties so high, it is reasonable to ask whether there is much benefit in actually applying for the OVDP. Obviously, protection from criminal prosecution is a major benefit. However, while the civil penalties may be extremely high, they do have the additional benefit of being predictable. If the IRS finds out about secret offshore accounts through an audit then the penalties, both civil and criminal, could be much higher than they would be if the tax filer had disclosed thos e assets to the IRS voluntarily. However, it is also important to point out, as Forbes notes, that during an audit the IRS may be able to be more flexible in what kind of penalties it imposes, whereas penalties imposed through the OVDP are fairly firm and harder to negotiate.

Dealing with tax problems

For those who have tax issues with the IRS, it is important to reach out to an experienced tax attorney for help who can deal with the IRS directly on clients' behalf. With qualified legal advice, disputes with the IRS are more likely to be resolved in a satisfactory manner.