In an OVDP case, the taxpayer must submit eight years of FBARs; submit eight years of amended income tax returns; pay the tax owing on the amended income tax returns, interest on the tax, and an “accuracy-related” penalty equal to 20 percent of the tax; pay a miscellaneous title 26 offshore penalty equal to 27.5 percent of the high year-end balance of the taxpayer’s foreign financial accounts over the eight-year disclosure period. This is a major commitment in tax, interest, penalties, and professional fees. The Streamlined Offshore Compliance Procedures were intended to ameliorate such harshness. Most taxpayers can become compliant by means of the Streamlined Procedures, the Delinquent FBAR Submission Procedures, or the Delinquent International Information Return Submission Procedures, discussed above. An OVDP case concedes willfulness. Only a taxpayer whose noncompliance was clearly willful should proceed under the OVDP. OVDP cases should be, and are, rare.
A taxpayer begins an OVDP case by submitting to the Internal Revenue Service Form 14457, Voluntary Disclosure Letter, and for each of the taxpayer’s foreign financial accounts, a Form 14454, Attachment to Voluntary Disclosure Letter. The purpose of this is to identify the taxpayer to the IRS, so that the IRS can check its records and determine whether it is aware of the taxpayer’s noncompliance. An OVDP disclosure is, after all, supposed to be a voluntary disclosure. If the IRS is not aware of the taxpayer’s noncompliance, it notifies the taxpayer that he or she may proceed under the OVDP. Otherwise, the IRS notifies the taxpayer that he or she may not proceed under the OVDP.
It is rare for the IRS to reject a taxpayer’s application to the OVDP. If it happens, the taxpayer should make sure that he or she is compliant with U.S. laws concerning the filing of FBARs and the filing of income tax returns and payment of income tax.
Within 90 days after being admitted into the OVDP a taxpayer must submit to the IRS the following:
- An amended U.S. income tax return for each of the last eight years properly reporting the taxpayer’s interests in foreign financial accounts and income therefrom. This includes filing a properly-completed Schedule B, Interest and Ordinary Dividends, for each year, as well as all required Forms 8938, Statement Of Specified Foreign Financial Assets, Forms 5471, Information Return of U.S. Persons With Respect To Foreign Corporations, and other required information returns.
- Form 14453, Penalty Computation Worksheet.
- Form 14452, Foreign Account Asset Statement, for each of the taxpayer’s foreign financial accounts.
- Form 872, Consent To Extend Time To Assess Tax, for each of the years covered by the voluntary disclosure.
- Consent to Extend the Time to Assess Civil Penalties Provided by 31 U.S.C. 5321.
- A copy of each FinCEN Form 114, Report of Foreign Bank or Financial Accounts, (“FBAR”) filed for the taxpayer for years in the eight-year disclosure period.
- Payment of tax due on the amended income tax returns, and interest on the tax, together with an accuracy-related penalty equal to 20 percent of the tax.
- A miscellaneous Title 26 offshore penalty equal 27.5 percent of the taxpayer’s highest aggregate year-end balance of foreign accounts for the eight-year OVDP disclosure period.
A taxpayer may request additional time to make the foregoing submission.
After an OVDP submission is completed, the IRS assigns a Revenue Agent to the case. The Revenue Agent is part of a team also including a technical advisor and a manager. The Revenue Agent reviews the case, consults with the technical advisor and the manager, requests additional information or documents needed from the taxpayer, and informs the taxpayer of proposed adjustments to the taxpayer’s OVDP submission. When the taxpayer and the IRS agree on the OVDP case, they enter into a Form 906, Closing Agreement, as to it.
If the taxpayer disagrees with adjustments proposed by the IRS, and is unable to persuade the IRS against the proposed adjustments, there is no appeal right. The taxpayer’s option is to withdraw the case from the OVDP. The IRS claims that it may examine the tax returns of a taxpayer who withdraws a case from the OVDP. We have withdrawn many taxpayers from the OVDP, and the IRS has not audited any of them.
If a taxpayer withdraws from the OVDP, the taxpayer must make sure that he or she is compliant with U.S. laws concerning the filing of FBARs and the filing of income tax returns and payment of income tax.