Hand-with-Key-Opening-Safe-Deposit-Box

Willful or not, the penalties are steep. Take advantage of offshore compliance options like the OVDP to conform, pay reduced penalties, and avoid prosecution.

Tax strategies

Hiding Foreign Assets From the IRS? Disclosure Programs Help You Come Clean

  • David Springsteen
  • 11/30/2016

If you’re a United States taxpayer with unreported financial assets, you can still come into compliance, pay reduced civil penalties, and avoid criminal prosecution by taking advantage of one of the IRS’s voluntary disclosure programs.

Civil penalties for willful failure to report foreign financial assets can be as high as 50 percent of the total balance of the foreign financial account per violation, so stepping forward and coming clean will cost you much less than noncompliance penalties. Noncompliance that wasn’t willful can be costly, too. In either case, the IRS can terminate these relief programs at any time, so you should act quickly to avail yourself of them.

The relief programs designed to assist taxpayers with federal foreign tax compliance include the:  

  • Offshore Voluntary Disclosure Program (OVDP)
  • Streamlined Filing Compliance Program (SFCP)
  • Delinquent FBAR Submission Procedures
  • Delinquent International Information Return Submission Procedures

You’ll need to understand the purpose and particulars of each program to find which option is right for you.

Offshore Voluntary Disclosure Program (OVDP)

The OVDP gives taxpayers the opportunity to avoid criminal and civil penalties for willful failure to report income from assets held in foreign financial accounts or failure to disclose foreign assets on certain information returns.

Under this program, you must: 

  1. File original or amended tax and information returns (including FBARs) for the most recent eight years. 2
  2. Pay all taxes, interest, and a 20 percent or 40 percent accuracy-related penalty on underpayments imposed by Section 6662.
  3. Pay a 27.5 percent penalty on the highest balance of your offshore assets for the period covered by the voluntary disclosure.

As of August 4, 2014, the 27.5 percent penalty is further increased to 50 percent in cases where the U.S. government has undertaken certain publicly disclosed enforcement actions against the financial institution holding your account.

The IRS has already collected $10 billion and received more than 55,800 disclosures under the OVDP.

Streamlined Filing Compliance Program (SFCP)

The SFCP is available to taxpayers who certify that their failure to report foreign accounts and pay all tax due was not willful.

The SFCP is composed of a two-track program: Streamlined Foreign Offshore Procedures (SFOP) and Streamlined Domestic Offshore Procedures (SDOP).

SFOP SDOP
The SFOP is available to nonresident individuals or estates of individuals who are not physically present within the U.S. for certain defined periods of time. The SDOP is available to U.S. citizens and tax residents and all other nonresident individuals or estates of individuals.
Participants in the SFOP are permitted to file delinquent original or amended tax returns and are not subject to penalty provisions. Participants in the SDOP may only file amended returns; original tax return filings are not accepted.
Taxpayers in the SFOP are not subject to an offshore penalty.

Taxpayers enrolled in the SDOP are subject to a 5 percent offshore penalty on the highest aggregate balance or value of assets that should have been reported on an FBAR or Form 8938 filing.

Both procedure programs require you to:  

  1. File three years of tax returns.
  2. Pay tax and interest due (exclusive of penalties).
  3. File six years of FBARs.
  4. Certify in writing under penalties of perjury that failure to file the aforementioned returns was not due to willful conduct.

You can be disqualified from using these streamlined procedures if the IRS has initiated a civil examination against your returns for any taxable year or if you are under criminal investigation by the IRS.

Delinquent FBAR Submission Procedures

The Delinquent FBAR Submission Procedures are available to taxpayers who are not required to use the OVDP or Streamlined Filing Compliance Procedures to file delinquent original or amended tax returns and pay additional tax.

These procedures are available to you if you have not filed FBARs, are not under civil or criminal investigation by the IRS, and have not been contacted by the IRS about the delinquent FBARs. You must include a statement to the IRS explaining why the FBARs are being filed late. Even though the FBARs are delinquent, the IRS will not impose a failure-to-file penalty if you properly reported income from the foreign financial asset on your U.S. tax returns and paid the federal tax due on the income.

Delinquent International Information Return Submission Procedures

Similar to the Delinquent FBAR Submission Procedures, the International Information Return Submission Procedures are available to taxpayers who are not required to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent original or amended tax returns and pay additional tax.

To use these procedures, you must have reasonable cause for failing to file one or more required international information returns and cannot be under civil or criminal investigation by the IRS or have been contacted by the IRS about the delinquent information returns.

You must attach a reasonable cause statement to each delinquent information return filing that details the facts establishing reasonable cause for failure to file and includes a statement certifying that you were not involved in tax evasion. The term “reasonable cause” is not explicitly defined by federal tax statute and, as such, your specific fact pattern needs to be reviewed to determine whether reasonable cause exists. The IRS may impose penalties on you if it does not accept your reasonable cause explanation for your delinquent tax returns.

How we can help

CLA’s international tax services can assist you in pursuing IRS settlements under the OVDP and similar relief programs. Generally, taxpayers who enroll in these programs receive the benefits of avoiding criminal prosecution and paying a narrower range of civil penalties than otherwise might apply if their noncompliance was detected by the IRS upon audit. We can help you sort through complicated forms, interface with the IRS on your behalf, and achieve compliance and the peace of mind that comes with it.