Overview of Offshore Account Disclosures
More Swiss banks are concluding their discussions as part of the huge U.S. settlement. Other enforcement efforts have included the John Doe summonses issued to FedEx, DHL, UPS, and HSBC relating to Sovereign.
Disclosure is clearly the best path, and the OVDP still has the highest degree of safety. Presently, taxpayers in the 2014 OVDP face a 50% penalty if they had accounts at any of the banks listed [here].
Penalties Within OVDP
- Outside of these banks, the norm within the OVDP remains 27.5%.
- That is far better than prosecution or much bigger civil penalties.
- Some taxpayers can opt for the easier and less costly Streamlined program.
This list does not impact the Streamlined programs because you must be non-willful to qualify. The Streamlined program remains very favorable for those who qualify.
All of this is part of the June 2014 improvements to the OVDP, which sparked new interest in cleaning up offshore accounts.
Enforcement Trends and Risks
With over 100 Swiss banks taking the DOJ deal and FATCA disclosures increasing, everyone is rooting out Americans with increasing vigilance.
Within the OVDP, people who pre-cleared before the various effective dates are generally safe from the higher 50% penalty.
Increasing Risks
- As additional banks are added to the list, only those who get in under the wire will stay safe.
- The 50% penalty now applies to all taxpayers with accounts at financial institutions or with facilitators which are named, are cooperating or are identified in a court filing such as a John Doe summons.
Compliance Options and Consequences
For those who are not compliant with reporting worldwide income on U.S. tax returns, FBARs and IRS Forms 8938, it is safest to join the OVDP or (in appropriate cases) at least the Streamlined program.
The IRS has been clear that “quiet” foreign account disclosures are not enough.
Setting aside the potential criminal liabilities, the civil penalties alone are potentially catastrophic outside one of the disclosure programs.
Civil Penalty Risks
- Although the 50% penalty is high, willful civil violations can draw penalties equal to the greater of $100,000 or 50% of the balance in the account for each violation.
- A Florida man was hit with civil penalties equal to 150% of his account even though this exceeded his entire offshore account balance.
In that sense, even a 50% penalty applied once can look attractive when you consider the possibility of prosecution or even just higher civil FBAR penalties.
IRS Guidance and Final Thoughts
Recent guidance suggests that the IRS could be more lenient in the future, but the IRS’s definition of leniency can still make the OVDP a very good and very certain deal.
Frequently Asked Questions
What is the Offshore Voluntary Disclosure Program (OVDP) and why does it matter?
The OVDP is an IRS initiative designed to encourage taxpayers with undisclosed offshore accounts to come forward voluntarily. Participating in the program helps taxpayers avoid criminal prosecution and potentially severe civil penalties.
What is the difference between the OVDP and the Streamlined program?
The OVDP is intended for taxpayers who may have willfully failed to report offshore assets, offering more protection but with higher penalties. The Streamlined program is for those who acted non-willfully, providing a simpler and less expensive disclosure option.
When does the 50% penalty apply in the OVDP?
The 50% penalty applies to accounts held at banks or with facilitators that are named, cooperating with the DOJ, or identified through legal proceedings such as John Doe summonses. Taxpayers who pre-cleared before effective dates may avoid the higher penalty.
Why are “quiet disclosures” risky?
Quiet disclosures amending past returns without formally joining a disclosure program are discouraged by the IRS. They expose taxpayers to the risk of full-blown audits, criminal prosecution, and significantly higher penalties.
Are there any signs that the IRS might ease penalties in the future?
Recent IRS guidance hints at potential leniency, but even so, the OVDP continues to offer a secure and definitive route for resolving offshore tax issues. Waiting for future changes may increase risk as enforcement intensifies.