2014 Streamlined OVDP (OVDI) Voluntary Disclosure Option
Under the 2012 OVDP programs, and prior OVDI programs, there was a streamlined procedure that allowed for a complete waiver of all offshore penalties, but was only available to non-residents who meet certain conditions. This prior Streamlined OVDP program was replaced with the 2014 Streamlined Filing Compliance Procedures. In addition to eliminating some of the stringent conditions for qualifying under the original streamlined program, the 2014 OVDP changes also announced another variation of the streamlined OVDP program: the Streamlined Domestic Offshore Procedures.
Streamlined Domestic Offshore Procedures: An Alternative to 2014 OVDI/OVDP
Under the 2014 OVDI Streamlined procedure, U.S. residents who meet certain requirements have the option of using the Streamlined Domestic Offshore Procedures to address their unreported income and/or undisclosed foreign bank accounts.
Key points of the 2014 OVDI Streamlined procedure:
- Taxpayers pay any tax due on unreported income for the past three years, plus interest.
- Offshore penalty equals 5% of the maximum aggregate balance in unreported foreign accounts over the past six years.
- This 5% penalty is calculated only on assets subject to reporting, unlike the broader penalties in the standard OVDI program.
- Offshore real estate held directly is excluded from the penalty computation.
Streamlined Domestic Offshore Procedure Qualification Requirements
To qualify under the new Streamlined Domestic Offshore Procedure, you must meet four eligibility requirements:
- Fail to meet the non-residency requirements for the Foreign Domestic Offshore Procedure.
- Non-residents qualify for Streamlined Foreign Offshore Procedures (no offshore penalties).
- Domestic residents must use Domestic Procedures and pay the 5% penalty.
- Have previously filed all required U.S. tax returns for the last three years.
- The relevant years are the three most recent years for which the filing due date has passed.
- Have failed to report income from a foreign financial asset and pay tax on that income.
- Required because those who properly reported income already have better options for remedying missed FBARs without penalty.
- Your failure must be due to non-willful conduct.
- “Willful” means conscious disregard of a known legal duty. Mistakes, misunderstandings, or negligence qualify as non-willful.
Streamlined OVDP / OVDI Submission Requirements
The new streamlined OVDP / OVDI program is far simpler and less burdensome than the standard voluntary disclosure program.
Steps for Compliance:
- Prepare amended returns for the most recent three years, including all necessary information returns (Forms 8938, 8621, 926, 5471, 5472, 3520, 3520-A).
- Write in red ink “Streamlined Domestic Offshore” on the top of each amended return.
- Mail all documents (excluding FBARs) to the designated service center in Austin, TX.
- Include a check for all taxes due, plus accrued interest.
- Interest miscalculations are not penalized; you will receive a refund or a balance notice.
- No penalties will apply for previously unreported income or late-filed forms under these procedures.
- Only three years of amended returns are required, compared to eight under standard OVDI.
Required Certification Statement:
You must certify under penalty of perjury that:
- You qualify for the 2014 OVDP Streamlined Domestic Offshore Procedures.
- All FBARs have been filed.
- Your failure was due to non-willful conduct.
- Your computed offshore penalty is accurate (attach calculation worksheet).
Additional Requirements (if applicable):
- If deferring income on foreign retirement accounts (e.g., Canadian RSPs), submit a late election request and explanation.
- Include Form 8891 for each applicable year and account.
- Submit a check for the 5% offshore bank account penalty.
- File all delinquent FBARs (FinCen Form 114) for the past six years online.
If You Disagree with the 5% Offshore Penalty
While the Streamlined Domestic Offshore Procedures are favorable for many, the 5% penalty might still seem high for some. Options include:
- Enter the voluntary disclosure program and opt-out at closing.
- Present your case for a warning letter instead of penalties.
- Honest mistakes often result in penalty waivers under opt-out procedures.
Important: Taxpayers entering the voluntary disclosure program on or after July 1, 2014 cannot later choose the Streamlined Procedures.
For more on this, see: Qualified Quiet Disclosures: Opting-out of OVDP.
Taxpayers Already in the Offshore Voluntary Disclosure Program
Transitional Treatment
For those who submitted a disclosure on or before June 30, 2014 (but not yet signed a closing agreement):
- Reduced 5% penalty may apply under transitional treatment.
- All standard OVDI rules remain (filing eight years of returns and FBARs).
- Penalty base is the highest balance over eight years, not six.
- Additional penalties (20% substantial understatement, late filing/payment) still apply.
Key Differences vs. Streamlined Procedures:
| Feature | Transitional Treatment | Streamlined Procedures |
|---|---|---|
| Years of Returns | 8 | 3 |
| FBAR Filing Period | 8 years | 6 years |
| Offshore Penalty | 5% | 5% |
| Additional Penalties | Yes (20%, late filing) | None |
| Consent to Assessment Period | Required | Not required |
Conclusion
While transitional treatment offers reduced penalties compared to the 27.5% standard OVDI rate, Streamlined Procedures remain the most favorable for eligible non-willful violators.
Frequently Asked Questions
What is the difference between the 2014 Streamlined Domestic Offshore Procedures and the original OVDP?
The 2014 Streamlined Domestic Offshore Procedures are a simplified alternative to the original Offshore Voluntary Disclosure Program (OVDP). They require only three years of amended returns, have no additional penalties beyond a 5% offshore penalty, and are designed for non-willful taxpayers. In contrast, the original OVDP was more stringent, requiring eight years of returns and higher penalties.
Who qualifies for the Streamlined Domestic Offshore Procedures?
To qualify, a taxpayer must: (1) reside in the U.S., (2) have filed the last three years of tax returns, (3) have failed to report foreign income due to non-willful conduct, and (4) not meet the non-residency requirements for the foreign streamlined program. All FBARs must be filed, and the taxpayer must certify non-willfulness.
How is the 5% offshore penalty calculated?
The 5% penalty is based on the highest aggregate balance of all foreign financial assets that were subject to reporting in the past six years. It excludes certain assets, such as directly held offshore real estate, and is significantly lower than penalties under the traditional OVDP.
Can taxpayers already in the OVDP switch to the streamlined procedures?
No, taxpayers who entered the OVDP on or after July 1, 2014, cannot later elect to use the streamlined procedures. However, those who entered before that date may qualify for transitional treatment, which may reduce penalties but still requires eight years of filings and additional penalty exposure.
What happens if I miscalculate interest or make an error in my submission?
Interest miscalculations are not penalized. The IRS will either refund any overpayment or send a notice for the balance due. Errors made in good faith as part of a non-willful streamlined submission generally do not result in penalties.