Foreign Nationals & Expats
Houston Tax Attorney
OVDP vs. Streamlined Filing Compliance Procedures
Offshore Voluntary Disclosure Program vs Streamlined Filing Compliance Procedures
Clients with undisclosed foreign assets or unreported foreign income can become compliant through various offshore compliance options. Often the choice comes down to whether to apply under the offshore voluntary disclosure program (OVDP) or streamlined domestic offshore procedures (SDOP).
When a client has undisclosed foreign accounts and has a reporting requirement, there are two things that should be determined first:
- Is there also unreported income? In the vast majority of cases there is also unreported income (usually interest). If there isn’t, then the client can submit FBARs under the Delinquent FBAR Procedures, or under the Delinquent International Information Return Submission Procedures. Otherwise, the client will need to become compliant under either the OVDP or streamlined procedures, discussed below.
- Is the failure to report the foreign accounts willful? This is an important consideration that needs to be made carefully. The OVDP carries a higher penalty, but offers the taxpayer an opportunity to avoid being criminally prosecuted. On the other hand, the streamlined procedures have much lower penalties but should only be used if the failure to comply was non-willful. Taxpayers filing under the streamlined procedures when their conduct shows willfulness can expose themselves to civil and criminal liability.
Offshore Voluntary Disclosure Program (OVDP)
Where the taxpayer has undisclosed foreign financial accounts and unreported income AND their failure to comply was willful, the taxpayer should make an offshore voluntary disclosure under the OVDP. The OVDP offers the taxpayer an opportunity to avoid criminal prosecution where there is willfulness.
The OVDP assesses a mandatory “miscellaneous Title 26 offshore penalty” of 27.5% on the highest account balance. If your financial institution is on the list of IRS’ Foreign Financial Institutions or Facilitator’s List, the penalty jumps to 50%. While 27.5% may seem high, it’s in exchange for not facing criminal prosecution.
In order to make a voluntary disclosure under OVDP, the disclosure must be truthful, timely, and complete.
Truthful: Taxpayer must show a willingness to cooperate with the IRS and make good faith arrangements to full-pay the tax, penalties, and interest that the IRS applies.
Timely: A disclosure is timely if it is received before the IRS has initiated a civil or criminal investigation and before the IRS has received information from a third party (e.g., a foreign bank) regarding potential noncompliance. Note that if the taxpayer has accounts with financial institutions that are on the IRS’ Foreign Financial Institutions or Facilitator’s List, the IRS is considered to be constructively aware of the taxpayer’s noncompliance and the taxpayer therefore does not qualify to make a voluntary disclosure.
Complete: Taxpayer should disclose all foreign accounts and income in the disclosure.
Prior to making a disclosure, taxpayers may request a preclearance letter from the IRS Criminal Investigation Lead Development Center. If the IRS has already learned of the taxpayer’s noncompliance then the preclearance letter will be rejected. A decision can take up to 30 days. If a preclearance letter is granted, the taxpayer has 90 days to fully comply with all the provisions in the letter.
Married individuals may choose to disclose under the OVDP either jointly or separately. In a community property state, each spouse owns a 1/2 undivided interest in each account, regardless of which spouse is titled on the account.
After the initial letters are submitted to the IRS, the IRS will respond back with a letter stating that if the taxpayer completely and truthfully submits documents required under the OVDP, the IRS will not recommend prosecution by the Department of Justice for noncompliance. Taxpayers have 90 days from the date of the IRS letter to submit the required documents. Additional time may be requested.
The OVDP submission will then be reviewed by the IRS and at the completion of the review, the IRS will propose a closing agreement (Form 906). The taxpayer must then sign the agreement or decide to opt out of the OVDP. If the taxpayer cannot full pay the additional tax, penalties, and interest, an installment agreement may be requested.
Streamlined Filing Compliance Procedures
The Streamlined Filing Compliance Procedures (SFPC) were created for taxpayers to comply with foreign account reporting requirements where their failure was not willful. Procedures under this program are simpler and carry a lesser penalty.
There are two separate procedures under the SFCP – Streamlined Domestic Offshore Procedures (SDOP) and Streamlined Foreign Offshore Procedures (SFOP). If the US citizen or permanent resident was a non-resident of the US (physically outside the US for at least 330 full days) at any time during the three most recent years for which a tax return due date has passed, and where taxpayer’s bona fide residence is not the US, the taxpayer can file under the foreign SFCP program. Under the SFOP, there is no miscellaneous Title 26 Offshore Penalty. Otherwise, the taxpayer must file under the SDOP, which carries a miscellaneous Title 26 Offshore Penalty of 5% of the highest aggregate account balance for the covered 6 year FBAR period and the 3 year tax return period.
To file under the streamlined procedures, taxpayer must amend the three most recent tax returns and file any delinquent FBARs for the six most recent years. Additionally, the taxpayer must certify that the failure to report foreign assets and income was non-willful.
The following are general eligibility requirements applicable to all streamlined filings.
- Taxpayers must certify that conduct was not willful. Taxpayers using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures, will be required to certify, in accordance with the specific instructions set forth below, that the failure to report all income, pay all tax and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22,1) was due to non-willful conduct.
- IRS has not initiated a civil examination of taxpayer’s returns for any taxable year. If the IRS has initiated a civil examination of taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures.
There are other eligibility requirements specific to the domestic and foreign streamlined filings:
- Eligibility for the streamlined domestic offshore procedures
- Eligibility for the streamlined foreign offshore procedures
Choosing between streamlined procedures and OVDP
After a taxpayer files under the streamlined filing compliance procedures, the taxpayer may not participate in OVDP. Similarly, a taxpayer who submits to an OVDP voluntary disclosure letter pursuant to OVDP FAQ 24 on or after July 1, 2014, is not eligible to participate in the streamlined procedures.
A taxpayer eligible for treatment under the streamlined procedures who submits, or who has submitted, a voluntary disclosure letter under the OVDP (or any predecessor offshore voluntary disclosure program) prior to July 1, 2014, but who does not yet have a fully executed OVDP closing agreement, may request treatment under the applicable penalty terms available under the streamlined procedures.
The decision of whether to file under the streamlined filing compliance procedures or OVDP is one that should be made carefully and with the guidance of qualified legal counsel.
Why hire us?
Kunal Patel, partner at Mitchell & Patel LLC, comes from a diverse background that includes IRS, Big 4 public accounting, and legal experience. He focuses almost exclusively in offshore compliance matters and has successfully brought numerous taxpayers into compliance with with U.S. tax laws concerning offshore accounts and income.
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.