IRS ends OVDP — what to do if you missed the deadline
by: Anthony Parent
The IRS ended its Offshore Voluntary Disclosure Program or OVDP for short, on September 28, 2018. So what does this mean for taxpayers who have not made a disclosure? What should they do now? Are there any options left? In this video, I’ll explain exactly what paths remain open for those worried about FBAR penalties, the myriad foreign reporting penalties, and criminal prosecution.
First thing: Good news, most people don’t need the full OVDP
Since June of 2014 when relaxed streamlined disclosure rules were announced, thousands of taxpayers from every corner of the globe have called into our office quite sure they must use the standard OVDP and pay that 27.5% or 50% penalty that the program calls for. But after we talk to most people, we find that the streamlined disclosure process is more far appropriate for them. The benefit of the Streamlined program is there is a 0% or 5% penalty and only three-year look back for unpaid taxes. So not only is the tax and penalty bill lower, but so too you bill from your tax professional. It’s why we really like the Streamlined program. Which by the way, is still open.
The problem is that taxpayers have a difficult time assessing their risk profile. What we find is that the people who should be scared to death of a criminal prosecution often aren’t. Meanwhile taxpayers who are convinced they will be going to prison tomorrow actually have a small risk of prosecution. What program is best for you is really something you need to talk to an experienced tax disclosure attorney about.
Additionally, many taxpayers don’t even need a Streamlined disclosure. So many of them are able to just file delinquent forms to solve their problem.
Second thing: A voluntary disclosure program MUST ALWAYS EXIST and there is nothing the IRS can do about it.
Congress actually mandates that the IRS always have a voluntary disclosure program. So you might be confused. How can the IRS end the OVDP if this is true?
The reason is that that the OVDP is a specific type of Voluntary Disclosure. Voluntary Disclosures existed long before 2009, which marked the first Offshore Voluntary Disclosure Initiative (OVDI) and these disclosures were primarily used to protect against unreported domestic income.
For instance let’s suppose a taxpayer owns a regional US pizza chain and intentionally did not report sales that were paid in cash. And now he is worried that someone (his ex-wife) may whistle blow and he could be subject to a tax evasion indictment. Well that person, even though they have no foreign income or assets to report could still get in the standard Voluntary Disclosure program.
So for domestic tax evasion, one would typcially use the plain old Voluntary Disclosure program. If international tax evasion was involved, one was usually forced to use the OVDP. So now with the OVDP gone, the only type of Voluntary Disclosure is left is the plain old non-specific Voluntary Disclosure.
You still might be a little confused so let me try to explain more.
The OVDP was a combination that offers:
the standard voluntary disclosure protections from criminal prosecution, along with
a pre-determined offshore penalty scheme of either 27.5.% or 50% of asset base.
So really the only thing that ended September 28th isitem 2. There is no longer that pre-determined offshore penalty scheme. However, you can still get protections from criminal prosecution by getting into the plain old Voluntary Disclosure program.
So its wonderful that you can still get protections from criminal prosecution. But what about protections from massive FBAR and foreign informational return penalties like those associated with Form 5471?
Unfortunately, with the OVDP penalty scheme now gone, each taxpayer making a that plain old Voluntary Disclosure will likely be subject to an IRS examination. The IRS examination is where FBAR and Foreign informational return penalties may or may not be assessed depending on how well your facts and circumstances are developed. The goods news is that the standard of review for such an audit is very much akin to the OVDP opt-out standard, which has delivered some remarkable success for many of our clients. Their OVDP opt-out penalties were much lower than the standard OVDP penalty that they though they would have to pay.