Offshore Voluntary Disclosure Program (OVDP): What You Need To Know

The Offshore Voluntary Disclosure Program (OVDP) is a program administered by the Internal Revenue Service (IRS) that allows taxpayers with undisclosed foreign assets and income to come forward and disclose their tax liabilities. The program is designed to encourage taxpayers to become compliant with their U.S. tax obligations and avoid the risk of criminal prosecution and substantial penalties. In this post, we will discuss what you need to know about OVDP, including eligibility requirements, benefits, and potential drawbacks.

Eligibility Requirements

To be eligible for OVDP, you must have undisclosed foreign assets and income that are subject to U.S. tax. This includes bank accounts, investments, real estate, and other assets held outside the United States. You must also have willfully failed to report these assets and income on your U.S. tax returns or other informational forms, such as the Report of Foreign Bank and Financial Accounts (FBAR).

Benefits of OVDP

The main benefit of OVDP is the opportunity to avoid criminal prosecution and reduce the penalties you may face. Under OVDP, taxpayers are required to pay back taxes, interest, and a miscellaneous offshore penalty based on the highest value of their undisclosed foreign assets. The penalty is usually 27.5% of the highest value of the foreign assets but can be as low as 5% or as high as 50%, depending on the circumstances of the case. The penalty amount is determined by the IRS and may take into account factors such as the willfulness of the noncompliance, the amount of tax owed, and the number of years of non-compliance.

Potential Drawbacks of OVDP

While OVDP offers many benefits to taxpayers, there are also potential drawbacks to consider. One of the main drawbacks is the high cost of participation, including the payment of back taxes, interest, and penalties. Additionally, OVDP requires taxpayers to waive certain legal rights and privileges, such as the right to contest the penalties assessed by the IRS. OVDP may also trigger other tax obligations, such as the payment of additional taxes on foreign income and the filing of amended tax returns.

Alternatives to OVDP

If you are not eligible for OVDP or do not wish to participate in the program, there are other options available to become compliant with your U.S. tax obligations. One alternative is the Streamlined Filing Compliance Procedures, which allows eligible taxpayers to come forward and disclose their foreign assets and income with reduced penalties.

The Streamlined Procedures are available to taxpayers who can certify that their noncompliance was non-willful and who meet certain other eligibility requirements. Another alternative is the Delinquent FBAR Submission Procedures, which allows taxpayers who have failed to file FBARs to come forward and file the delinquent forms without penalty, provided that they have not been contacted by the IRS regarding their non-compliance.

How to Participate in OVDP

To participate in OVDP, taxpayers must submit a letter to the IRS Criminal Investigation Unit expressing their intent to disclose their offshore assets and income. The letter should provide a detailed explanation of the facts and circumstances surrounding the noncompliance, as well as the taxpayer’s cooperation and willingness to comply with U.S. tax laws.

After the letter is submitted, the IRS will review the case and may request additional information and documentation from the taxpayer. If the case is accepted into OVDP, the taxpayer will be required to provide full and complete disclosure of their offshore assets and income and pay back taxes, interest, and penalties as determined by the IRS.

Timing of OVDP Participation

Taxpayers should consider the timing of their OVDP participation, as the IRS may change the terms or requirements of the program over time. It is important to stay informed of any changes to the program and consult with tax resolution/consultation services to determine the best timing for participation.

Disclosure of Foreign Accounts

Under OVDP, taxpayers are required to disclose all foreign accounts, even those that have been closed or are dormant. Failure to disclose all accounts could result in penalties and possible criminal prosecution. Taxpayers should make sure to thoroughly review all of their foreign accounts and assets before submitting their OVDP letter to the IRS.

Avoiding Future Noncompliance

Participation in OVDP should also serve as a wake-up call to taxpayers to avoid future noncompliance with U.S. tax laws. Taxpayers should take steps to ensure that they are properly reporting all foreign income and assets on their tax returns and FBARs going forward. This may include hiring a tax professional, conducting regular reviews of their financial accounts, and staying informed of changes to tax laws and reporting requirements.

OVDP can be a valuable program for taxpayers with undisclosed foreign assets and income who wish to become compliant with their U.S. tax obligations. While there are potential drawbacks to participation, such as the high cost and loss of certain legal rights, the benefits of avoiding criminal prosecution and reducing penalties can outweigh these drawbacks for some taxpayers.

However, it is important to carefully consider all options and seek the advice of a qualified tax professional before deciding whether to participate in OVDP or pursue alternative options. By becoming compliant with U.S. tax laws, taxpayers can avoid the risk of significant penalties and legal consequences and ensure that they are in good standing with the IRS.

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