OVDI Is Closed: Current IRS Offshore Disclosure Options

The Offshore Voluntary Disclosure Initiative (OVDI) was a program from the Internal Revenue Service (IRS) that allowed taxpayers to report previously undisclosed foreign financial assets. Running in various forms since 2009, the final version of the program closed on September 28, 2018. These programs provided a pathway for U.S. taxpayers to become compliant with tax obligations, offering a chance to avoid criminal prosecution and limit civil penalties. The IRS closed the program due to declining participation and the effectiveness of other enforcement tools.

Current IRS Disclosure Options

With the closure of the OVDI, the IRS provides other avenues for taxpayers to address undisclosed foreign accounts. The main options are the updated Voluntary Disclosure Practice (VDP) and the Streamlined Filing Compliance Procedures (SFCP). The appropriate path depends on whether a taxpayer’s failure to comply was “willful” or “non-willful.”

Willful conduct is a voluntary, intentional violation of a known legal duty. This can include intentionally hiding assets or “willful blindness,” which is consciously avoiding knowledge of tax reporting obligations. The VDP is for taxpayers whose non-compliance is willful. It offers a way to become compliant and generally eliminates the risk of criminal prosecution, though significant penalties may apply.

Non-willful conduct is behavior due to negligence, inadvertence, or a good faith misunderstanding of the law. The SFCP is available for taxpayers who can certify their failure to report was non-willful. The SFCP has separate versions for U.S. taxpayers residing in the United States and for those living abroad, each with different penalty structures.

Information and Documents for Disclosure

A disclosure requires gathering specific documents. For any foreign financial account, the taxpayer must provide the name and address of the financial institution, the account number, and the highest value of the account for each year. The disclosure period is the last six years for the VDP and the last three years for the SFCP.

Taxpayers must prepare amended federal income tax returns (Form 1040-X) for the years in their disclosure period, reporting previously omitted foreign income. The most common informational forms are FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), and Form 8938, Statement of Specified Foreign Financial Assets. The FBAR is filed electronically with the Financial Crimes Enforcement Network, while Form 8938 is filed with the tax return.

For the SFCP, a detailed narrative statement, signed under penalty of perjury, is required. This document must explain the specific facts for the failure to report, including the taxpayer’s background and how they discovered their obligations. The VDP also requires a narrative explaining the facts and circumstances of the non-compliance.

The Voluntary Disclosure Submission Process

The submission process differs between the VDP and the SFCP. For the VDP, the process begins with a preclearance request using Form 14457 submitted to the IRS Criminal Investigation division. This allows the IRS to determine if the taxpayer is eligible, meaning they are not already under a civil examination or criminal investigation.

If the IRS grants preclearance, the taxpayer submits the complete disclosure package. This package includes the amended tax returns, informational forms, and the required narrative. The submission is sent to a specific VDP address, where an examiner is then assigned to review the submission and finalize the case.

The SFCP submission process is more direct and does not require preclearance. Taxpayers mail their complete package, including amended returns, informational forms, the non-willful narrative, and penalty calculation, to a designated IRS service center. The mailing address depends on whether the taxpayer is a U.S. resident or resides abroad.

Calculating Applicable Penalties

The financial cost varies significantly between the VDP and the SFCP. For the VDP, which addresses willful violations, penalties are substantial. They include a civil fraud penalty of 75% of the unpaid tax for the year with the highest tax liability and a willful FBAR penalty of 50% of the highest aggregate balance of all unreported foreign accounts.

The SFCP offers a much more lenient penalty structure for non-willful taxpayers. For U.S. taxpayers residing abroad who qualify for the Streamlined Foreign Offshore Procedures, the miscellaneous offshore penalty is waived entirely.

For U.S. taxpayers residing in the United States who use the Streamlined Domestic Offshore Procedures, a 5% miscellaneous offshore penalty is applied. This penalty is calculated on the highest aggregate value of the taxpayer’s specified foreign financial assets during the covered tax and FBAR periods. Under all programs, taxpayers must pay all back-taxes owed, interest, and any applicable accuracy-related penalties.