The IRS OVDP Is Closed: An Overview of Current Options

The Offshore Voluntary Disclosure Program (OVDP) was an initiative from the Internal Revenue Service (IRS) introduced in 2009. Its purpose was to create a pathway for taxpayers who had not reported foreign financial assets to come into compliance with U.S. tax law. The program was designed for individuals to voluntarily disclose their foreign accounts and investments, report the related income, and settle their tax obligations.

The incentive of the OVDP was the opportunity to avoid potential criminal prosecution for tax evasion. In exchange, participants paid back taxes, interest, and a specific offshore penalty. Over its various iterations, the program provided a predictable route for taxpayers to resolve serious tax issues that could otherwise lead to severe penalties.

The Closure of the OVDP and Current Disclosure Options

The IRS closed the Offshore Voluntary Disclosure Program on September 28, 2018. The agency cited the program’s success and the increased availability of third-party information from foreign financial institutions under the Foreign Account Tax Compliance Act (FATCA) as reasons for its closure. The number of taxpayers using the program had also declined from its peak in 2011.

Following the closure, the IRS transitioned to using its traditional voluntary disclosure practices with updated procedures. The current options are distinguished by the taxpayer’s state of mind regarding their non-compliance. For those whose failure to comply was willful, meaning they intentionally disregarded a known legal duty, the main path is the updated Voluntary Disclosure Practice (VDP).

For taxpayers whose non-compliance was non-willful, the Streamlined Filing Compliance Procedures remain available. These procedures are for individuals who can certify that their failure to report foreign assets was due to negligence or a good faith misunderstanding of the law. The IRS also offers Delinquent FBAR Submission Procedures and Delinquent International Information Return Submission Procedures for certain taxpayers to catch up on filings without facing penalties.

The Updated Voluntary Disclosure Practice

The updated Voluntary Disclosure Practice (VDP) is the primary channel for taxpayers who willfully failed to report foreign assets and income. To be eligible, the taxpayer must come forward voluntarily before the IRS has initiated an inquiry against them. The disclosure must involve legal source income, and the taxpayer must cooperate with the IRS and arrange to pay the full amount of tax, interest, and penalties.

The civil fraud penalty of 75% will generally be asserted, a departure from the prior program’s 20% accuracy-related penalty. This penalty will be applied to only the single year within the disclosure period with the highest tax liability. The penalty for the willful failure to file a Report of Foreign Bank and Financial Accounts (FBAR) is the greater of $100,000 or 50% of the highest aggregate balance of the foreign accounts.

While examiners have some discretion, this is the expected outcome in VDP cases. The disclosure period covers the preceding six tax years, and the benefit for completing the VDP is avoiding criminal prosecution.

Streamlined Filing Compliance Procedures

For taxpayers whose failure to report foreign financial assets was not willful, the Streamlined Filing Compliance Procedures offer a more favorable resolution. These procedures are split into two programs based on residency, and taxpayers must certify their non-willful conduct. A mistaken certification can lead to an examination with much higher penalties.

Streamlined Foreign Offshore Procedures (SFOP)

The SFOP is for U.S. taxpayers residing outside the United States who meet a specific non-residency requirement. This generally involves being physically outside the U.S. for at least 330 full days in one of the last three years. Participants must file three years of amended or delinquent tax returns and six years of FBARs. The benefit of the SFOP is that the IRS waives all related penalties.

Streamlined Domestic Offshore Procedures (SDOP)

The SDOP is for U.S. taxpayers residing within the United States. To be eligible, a taxpayer must have filed a U.S. tax return for each of the most recent three years. Participants also file three years of amended tax returns and six years of FBARs. Under the SDOP, the taxpayer must pay a miscellaneous offshore penalty equal to 5% of the highest aggregate year-end balance of their specified foreign financial assets during the six-year period.

Information and Documentation for a Disclosure

A successful submission requires gathering specific information and documentation. The taxpayer must collect all relevant financial records for the disclosure period, including complete bank and financial account statements for all foreign accounts. Amended or delinquent tax and information returns must also be prepared. Common forms include:

• Form 1040X, Amended U.S. Individual Income Tax Return
• FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)
• Form 8938, Statement of Specified Foreign Financial Assets
• Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
• Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations

For those pursuing the VDP, IRS Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, is required. This form asks for detailed information about the taxpayer, the noncompliance, and the financial institutions involved. A comprehensive written narrative must also be drafted. This document explains the facts and circumstances of the non-compliance and is the primary tool for the taxpayer to argue for non-willful conduct in a streamlined submission or to provide context in a VDP case.

The Voluntary Disclosure Submission Process

For those entering the updated Voluntary Disclosure Practice, the first step is to seek preclearance from the IRS Criminal Investigation (CI) division by submitting Part I of Form 14457. This allows the IRS to determine if the taxpayer is eligible for the program before a full disclosure is made. CI will review the request and notify the taxpayer of its decision.

Upon receiving preclearance, the taxpayer must submit the full disclosure package. This includes the second part of Form 14457, all amended tax returns, delinquent information returns, FBARs, and the detailed narrative. The submission must be thorough and accurate, as it will form the basis of the subsequent examination.

After the full disclosure is submitted, the case is assigned to an IRS examiner for a civil examination to verify the accuracy of the returns and the amount of tax, interest, and penalties due. The taxpayer is expected to cooperate fully with the examiner to reach a final resolution. This is typically formalized in a closing agreement that details the taxpayer’s obligations and concludes the matter.