What Was the OVDP and What Are Current Options?

The Offshore Voluntary Disclosure Program (OVDP) was a significant initiative by the Internal Revenue Service (IRS) designed to offer a path for U.S. taxpayers to report previously undisclosed foreign financial assets. Its primary purpose was to bring taxpayers into compliance with their U.S. tax obligations, allowing them to resolve potential criminal liability and substantial civil penalties. The program provided a uniform penalty structure for those who came forward voluntarily. This program was closed by the IRS on September 28, 2018, following a decline in participation and a shift in its approach to offshore compliance.

Eligibility for the Program

Participation in the OVDP was intended for taxpayers whose failure to report foreign assets was willful, meaning they were aware of their reporting obligations and intentionally chose not to comply. A requirement for eligibility was that the funds in the undisclosed foreign accounts originated from a legal source, as the program was not available for assets connected to illegal activities.

A taxpayer’s eligibility also depended on their status with the IRS. Individuals already under a civil examination or criminal investigation were ineligible, as the disclosure had to be made before the IRS initiated contact about the non-compliance. This framework created an incentive for taxpayers to come forward, as participation provided certainty and limited their financial penalties and exposure to criminal prosecution.

The OVDP Disclosure and Submission Process

The process for entering the now-closed OVDP was a structured procedure that demanded thorough documentation and full cooperation. It was a formal process designed to ensure a complete and truthful disclosure of all previously hidden offshore financial activities.

Pre-Clearance

The first step was requesting pre-clearance from the IRS Criminal Investigation (CI) division to confirm the taxpayer was not already under an existing examination or investigation. Receiving pre-clearance did not guarantee acceptance into the program, but it was a necessary prerequisite to move forward with submitting the full disclosure package.

Required Documentation and Information

After pre-clearance, the taxpayer submitted a comprehensive package covering an eight-year disclosure period. The submission had to provide the IRS with a complete financial picture and included several key documents.

• Amended federal income tax returns for the eight-year period to include all earnings from the foreign assets.
• Delinquent Report of Foreign Bank and Financial Accounts (FBARs), or FinCEN Form 114, for any year the aggregate value of foreign accounts exceeded $10,000.
• Other delinquent international information returns, such as Form 3520 for foreign trusts or Form 5471 for interests in foreign corporations.
• Form 14457, the Voluntary Disclosure Letter, which required a detailed narrative explaining the non-compliance and the origin of the funds.

This form also required a complete list of all foreign accounts and assets, including financial institution names, account numbers, and the highest balance for each year in the disclosure period. The taxpayer was also expected to include a check to pay the back taxes, accrued interest, and certain penalties.

Calculating the OVDP Penalty

The financial cost of the OVDP was substantial, comprising back taxes, interest, and several penalties that reflected the willful nature of the non-compliance.

The Offshore Penalty

The primary penalty was a miscellaneous offshore penalty of 27.5%. This was calculated on the highest aggregate value of the taxpayer’s undisclosed foreign assets during the eight-year disclosure period, meaning the IRS applied the penalty to the single highest total value reached during that time. For instance, if the highest combined balance over the eight years was $1 million, the penalty would be $275,000.

This rate increased to 50% if a taxpayer’s foreign financial institution was publicly identified as being under investigation by the U.S. government. This higher rate served as an incentive for taxpayers to enter the program before the institutions holding their assets became subjects of government enforcement actions. This penalty was paid in lieu of other penalties that might have applied, such as those for willfully failing to file an FBAR.

Back Taxes and Interest

Participants paid all back taxes owed on the unreported income from their foreign assets for the eight-year disclosure period. This required amending their tax returns to include all dividends, interest, and capital gains. The IRS also charged interest on these underpayments, accruing from the original due dates of the tax returns until the date of payment.

Accuracy-Related Penalties

Participants also paid a 20% accuracy-related penalty on their offshore-related tax underpayment for all years in the disclosure period. This meant that for each of the eight years, the additional tax owed due to the unreported foreign income was subject to this separate penalty.

Current Options for Voluntary Disclosure

Since the OVDP closed in 2018, the IRS offers other programs to correct non-compliance with foreign asset reporting. These options differentiate between willful and non-willful conduct, with the appropriate path depending on the taxpayer’s intent.

Updated Voluntary Disclosure Practice (VDP)

For taxpayers whose failure to comply was willful, the primary option is the updated Voluntary Disclosure Practice (VDP), which succeeded the OVDP for cases with potential criminal exposure. To enter the VDP, a taxpayer must submit a preclearance request on Form 14457, which requires an admission that the non-compliance was willful. Applicants must provide full cooperation with the IRS.

The penalty structure is severe: it includes a civil fraud penalty equal to 75% of the unpaid tax, but this is typically applied only to the single year with the highest tax liability within the six-year disclosure period. In cases involving FBAR non-compliance, a willful FBAR penalty will also be asserted, which is generally 50% of the highest aggregate account balance in the foreign accounts during the disclosure period. While the IRS does not offer a guarantee against prosecution, a truthful disclosure generally results in the case being resolved civilly.

Procedures for Non-Willful Conduct

Taxpayers whose non-compliance was not willful have other programs available, most prominently the Streamlined Filing Compliance Procedures. This program is for individuals who can certify their failure to report was due to negligence, inadvertence, or a good-faith misunderstanding of the law. It requires filing three years of amended tax returns and six years of FBARs. U.S. residents pay a 5% miscellaneous offshore penalty, while for non-residents, this penalty is waived.

Two other procedures exist for specific non-willful errors. The Delinquent FBAR Submission Procedures are for taxpayers who reported all income but failed to file FBARs, and they may avoid penalties by filing the late forms with an explanation. The Delinquent International Information Return Submission Procedures allow taxpayers to file late forms like Form 5471 or 3520 with a reasonable cause statement to avoid penalties, provided no additional tax is owed.