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WHITEMAN
OSTERMAN
& HANNA LLP
Attorneys at Law
www.woh.com
IRS OFFSHORE VOLUNTARY
DISCLOSURE PROGRAM
Updated
August 2015
Whiteman Osterman & Hanna LLP has developed a reputation for innovative solutions and professional leadership. Through
integrated, firm-wide collaboration, it offers clients a broad range of expertise in business, commercial, education, energy, utility
regulation, environmental, land use, health care, immigration, intellectual property, labor, employment, real estate development,
tax and telecommunications law as well as estate planning and administration, government relations and litigation.
On July 31, 2015, President Obama signed into law the surface Transportation and Veterans Health Care
Choice Improvement Act of 2015 (P.L. 114-41). A provision of this new law changes several important IRS
filing dates. Among these is the deadline for filing the FinCEN, which is now required to be filed by April
15 of each year. The FinCEN filing now coincides with each individual taxpayer’s Form 1040 requirement. Like Form 1040, an automatic extension is available for filing the FinCEN beginning in 2016.
Criminal and Civil Penalties for Failure to Report Foreign Accounts Can Be Mitigated
under the IRS’s Offshore Voluntary Disclosure Program
Many U.S. taxpayers are not aware of their obligations to report overseas assets or may not appreciate the
consequences of failing to timely report those assets. Every individual subject to U.S. income tax with foreign bank
accounts or financial accounts is required to file annual reports with the United States Department of the Treasury
Financial Crimes Enforcement Network (FinCEN). This annual report is commonly known as an FBAR (Report
of Foreign Bank and Financial Accounts) and must be filed if the total value of an individual’s foreign accounts
exceeds $10,000 at any time during the calendar year. The report is due each year on June 30. The filing
requirement applies to all taxpayers, including U.S. citizens, whether residing here or abroad, and resident aliens.
Consequences for Failure to Report Foreign Accounts and Income
Significant civil and criminal penalties may be imposed for violations of these foreign account reporting
requirements. The civil penalties can equal the greater of $100,000 or 50% of the highest amount in the foreign
accounts. The willful failure to report a foreign account is a felony. The criminal penalties can include a fine of up
to $250,000 and a term of imprisonment of not more than five years; these maximum criminal penalties double if
the FBAR violation occurs while violating another U.S. law or as part of a pattern of illegal activity.
The penalties for noncompliance with the FBAR reporting requirements are in addition to the civil and criminal tax
penalties that the IRS can assert against taxpayers that do not accurately report the income from foreign accounts
on their tax returns. These civil penalties include understatement penalties of at least 20%, civil fraud penalties of
75%, and underpayment interest. The criminal penalties for making a false return or attempting to evade taxes can
include a fine of up to $100,000 and a term of imprisonment of not more than five years.
IRS Voluntary Disclosure Programs
Many U.S. taxpayers have not complied with the foreign account reporting requirements and have also not
accurately reported the income from these foreign accounts on their tax returns.
The IRS is currently offering three voluntary disclosure programs as an incentive for U.S. taxpayers to get current
with the income tax and FBAR reporting obligations on their foreign accounts: (1) the Streamlined Disclosure
Program; (2) the 2014 Offshore Voluntary Disclosure Program; and (3) the Delinquent Information Return
Program. These programs provide a path back to tax compliance and, for participants in the 2014 Offshore
Voluntary Disclosure Program, also provide a level of protection from criminal prosecution.
One Commerce Plaza, Albany, NY 12260
518.487.7600
August 2015
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Page 1
1.
Streamlined Disclosure Program
The Streamlined Disclosure Program (“SDP”) is the most favorable program for foreign account disclosure that
the IRS has offered. The SDP allows taxpayers that mistakenly failed to report their foreign financial assets a
streamlined process for filing their returns and resolving their tax and penalty obligations. To be eligible for the
SDP, a taxpayer must certify that their failure to report foreign assets and pay the required tax was “non-willful,”
defined as negligence, inadvertence, mistake, or a good faith misunderstanding of the requirements of the law.
As compared to its prior version, the SDP has been simplified and is available to significantly more taxpayers. The
SDP is no longer subject to a $1,500/year ceiling on the amount of tax that may be due by an eligible participant
and can be used by a taxpayer residing in the U.S., so long as the taxpayer filed returns for the preceding three years.
Moreover, the current SDP does not require the risk assessment process that was included in prior versions of the
program.
A taxpayer eligible to participate in the SDP must (1) file amended tax returns, together with all the required
information returns, for the three most recent tax years and (2) file any delinquent FBARs for the six most recent
periods. If the IRS is conducting an examination of a taxpayer’s returns for any tax year, regardless of the scope,
the taxpayer will be ineligible to participate in the SDP.
A taxpayer participating in the SDP is required to pay all of the tax and statutory interest reflected on the corrected
returns. A U.S. resident that participates in the SDP must also pay a 5% offshore penalty on the highest aggregate
balance in the foreign accounts that were not reported. This 5% penalty does not apply to non-U.S. residents.
2.
2014 Offshore Voluntary Disclosure Program
Taxpayers that are ineligible for the SDP may qualify for the 2014 Offshore Voluntary Disclosure Program
(“OVDP”). The OVDP allows taxpayers that have not complied with their foreign account tax reporting
requirements and cannot satisfy the non-willful requirement for the SDP to become compliant, to avoid certain civil
penalties, and to generally eliminate the risk of criminal prosecution for the failure to submit FBARs and report the
income attributable to the foreign accounts. Although participation in the OVDP is more onerous than the SDP
program, the near elimination of risk of criminal prosecution may make the OVDP program a desirable option for
taxpayers with unreported foreign account income.
A taxpayer participating in the OVDP must (1) file original or amended tax returns, together with all required
information returns, for the eight most recent tax years and (2) file any delinquent FBARs for each of the eight
most recent periods. OVDP participants must also submit a completed Offshore Voluntary Disclosure Letter, a
completed Foreign Account Asset Statement, and various other source documents and agreements set forth in the
OVDP program rules.
A taxpayer participating in the OVDP is required to pay all of the tax and statutory interest reflected on the correct
returns for the preceding eight years. The taxpayer must also pay: (1) a 20% accuracy related penalty on the
underpayments of tax attributable to the foreign accounts; (2) a failure to file penalty of up to 25%, if applicable;
(3) a failure to pay penalty of up to 25%, if applicable; and (4) a 27.5% offshore penalty on the highest aggregate
balance in the foreign accounts that were not reported. The offshore penalty under the OVDP increases to 50% if
a foreign account is with a financial institution that is under investigation by, or cooperating with, the IRS or the
Department of Justice. The United States is already cooperating with numerous foreign banks and continues to
seek both cooperation from additional financial institutions and agreements or treaties with other countries to
remove the bank secrecy laws that once protected foreign accounts. The likelihood that an OVDP participant will
face the 50% penalty only increases with time.
One Commerce Plaza, Albany, NY 12260
518.487.7600
August 2015
www.woh.com
Page 2
Once a completed OVDP submission is made, the file is assigned to an examiner to certify the accuracy and
completeness of the submission. This certification process is less formal than an audit, although the IRS reserves
the right to conduct an audit if deemed necessary.
If the IRS is conducting an examination of the taxpayer’s returns for any tax year, regardless of the scope, the
taxpayer will be ineligible to participate in the OVDP.
3.
Delinquent Information Return Program
Taxpayers that reported the income from their foreign financial accounts on their tax returns but failed to file a
required FBAR may, under limited circumstances, simply file the delinquent FBARs and avoid all penalties. This
delinquent information return program is not available to a taxpayer under a civil or criminal investigation by the
IRS and is also not available to a taxpayer that has been contacted by the IRS regarding a delinquent FBAR.
CONTACTS
The assessment of the three disclosure options and the decision to participate in the IRS’s Offshore Voluntary
Disclosure Program should be carefully made. For additional information or to discuss how we may assist you in
evaluating compliance with the FBAR report requirements and the IRS Voluntary Disclosure Initiatives, please
contact one of the attorneys listed below or your regular Whiteman Osterman & Hanna LLP attorney.
Nathaniel Dorfman, Esq.
[email protected]
518.487.7667
Scott Shimick, Esq.
[email protected]
518.487.7678
CONTACTING WHITEMAN OSTERMAN & HANNA LLP
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One Commerce Plaza, Albany, NY 12260
518.487.7600
August 2015
www.woh.com
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