Should I Take Advantage of the IRS Offshore Voluntary Disclosure Program?

The IRS Offshore Voluntary Disclosure Program (OVDP) offers taxpayers with unreported income from foreign financial accounts a chance to come into compliance with the law. The program benefits taxpayers by offering lower penalties and eliminating the threat of criminal prosecution for failing to file Foreign Bank Account Reports (FBARs).

Failure to file an FBAR can result in both criminal and civil penalties. The criminal penalties can be fines of up to $250,000 and five years in jail. The civil penalties for a willful failure to file an FBAR can be up to the greater of $100,000 or 50 percent of the account balance.

To avoid these onerous penalties, taxpayers can come into compliance in a variety of ways. They can file the past due returns quietly, which is known as a quiet disclosure. They can use the Streamlined Filing Compliance Procedures, or the OVDP, depending on the circumstances of their offshore bank account problems.

Why You Should File an Offshore Voluntary Disclosure

Taxpayers who take advantage of the OVDP can avoid most of these penalties. However, they will be charged a miscellaneous offshore penalty of 27.5 percent of the highest value of their offshore assets during the period covered by the disclosure.

Taxpayers who use the OVDP will also have to pay 20 percent accuracy related penalties, as well as penalties for failure to file and failure to pay taxes, if applicable. Of course, they must also pay taxes on all of the previously unreported income from their foreign accounts.

The 27.5 offshore penalty is increased to 50 percent if the IRS is investigating the foreign financial institution where you hold an account.

Even with these penalties, OVDP is still a good option for some taxpayers who have willfully failed to file FBARs and report foreign account income. It may make it easier to sleep at night knowing that you are no longer at risk of criminal prosecution, and whatever penalties you pay now from a voluntary disclosure will certainly be less than the penalties the IRS will assess if they later discover your unreported foreign accounts.

A quiet disclosure does not offer that benefit. The IRS can still choose to assess civil and criminal penalties, even after you have come into compliance with all FBAR requirements.

For help determining whether you qualify for OVDP or Streamlined Filing Compliance Procedures, talk to a tax attorney with experiencing handling offshore bank account issues.