On March 13, the Internal Revenue Service announced that the Offshore Voluntary Disclosure Program (OVDP) will come to an end on Sept. 28, 2018. By making this announcement now, the IRS is giving taxpayers with undisclosed foreign financial accounts six months to come forward voluntarily before the program is terminated. Taxpayers with undisclosed foreign financial accounts should give serious consideration to whether the OVDP program may make sense for them before this opportunity expires.
The IRS initially created the OVDP after some high-profile investigations of Swiss banks disclosed a significant number of U.S. citizens and residents had failed to disclose offshore financial assets. (Note: Generally, a U.S. person with foreign financial accounts exceeding $10,000 during the year is required to file a Report of Foreign Bank and Financial Accounts, i.e., an FBAR.)
The OVDP allows taxpayers to voluntarily address previously undisclosed financial accounts without the risk of criminal prosecution. The OVDP also limits the taxpayer’s penalty exposure to 27.5 percent of the balance in the account.
While the 27.5 percent penalty is steep, particularly for those with substantial foreign financial accounts, this penalty is significantly less than the willful FBAR penalty (i.e., 50 percent) that might otherwise be imposed. Most important, the program affords taxpayers an opportunity to affirmatively resolve the issue and avoid the possibility that he or she will be criminally prosecuted for failing to disclose the offshore financial assets. Although the OVDP program may be ending, there has been no signal from the IRS or Department of Justice that enforcement of the tax law with respect to offshore accounts will be any less vigorous on a going forward basis. Accordingly, appropriate reporting of offshore income and accounts should remain a priority.