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All You Need to Know About IRS OVDI

IRS Offshore Voluntary Disclosure Program (OVDI)

As stated in our IRS OVDI page, IRS OVDI is the Offshore Voluntary Disclosure Initiative, which gives an opportunity for individuals holding undisclosed foreign bank accounts to disclose this information to the IRS.  This will help to avoid criminal penalties as well as reduce civil penalties a great deal.  This is also sometimes referred to as OVDP, Offshore Voluntary Disclosure Program.

What is IRS OVDI?

The IRS updated the OVDI program in 2012, presenting people the opportunity to get current with their tax returns.   This offers clear benefits to encourage taxpayers to come forward and disclose their foreign accounts now, rather than risk detection by the IRS and potential criminal prosecution.

Why Should I make an IRS OVDI Voluntary Disclosure?

With this opportunity, taxpayers with undisclosed bank accounts or entities should make the voluntary disclosure.  It benefits them by enabling them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution.

IRS OVDI also provides the opportunity to calculate approximately, the total cost of resolving all offshore tax issues.  Taxpayers who do not submit a voluntary disclosure enter the risk of detection by the IRS and the obligation of substantial penalties, including the fraud penalty and foreign information return penalties, as well as an increased risk of criminal prosecution.

Keep in mind, the IRS remains active in searching and finding those people with undisclosed foreign accounts.  This information is gradually available to the IRS under tax treaties, through submissions by informers, and will become more available under the Foreign Account Tax Compliance Act (FATCA).

This can be the safest move and only move you make to ensure your accounts are not touched, and you are not prosecuted.

Should You Opt-Out of IRS OVDI?

First and foremost, the opt-out election is irrevocable.  Typically, the decision is made after the IRS has calculated a proposed miscellaneous offshore penalty.  This could be a year after you enter OVDI, so there’s a good amount of time to consider it.  You can aim for reduced or no penalties.   The IRS may still assess the civil fraud penalty or information return penalties once outside the program.

What this means is a delay.  According to information submitted by the Taxpayer Advocate Service, over 300 taxpayers opted out of the 2009 and 2011 offshore voluntary disclosure programs.  In the past, most opt-outs included smaller dollars; however, the incentives to opt-out are much higher if there are larger amounts at stake.

The IRS OVDI Process

Applying for participation in the OVDI program involves a three-step process.

Step 1.

First, send a pre-clearance letter to the designated IRS Criminal Investigation (CI) Division.  This includes a fax of the taxpayer’s name, date of birth, social security number and address to (215) 861-3050.  It takes about one week to hear back from the CI approving the taxpayer’s participation.  After it is determined if a taxpayer is eligible to make a voluntary disclosure, the CI will notify the taxpayer or representative whether the taxpayer is cleared to make a voluntary disclosure.

Step 2.

Once approved, the taxpayer’s next step is to send a full voluntary disclosure package within 90 days to the IRS in Texas.  However, if impossible to get the OVDI package in within the time period, an extension of time can be obtained through a written request.

If you are requesting an extension, you must submit your name, address, date of birth, social security number, and any other piece of information as possible that is required with the Voluntary Disclosure Package. This includes the completed and signed agreements—to extend the time to assess tax.

All participants must submit:

-Copies of previously filed federal tax returns and/or complete amended tax returns for the eight tax years included in the voluntary disclosure.

– A copy of the completed and signed Offshore Voluntary Disclosures Letter.  This can be found here.

Step 3.

Lastly, you must file a set of specified documents, including amended tax returns, originally filed tax returns, FBARs, statute of limitation extensions, and a check for the unpaid taxes, interest and penalties, with the IRS in Austin, TX before the end of August.  You must include:

-Checks made out to the U.S. Treasury for the full amount of tax, penalties and interest owed.  Also, a second check should be submitted for each tax year for which amounts are owed for the 20% accuracy-related penalty.  Also, if applicable, include the failure to file and failure to pay penalties plus interest back to the original filing date of the return.  A separate check should be submitted for other penalties that may apply.

-When required, include a Foreign Account or Asset Statement, available here.  This is required for applicants disclosing offshore financial accounts with a total highest account balance in any year of $1 million or more.  Keep in mind, a separate statement is required for each foreign account or asset included in the voluntary disclosure.

-A completed penalty worksheet, which includes the taxpayer’s determination of the aggregate highest account balance of the offshore accounts, fair market value of foreign assets, and penalty computation.

-Completed and signed agreements to extend the period of time to assess tax and FBAR penalties.  More information can be found here.

-Complete the IRS FBAR form.

There may be other documents required, where applicable, that you will have to submit.  Keep in mind, the IRS could potentially examine tax years prior to the IRS OVDI’s 8-year disclosure period.  You must consider what you’ve told the IRS prior to making the opt-out election.  Advices about the facts are imperative.

Talk to the professionals at Dallo Law Group to ensure you are taking the right steps with the IRS regarding your offshore account, and your options of OVDI.  The risk of being caught will only increase.  Contact us today!