In the first part of this post last week, we noted the Treasury Department’s postponement of some of the withholding requirements that the Foreign Account Tax Compliance Act (FATCA) will require of foreign banks on accounts held by U.S. taxpayers.
In this part of the post, we will discuss how the potential penalties for failing to properly disclose offshore assets have driven many U.S. taxpayers into the Offshore Voluntary Disclosure Program (OVDP).
Unlike other countries, the U.S. takes the position that it will tax U.S. taxpayers on their worldwide income, not only income earned in the U.S. And there are numerous disclosure hoops for taxpayers with offshore accounts that meet certain valuation thresholds to jump through. In addition to FATCA, these hoops include the FBAR form (now called FinCEN Form 114).
The potential consequences for not meeting disclosure requirements on offshore accounts are both civil and criminal. On the civil side, the penalties can sometimes come to more than the balance in the account. And if U.S. tax authorizes deem the nondisclosure to be willful, there is a risk of criminal prosecution.
In order to avoid such consequences, many taxpayers have entered the IRS’s Offshore Voluntary Disclosure Program (OVDP). Since it was launched in 2009, more than 50,000 taxpayers have used the program to resolve their tax compliance issues with the IRS. Cumulatively, these taxpayers have paid about $7 billion to the IRS. This amount includes not only back taxes, but also penalties and interest.
As currently constituted, the OVDP actually consists of two rather different programs. Originally, the program offered limited amnesty, in the sense that cooperating taxpayers could get protection from the threat of criminal prosecution. Last year, however, the IRS begin offering a streamlined version of the program that requires less filing of forms from previous years but does not offer limited amnesty.
In an upcoming post, we will explore the pros and cons of the streamlined program compared to the original. For now, our point is simply that if you are still not in compliance with the IRS’s offshore regime, it makes sense to discuss your situation with a tax attorney knowledgeable about offshore issues.