The 2012 Offshore Voluntary Disclosure Program Requirements

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In January 2012 the Internal Revenue Service started an offshore voluntary disclosure program, known as OVDP. This program is a result of the positive outcome of similar programs initiated in 2009 and 2011. The 2012 OVDP program does not have an expiration date, but the IRS can choose to end the program at any time in the future. The IRS also has the ability to change the terms of the program at any point, and could decide to increase penalties or limit eligibility. The OVDP will be open until further notice for taxpayers who want to come forward and complete strict requirements.

The 2012 OVDP has the highest penalty rate compared with previous programs. However, this does not mean the program is without benefits to taxpayers. The main purpose of the program is to encourage taxpayers to disclose any foreign accounts, rather than risk being caught by the IRS and have the possibility of criminal prosecution and harsh fines. If taxpayers disclose their information they will have to pay back taxes, interest, and penalties but no longer face criminal tax charges. Taxpayers who are currently under any type of investigation by the IRS, including civil, regardless if it relates to undisclosed foreign accounts or entities, are not eligible for the program.

Some taxpayers have disclosed unreported foreign accounts on amended returns. Returns that are amended to include undisclosed foreign income are known as ‘quiet disclosures’ are still eligible for the OVDP and the penalty system. These applicants will submit an application with the original and amended returns to the Voluntary Disclosure coordinator. Taxpayers who make quiet disclosures should understand that the IRS often audits amended returns to ensure accuracy, and there is a risk of being examined as well as facing criminal tax charges if they decide to report these finances but not file with the OVDP. Therefore, this is not a recommended course of action.

As a condition to being accepted into the OVDP, applicants must provide the IRS with documentation that can include:

  • Copies of all previously filed federal income tax return for every tax year in the voluntary disclosure period (typically last 8 years).
  • Amended federal income tax returns for all tax years covered by the voluntary disclosure. These amended returns should include all schedules that show the previously unreported income including; Schedule B for interest, Schedule D for capital gains, Schedule E for income from rents and royalties. Form 8938, the Statement of Specified Foreign Financial Assets must also be filed for applicable years.
  • The completed and signed Offshore Voluntary Disclosure letter and all attachments.
  • Check made out to the U.S. Treasury for the back taxes owed, as well as any interest and penalties.
  • Foreign Account or Asset Statement for each previously undisclosed foreign account, if not already provided in the initial Offshore Voluntary Disclosure Letter.
  • A penalty computation worksheet. This worksheet should show the applicant’s highest account balance of their offshore accounts per each year, as well as a fair market value of foreign assets. This worksheet should also include the penalty computation, and should be signed by the applicant and the applicant’s tax lawyer representative.
  • For applicants disclosing offshore financial accounts: completed Form TD F 90.22-1 for all foreign accounts maintained during each calendar year covered by the voluntary disclosure and any copies of previously filed FBARs.
  • For applicants disclosing offshore entities: statement identifying all offshore entities for the tax years within the voluntary disclosure period. This statement must include ownership percentage, and whether the entity was held directly or indirectly.
  • For applicants whose offshore financial accounts have a highest balance for any year greater than $500,000, copies of account statements must also be provided for all years under the voluntary disclosure. For applicants with financial accounts worth less than $500,000, financial account statements must be available for all years covered by the voluntary disclosure upon request.

The 2012 OVDP has strict requirements that must be met for all applicants to gain its many benefits. The application process is lengthy and complex, with multiple forms and documentation necessary. An experienced tax lawyer who has successfully helped clients apply and avoid criminal charges is a benefit when applying for the OVDP. The IRS Criminal Investigation unit will carefully review the submitted documents, and if the taxpayer completely and accurately complies will every provision of the voluntary disclosure program, the IRS will not recommend criminal prosecution for their case.

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