An Offshore Voluntary Disclosure vs. Streamlined Procedures

OVDP vs Streamlined

Offshore Voluntary Disclosure vs. Streamlined Procedures

With the new tax year just around the corner — and less experienced tax lawyers publishing inaccurate and ‘fear-mongering’ misinformation about IRS offshore disclosure and the streamlined procedures — our international tax law specialist team at Golding & Golding wanted to provide an update to our prior articles about the difference between the Offshore Voluntary Disclosure Program (now VDP) — along with the differences between the two Streamlined Filing Compliance Procedure Programs (Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures). The main difference between these two programs is that to qualify for the streamlined procedures, the taxpayer must be non-willful — whereas a willful taxpayer does not qualify for the streamlined procedures and instead submits to the IRS Voluntary Disclosure Program (VDP). Let’s walk through some of the basics of the differences between the Offshore Voluntary Disclosure Program and the Streamlined Procedures.

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

First, What is OVDP/VDP?

When tax practitioners refer to the offshore voluntary disclosure program, they are referring to the traditional IRS Voluntary Disclosure Program (VDP) — which is used to disclose unreported foreign and domestic income and assets to the IRS. Before 2018, there was an offshoot of the voluntary disclosure program specifically geared toward offshore compliance, which was referred to as the Offshore Voluntary Disclosure Program (OVDP). At the end of 2018, this program was terminated and it merged back into the traditional voluntary disclosure program VDP.

Willfulness and OVDP/VDP

The most recent version of the voluntary disclosure program is geared specifically toward willful taxpayers. In other words, a non-willful taxpayer would not submit to the voluntary disclosure program. That is because as part of submitting to the voluntary disclosure program, taxpayers must certify under penalty of perjury that they acted willfully. With the prior OVDP practice, some non-willful taxpayers would submit to OVDP because they would be able to receive a closing letter along with being able to amend up to eight years of tax returns (which was later reduced to six years). Under the current version of VDP, because taxpayers have to certify their willfulness under penalty of perjury, they should not submit to IRS VDP unless they are willful.

• • • Example: Frank is a U.S. citizen who has unreported foreign income and assets. Frank was aware he was required to report his income and assets on his tax return each year but when his CPA asked him if he had any foreign income or assets he said no. Since Frank was aware that they had foreign income and assets to report but intentionally did not do so, this would presumably qualify as willfulness and VDP would be appropriate.

    • Example: Fran is a lawful permanent resident who previously lived and worked in a foreign country. Before moving to the united states, Fran amassed a very large amount of assets in her foreign country. When she relocated to the United States, Fran began filing tax returns using TurboTax. She had spoken with the CPA who had told her that she was required to report her foreign income and assets but when the program asked her whether she had foreign accounts she stated no, even though she knew she had the accounts and assets and was required to report them. This would presumably qualify as willfulness and VDP would be appropriate.

    • Example: Fred is a U.S. citizen who has a few foreign accounts. He also uses TurboTax to prepare his tax returns, but he completely misunderstood that accounts in foreign countries where he previously lived and which accounts were opened before he came to the united states were required to be reported to the IRS. Fred had received some misinformation when he first came to the United States and he was not intending on hiding or concealing any of his foreign income or accounts. Presumably, Fred would be considered non-willful and should consider the streamlined procedures.

*The VDP program has become very complex and Taxpayers should consult with a Board-Certified Tax Law Specialist before making any communication to the IRS.

Streamlined Procedure Non-Willfulness Requirement

The most important aspect of qualifying for the Streamlined Filing Compliance Procedures (domestic or offshore) is that the filer is non-willful. Taxpayers will find a lot of information online explaining the difference between willful and non-willful — and unfortunately many of those resources are inaccurate or designed to simply fear-monger unsuspecting Taxpayers:

• • • Example: Adam is a U.S. citizen who has been living in the United States his entire life. His grandfather lives overseas and when his grandfather passed away he left Adam money in two different foreign bank accounts. These are the only foreign accounts that Adam has and other than these two foreign accounts Adam’s tax return is relatively straightforward. He has not made any deposits or withdrawals from the account and only very recently learned about the reporting requirements. Adam should qualify as non-willful.

    • Example: Adrian is an L-1 visa holder who recently relocated to the United States a few years ago. When he relocated to the United States he began using a local CPA who claimed to be knowledgeable in international tax.  Adrian had several foreign accounts and assets that he told the CPA about, but the CPA told Adrian there was nothing he needed to do because he was not a permanent resident or a citizen. Adrian relied on this information and only recently learned that he was required to report this information to the IRS in prior years. Adrian should qualify as non-willful.

    • Example: Alicia is a lawful permanent resident who has been filing tax returns for the past several years. A few years ago she learned that she was supposed to report her foreign accounts on the FBAR and Form 8938 but chose not to do so because she did not want to have to pay any penalty. When Alicia’s CPA asked her if she had any foreign accounts, she told the CPA no — even though she was aware she had foreign accounts and that they were required to be reported. Alicia would not qualify as non-willful.

Taxpayer is Not Under Audit or Already Penalized

To be eligible for the streamlined procedures, the Taxpayer must not be under audit or already penalized regarding the foreign accounts.

• • • Example: Brian is a U.S. citizen who learned earlier in the year that he had foreign accounts that were required to be reported to the U.S. government on the FBAR and Form 8938. He was planning on submitting under the streamline procedures but in the interim, he found himself under IRS examination — including for one of the years involving the foreign accounts. Brian would now be ineligible for the streamlined procedures.

    • Example: Brenda is a lawful permanent resident who received a foreign gift but was unaware that she had to report the foreign gift on Form 3520 until very recently. She was also unaware that she was required to report the foreign accounts that the gift was deposited into. Before learning about the streamlined procedures, Brenda’s accountant submitted a late form 3520 and she received a CP15 notice. Since Brenda has already been penalized, she may not be eligible for the streamlined procedures.

Domestic Streamlined Filing Requirements

Some additional Domestic Streamlined Offshore Procedures requirements include:

• • • Having filed timely original returns; and

    • Paying a 5% Title 26 Miscellaneous Offshore Penalty.

Previously Timely Filed U.S Tax Returns 

To qualify for the Streamlined Domestic Offshore Procedures, Taxpayers must have filed timely tax returns when they were due. While the IRS may provide some leeway as to what is considered ‘timely,’ they have been known to be very strict about the prior filings having been made on time.

• • • Example: Frank is a U.S. Citizen who previously filed U.S. tax returns timely, but he did not include his foregin interest income because it is tax-exempt overseas and he was unaware he was required to include it on his U.S. tax return — or File a Form 8938. Frank should qualify for the Streamlined Procedures.

    • Example: Fred is a Lawful Permanent Resident who filed his tax returns in October in each of the past three (3) years but was on extension. He was unaware he had to report foreign income, FBAR or Form 8938. Since he was on extension, Fred should qualify for the Streamlined Procedures.

    • Example: Felicia is a U.S. Citizen who was required to file U.S. tax returns but did not do so. She recently learned she was required to file returns and report her foreign income. She does not qualify for the Streamlined Foreign Offshore Procedures, because she resides in the U.S. Unfortunately, Felicia would not qualify for the Streamlined Procedures since she did not file timely U.S. tax returns at the time they were due.

5% (Title 26) Offshore Penalty Instead of Multiple FBAR/Form 8938 Penalties

Taxpayers can avoid the extremely harsh FBAR and Form 8938 penalties by submitting to the Streamlined Domestic Offshore Procedures. In place of FBAR and Form 8938 penalties, Taxpayers pay a single, 5% of Title 26 Miscellaneous offshore penalty. The penalty is based on the highest 12/31 aggregate value and not the highest value throughout the year.

• • • Example: Matthew submitted to the Streamlined Domestic Offshore Procedures and failed to file FBAR and Form 8938 in multiple years. The maximum 12/31 value of his accounts and assets is $160,000. His SDOP penalty would be $8,000 instead of potentially $150,000+ if he was audited and penalized.

    • Example: Michelle submitted to the Streamlined Domestic Offshore Procedures and had several accounts with very high balances throughout the year, but the 12/31 maximum value for all accounts combined was $90,000. Her SDOP penalty would be $4,500. 

    • Example: Miranda is considering submitting to the Streamlined Domestic Offshore Procedures but her 12/31 maximum value is $7,000,000. Her penalty would be $350,000 but she believes she may qualify for Reasonable Cause and a penalty waiver. Miranda may consider alternative to the Streamlined Domestic Offshore Procedures.

Exceptions to the 5% Penalty

While most assets are subject to the Title 26 Miscellaneous Offshore Penalty, some accounts and assets may be excluded from the penalty base.

• • • Example: Tim submits to the Streamlined Domestic Offshore Procedures. He has $800,000 in RRSP and $150,000 in TFSA and Foreign Accounts. Even though the total value is $950,000, the RRSP may be exempt from the penalty computation – reducing the penalty from $45,000 to $7,500.

    • Example: Tonya submits to the Streamlined Domestic Offshore Procedures. She has a foreign bank account with a maximum 12/31 value of $80,000 and 5 rental properties she individually owns. Since the rental real estate is individually owned, it is excluded from the penalty base so that her SDOP penalty would be $4,000.

    • Example:  Ted submits to the Streamlined Domestic Offshore Procedures. He has 7 rental properties but he does not own them individually. Rather, they are all owned in a foreign corporation. Unfortunately for Ted, the value of the foreign corporation may be subject to the SDOP penalty.

Foreign Streamlined Filing Requirements

Some additional Foreign Streamlined Offshore Procedures requirements include:

• • • Qualifying as a Foreign Resident.

Foreign Resident 330-Day Rule or Substantial Presence Test

The benefit of the Streamlined Foreign Offshore Procedures compared to the Streamlined Domestic Offshore Procedures is that Taxpayers who qualify for the Streamlined Foreign Offshore Procedures are not penalized (they are also eligible to file original tax returns which they are not able to do under the Streamlined Domestic Offshore Procedures). But to qualify for the Streamlined Foreign Offshore Procedures, the Taxpayer must qualify as a foreign resident:

• • • Example: Charlene is an H-1B visa holder, but only just started to meet the substantial presence test last year. Recently, she learned that she was required to report her foreign accounts. Since she is not a U.S. citizen or lawful permanent resident and is still a visa holder — and did not meet the substantial presence test in at least one of the three years included in her streamlined foreign application — she may qualify for the Streamlined Foreign Offshore Procedures.

    • Example: Christopher is a lawful permanent resident who has been living in a foreign country for the past five years. He has several foreign accounts and assets but was unaware that he was required to report this information to the U.S. government since he lives overseas and all of his money is sourced in a foreign country. Since Christopher has been out of the United States for at least 330 days in the last year, he should also qualify for the Streamlined Foreign Offshore Procedures.

    • Example: Charlie is a lawful permanent resident who travels back and forth between the United States and different foreign countries. He recently learned that he should have been reporting his foreign pension plan and bank accounts on his U.S. tax return. He has been out of the country for 365 days but it was not in the same 12-month year, but instead split over two years. Since Charlie was not out of the United States for at least 330 days in a single tax year, the IRS takes the position that he does not qualify for the Streamlined Foreign Offshore Procedures.

No Title 26 Offshore Penalty under SFOP

One of the key benefits of qualifying for the Streamlined Foreign Offshore Procedures is that Taxpayers are exempt from having to pay any Title 26 miscellaneous offshore penalty. This means that the Taxpayer can circumvent penalties such as FBAR penalties and Form 8938 Penalties. In recent years, the IRS has discussed eliminating this program and so especially for Taxpayers who qualify for the Streamlined Foreign Offshore Procedures, they should consider getting into compliance while the program is still available.

SFOP Allows for Original Tax Return Filing

Another key benefit to the streamlined foreign offshore procedures is that, unlike the Streamlined Domestic Offshore Procedures, in the streamlined foreign program Taxpayers are eligible to file original tax returns. Therefore, Taxpayers who have not filed tax returns for multiple years can file tax returns under the Streamlined Foreign Offshore Procedures and safely get into compliance — whereas under the Streamlined Domestic Offshore Procedures, non-willful Taxpayers cannot file original returns and are only eligible to amend previously filed timely returns.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.