UPDATE: The 2012 Streamlined Program has been replaced with a new program with far more favorable rules. Learn more about the new program here. The information below is out of date, but presented as proof of actual improvement to IRS procedures.
* * *
The IRS has gone live with its Streamlined Offshore Voluntary Disclosure Initiative (OVDI) program, or Streamlined OVDI, as of September 1, 2012. As someone who works on OVDI cases every day, and the actual facts on a huge sample of cases, it is my opinion that this Streamlined OVDI process is strange. There are four reasons: First, this Streamlined OVDI process hardly addresses the vast majority of innocent non-compliant offshore accounts holders who tried their best. Second, it has the potential to reward those who made no attempts at compliance while punishing those who did. Third, it only applies to expatriates or "inadvertent" US citizens. Lastly, the guidance is so vague and uncertain, that it is foolhardy to recommend this Streamlined OVDI program except to very, very few.
The Streamlined OVDI does not affect the majority of innocent non-compliance
First, this Streamlined OVDI initiative does not address the vast majority of cases. Each day, we speak to about 3-5 people about making a disclosure under the 2012 OVDI. 80% of those are foreign-born nationals (with a majority of those being Indians). With incredibly few exceptions, everyone who has hired us had filed their US tax returns. So right there — this Streamlined OVDI initiative cannot apply to any of our current or prospective clients — regardless of innocence. I need to really stress this: this Streamlined OVDI initiative only applies to those who have NOT filed taxes.
The Streamlined OVDI is limited to expatriates or inadvertent US taxpayers
Second, in order to apply for the Streamlined OVDI program, one must be an expatriate citizen living abroad or an "inadvertent" citizen (like Canadians who were born in the US but otherwise lived in Canada, or adult children of foreign ambassadors born in the US). If you are living in the US (even on a VISA), this Streamlined OVDI program does not apply to you, regardless of innocence.
You can use the Streamlined OVDI program if you never filed a US tax return, but you can't if you did
Third, this program has the odd effect of placing someone who was in total non-compliance on better ground than someone who attempted compliance. It has the perverse effect of rewarding people who filed no returns, while punishing those who filed returns with the admittedly onerous full OVDI.
The standards of the Streamlined OVDI are vague and uncertain
I was hoping to give a more in-depth analysis (I have some OVDI cases to work, after all), and I'll get to that later. But here is the quick and dirty: I'll cut and paste a troubling portion of this Streamlined OVDI process:
Compliance Risk Determination
The IRS will determine the level of compliance risk presented by the submission based on information provided on the returns filed and based on additional information provided in response to a Questionnaire required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent any high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk and processed in a streamlined manner.
The risk level may rise if any of the following are present:
- If any of the returns submitted through this program claim a refund;
- If there is material economic activity in the United States;
- If the taxpayer has not declared all of his/her income in his/her country of residence;
- If the taxpayer is under audit or investigation by the IRS;
- If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
- If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
- If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
- If there is U.S. source income; or
- If there are indications of sophisticated tax planning or avoidance.
Again, I don't have too much time to get in to it today, but a few questions regarding this Streamlined OVDI:
- What is a simple return?
- What kind of penalties will be imposes if someone who thought they were low-risk, the IRS determined to be high risk?
- Is the IRS bound by any hard and fast rules?
- Or is this Streamlined OVDI initiative simply a ruse to force people to accept that they should enter into the standard 2012 OVDI?
Bottom Line on OVDI
My first impression of this Streamlined OVDI is that it looks to give cover to a perceived stance of reasonableness: the IRS' OVDI is a program that has a draconian impact on many innocent taxpayers, and this Streamlined OVDI program, on the surface, makes it appear the IRS is being "kinder and gentler." But the truth is this program would actually only help a few obvious cases. But for the rest, the guidance is so vague, one can't possibly enter into this Streamlined OVDI initiative as it fails to limit any penalties and criminal charges the IRS can impose. The Streamlined OVDI gives the IRS and Department of Justice plenty of wiggle room to do whatever they want. And that's not appealing to many people. They want this behind them as soon as possible with an acceptable range of outcomes.
So, while the streamlined OVDI offers plenty unfairness and uncertainty, the standard 2012 OVDI at least provides certainty (thanks for correction @USCitizenAbroad). But no doubt, this is a confusing area of tax law and you may even be reading about this entire mess for the first time. That's why we developed our exclusive IRSmedic Offshore Awareness Guide. We'll walk you through all the steps and explain to you how to come clean properly and get your offshore tax problem behind you permanently. Just sign up for it below. And in minutes you'll be getting your first installment which explains why a "soft" or "quiet" disclosure is a dangerous idea.