**For updated information about current IRS disclosure programs, click here**
OVDI stands for the IRS Offshore Voluntary Disclosure Initiative. Sometimes, it is referred to as OVDP, with the P standing for "procedure." However, both OVDI and OVDP are the same exact thing (UPDATE 3-2016: It is now referred to as to OVDP).
OVDI is the process by which holders of undisclosed foreign-held bank accounts (above a certain threshold) come forward with that information to the IRS, along with unpaid taxes and penalties in exchange for not just criminal immunity, but also incredibly onerous FBAR penalties.
Historically, there has always been a Voluntary Disclosure Program, but the IRS is greatly expanding its scope and enforcement.
The IRS has always encouraged taxpayers to come forward to report previously undisclosed income. Typically, in the past, these disclosures involved domestic income. However, since the UBS scandal broke, the IRS was given vastly greater powers in the collecting information and assessing punitive penalties, so the focus has shifted to offshore voluntary disclosures and compliance.
The 2009 OVDI
In 2009, the IRS developed the first Offshore Voluntary Disclosure Program. This program was very attractive to taxpayers who were intentionally avoiding paying taxes on their worldwide income. The reason is that such taxpayers only needed to pay back taxes owed, plus interest along with a 20% penalty based upon the highest values ever realized in the unreported offshore accounts (and underpayment penalties as well). So for someone with years of evading huge amount of taxes, this program was a great deal. Around 5,000 taxpayers "came clean" using this 2009 program.
The 2011 OVDI
However, because the penalty structure of the 2009 OVDI treated taxpayers who intentionally evaded taxes and those who made an honest mistake exactly the same, the IRS created an opt-out procedure that debuted in the 2011 OVDI.
Of note, the 2011 OVDI increased the “in-lieu-of FBAR penalty” (referred to as FBAR penalty herein) from 20% of highest account value to 25%. Additionally, the IRS looked at an 8-year look-back period, as opposed to the 6-year of the 2009 OVDI.
The good news is that those who did not intentionally evade taxes or who were unaware that they had to pay taxes or disclose their foreign accounts on the FBAR, could now take advantage of of a new procedure where a taxpayer could argue for a reduced “FBAR” penalty rate of 5%, if the taxpayers could show they had a reasonable cause. This is called an 'opt-out.'
The 2012 OVDI
The 2011 OVDI ended on August 30, 2011 (it was extended a few weeks in the Northeast on account of Hurricane Irene). Then in January of 2012, the IRS announced the new 2012 OVDI. The major change from the 2011 OVDI is that now the “FBAR penalty” was set at 27.5%.
Because of the unfairness in cost of going through the program, there are taxpayers still wanting to avoid even the reduced penalties. Many tax practitioners have been advising clients to make a 'soft' or 'quiet' disclosure. The fact is there is no 'soft' disclosure process. The IRS warns against this.
Legal and accounting fees are an honest considerations in determining whether or not someone should utilize the program as well. The fee is determined by several factors, most importantly, the size and complexity of the unreported accounts (PFICs especially), the complexity of the amended return, the reasons for the non-compliance, along with whether or not an opt-out of the 27.5% penalty is desired.
It is important to note that for whatever penalties the IRS does asses in the OVDI opt-out, these penalties are not just appealable to the IRS Office of Appeals. But also to US Tax Court, and all the way to the US Supreme Court, theoretically.
Something to keep in mind when considering to opt-out or not is that in 2011, there were approximately 29,000 new tax court cases filed — these were all types – not just OVDI. Additionally, during the first five months of 2012, a total 2,500 OVDI's were filed.
The point is that should the IRS be unreasonable in assessing OVDI penalties, this will strain the appeal and court system drastically if taxpayers are unwilling to accept the findings of the tax examiners who assess the “FBAR penalty.” You see, the IRS can not afford to increase its appeal workload by 10%. The truth is the IRS is vastly overwhelmed now.
In our opinion, FATCA does more harm than good, and all of this reporting should just go away. It affects average Americans unfairly, and we've heard no evidence of any criminals being caught because they didn't report an offshore account.
If you have offshore accounts and are just realizing that you should have been reporting them all along but have not, contact us. We have helped thousands of taxpayers get into compliance and avoid stiff penalties. Call us at 888-727-8796 or email info@irsmedic.com.
