OVDP or Streamlined? Which Reporting Method Should You Choose?

If you are a U.S. citizen and you have foreign accounts, you have to file tax returns and report those accounts to the IRS. U.S.-connected individuals, including those who reside abroad, can face consequences for failure to file tax returns, report foreign and U.S. sourced income, and report their offshore accounts.

The IRS is encouraging voluntary compliance from those who may not have filed tax returns or reports of financial accounts in the past. There are different programs which can be used to alert the IRS to undeclared offshore funds, including the Offshore Voluntary Disclosure Program (OVDP) and Streamlined Filing Compliance Procedures. 

Both OVDP and Streamlined Filing can still have significant financial consequences, and it is important to understand which of these programs is right for you, if any. A Boston tax attorney can provide you with help understanding IRS requirements and deciding whether to take advantage of any programs that allow you to report undeclared offshore accounts.

Making the Choice Between the Two

Streamlined Filing involves filing original or amended tax returns, reporting foreign and U.S. source income for all relevant years, and properly reporting all interests in foreign financial accounts and assets.  Taxpayers eligible for streamlined filing who live outside of the U.S. will have penalties waived under streamlined procedures. Those who are eligible and who live in the U.S. will face a penalty of five percent of foreign financial assets which they failed to properly report. 

At first glance, this suggests streamlined filing could result in a lesser penalty than participation in OVDP, as OVDP imposes up to a 50 percent miscellaneous offshore penalty if the foreign account is held at an institution that is under investigation by the IRS or if public disclosures have been made regarding an investigation into the institution.

However, Streamlined Procedures can actually result in fairly substantial financial penalties. Streamlined Procedures don't limit civil penalties which are associated with reporting income from U.S. sources. There is also the possibility of criminal prosecution with Streamlined processes if it is determined that a tax law violation happened. OVDP can provide protection from criminal prosecution.

OVDP and Streamlined Procedures are also open to different people. Streamlined Procedures are a possibility only if the failure to follow IRS rules was non-willful. Those participating in Streamlined Procedures must certify their non-willfulness under penalty of perjury, asserting that their failure to follow IRS rules was negligent but not intentional.  OVDP, on the other hand, can also provide relief to willful violators by precluding criminal charges, albeit with substantial financial penalties imposed.

The IRS conducts an investigation into willfulness, and could decide that the failures were actually willful after all. The sources of funds, the nature and structure of deposits and withdrawals, and whether the offshore accounts have moved to different institutions are among the many factors the IRS considers in assessing willfulness.

Determining what options are best for coming forward to deal with tax issues is very complicated, so those considering OVDP, streamlined procedures, or other solutions for dealing with tax problems should consult with tax attorney Kevin Thorn.

For a consultation, contact Kevin E. Thorn, Managing Partner, at ket@thornlawgroup.com or (617) 692-2989