The IRS wrapped up the Offshore Voluntary Disclosure Program (OVDP) on September 18, 2018. They cited advances in third-party reporting and a growing awareness among U.S. taxpayers about their offshore tax responsibilities as the reasons.
As the curtain falls on the OVDP, many Americans are still playing catch-up with their U.S. tax filings. Naturally, folks are wondering if the relief options that came with the OVDP are now off the table.
The OVDP was put in place by the IRS to cushion from criminal prosecution American taxpayers who:
- didn’t file the required U.S. tax returns regarding foreign accounts, assets, or income; or
- filed incorrect returns concerning foreign accounts, assets, or income
Since the OVDP was essentially a tax amnesty program, its overarching benefit to American taxpayers is that it guaranteed immunity from criminal prosecution for those who failed to file returns to report their foreign accounts and assets.
“Even with the OVDP gone, you’ve still got some options to get back on track. These are primarily determined by whether your failure to file and report your financial assets and income was willful or not.
Below, we dig further into the evolution of the OVDP and the “new” amnesty framework. We also present the options available for US taxpayers to become compliant with their US taxes in 2023, with an emphasis on FBAR compliancy.
What happened to the Offshore Voluntary Disclosure Program?
The Offshore Voluntary Disclosure Program has existed in various forms since 2009. It was terminated on September 28, 2018.
The OVDP was discontinued because of:¹
- Declining participation: At its peak in 2011, approximately 18,000 taxpayers used OVDP. But that number steadily declined, falling to only 600 disclosures in 2017.
- Increased awareness: 56,000 disclosures were made through the OVDP, raising $11.1 billion in revenue.
- Increased third-party reporting: FATCA’s implementation in 2010 helped inform the IRS and taxpayers of reporting requirements.
How the IRS updated the Voluntary Disclosure Program
As mentioned earlier, one of the main benefits of the OVDP was immunity from criminal prosecution for willfully not filing your tax returns. While you may have owed some hefty penalties, jail time wasn’t a risk.
Today, the IRS uses the Voluntary Disclosure Program (VDP). It remains the only voluntary disclosure option available for taxpayers with potential criminal exposure due to their willful violation of US tax law.
While the current VDP is more nuanced and doesn’t guarantee criminal immunity, taxpayers should consult an international tax attorney, versed in the program, to discuss the best approach.
Pre-approval for VDP is necessary
The current VDP is managed by the IRS Criminal Investigation Unit (IRS-CI).
As a result, taxpayers wanting to use the VDP must obtain approval from IRS-CI by filing a preclearance letter called Form 14457.
If you're lagging behind on your U.S. expat tax returns, chances are you might have skipped your annual FBAR too, if it applies to you. By working with an expert in US expat tax, you can ensure that all loose ends are tied up – and professional assistance will minimize your exposure to financial penalties.
Voluntarily disclosing late FBARs
If you’re behind on your FBARs, don’t sweat it—you’ve got two ways to sort it out. You can make a quiet disclosure, which means simply filing without following a particular program to do so. Or, you can submit a late filing under an amnesty program such as Streamlined Procedures or Voluntary Disclosure Program.
As you will discover, making a quiet disclosure can be an idea rife with negative potential consequences.
A ‘quiet disclosure’ is when you file without using a specific program like the VDP or Streamlined Filing Procedures. Ultimately, in doing so, you’re filing with the expectation of “quietly” becoming compliant without drawing IRS attention to yourself in the process.
Caution: Before you choose between a voluntary disclosure and a quiet one, here’s what you should know:
- Quiet compliance offers no protection from possible financial penalties
- Quiet compliance offers no protection from criminal prosecution
- The IRS has explicitly warned against taking a quiet disclosure approach
Amnesty programs to file late FBARs
Instead of making a quiet disclosure when it comes to international income and accounts, you should consider late filing under one of the following amnesty programs.
- Delinquent International Information Return Submission Procedures
- Delinquent FBAR Submission Procedures
- Streamlined Filing Procedures
- Voluntary Disclosure Practice
Delinquent International Information Return Submission Procedures
Delinquency Procedures come in handy if you’ve reported all your income and tax but missed out on some forms.
So, if you included all your taxable income (including from foreign accounts) on your US tax returns but simply failed to attach Form 8938 or another informational disclosure on the tax return, the Delinquency Procedures might be best for you.
Other common forms filed in the Delinquent International Information Return Submission Procedures include:
Streamlined Filing Procedures (SLP)
The Streamlined Filing Procedures are aimed at taxpayers who:
- Failed to file their FBARs and
- Failed to pay tax related to their foreign financial accounts.
If you fully disclose all of your unreported foreign accounts and pay all taxes, you’ll be free from paying any penalties.
Note: There are two versions of this procedure: Offshore & domestic. Offshore is penalty-free but domestic is not.
To file under the Streamlined Procedure you’ll need to affirm that your noncompliance was not willful. (Bright!Tax can help you navigate this! We’ve helped thousands of US expats back into Uncle Sam’s good graces without paying a dime to the IRS.)
Voluntary Disclosure Program (VDP)
As noted above, the VDP is the only voluntary disclosure option available for taxpayers with potential criminal exposure due to their willful violation of US tax law.