I must pause here to note that if you do have significant international compliance issues, you should consult legal counsel in addition to a tax professional due to the many civil and criminal consequences imposed by the Department of Justice and Department of the Treasury.
Imagine a normal day in the life of a hard-working taxpayer. She always files her tax return on time and doesn’t take any undue deductions. One day she learns a wealthy relative left her interest in a profitable commercial property in Croatia. How fortunate! But wait, this wealthy relative left it to her a couple of years ago and it has been generating income this whole time. Oh no! There are full pages in the IRS instructions detailing penalties for the forms she didn’t file over that period that could amount in many thousands of dollars and even jail time. What is our hard-working taxpayer to do?
The IRS, in an effort to provide a bridge to compliance, has enacted the 2012 Offshore Voluntary Disclosure Program (“OVDP”), modified effective July 1, 2014. This program is designed to incentivize taxpayers (entities and individuals) to come to the IRS with undisclosed assets and accounts rather than the IRS having to hunt them down; it offers a reduction in penalties and potential elimination of the risk of criminal prosecution. The penalties described in the Internal Revenue Code for failing to comply with foreign reporting are incredibly brutal; in some cases 100% of the highest value of an asset during a given year, plus other penalties, plus interest, plus criminal prosecution. That, coupled with the increasing risk of being detected by the US Government by their new, more aggressive approach to treaties and policy, creates a very compelling argument for taxpayers to come forward.
This relief a taxpayer receives from this program is not completely painless. Paying the offshore penalty of 27.5% plus the accuracy-related penalty of 20% is a hard pill to swallow, but when weighed against the alternative (potentially 100% and criminal prosecution), it should go down a little easier.
Eligibility for the OVDP is contingent upon coming forward before the IRS is aware of the unreported foreign assets; if they find you, OVDP is off the table. In some cases, a taxpayer may have already amended and submitted reports, referred to as a “quiet disclosure.” These taxpayers still run the risk of full penalties and criminal prosecution if they don’t apply to the OVDP.
In our example, the hard-working taxpayer has the ability to compile all information on the property and the unreported income and then submit an application via Forms 14454 and 14457 to the IRS OVDP. If accepted, original and amended tax returns accounting for the foreign income and forms reporting the foreign transactions and activity must be prepared and submitted. In addition, the taxes, penalties, and interest due must be paid or arrangement to pay must be made. All this just to be a good tax citizen!
The Offshore Voluntary Disclosure Program offers a bumpy path to compliance that is not without its difficulties. It is important for someone considering this path to enlist the counsel of professionals in law and accounting.