The IRS announced that its popular Offshore Voluntary Disclosure Program (OVDP) will remain open on an indefinite basis, while warning taxpayers that identifying individuals with undeclared offshore accounts remains one of the agency's top priorities.
In 2009, the IRS announced its first Offshore Voluntary Disclosure Initiative (OVDI), which gave taxpayers with undisclosed foreign accounts a six month window to voluntarily file amended returns and pay a 20% penalty, in exchange for immunity from criminal prosecution and larger financial penalties. The program was so successful that the IRS offered it again in 2011, with the penalty amount increased to 25%. In 2012, the current Offshore Voluntary Disclosure Program (OVDP) was announced. The penalty amount was increased to 27.5%, and no ending date was given. Since 2009, the IRS has received more than 50,000 voluntary disclosures, resulting in the collection of more than $7 billion.
Those who fail to voluntarily disclose their foreign accounts risk facing draconian penalties and/or criminal prosecution. The willful failure to file an FBAR is a felony, punishable by up to five years in prison. Civil penalties for willful violations can often exceed the total amount of the undisclosed assets. In a recent case, a San Jose man was convicted for FBAR violations and civil penalties totaled 150% of the balance in his foreign accounts. These penalties are in addition to back taxes that are owed.
On June 18, 2014, new streamlined procedures were announced for individuals whose failure to disclose offshore accounts was non-willful. Under these new procedures, approved taxpayers pay a one-time penalty equal to 5% of the amount held in the undisclosed offshore accounts, and amended returns are only filed for the three most recent tax years. Those who were residents of a foreign country for at least one of the three most recent tax years do not have to pay a penalty at all.
To be eligible for any of these programs, taxpayers must come forward before the government learns of their offshore accounts. With the implementation of the Foreign Account Tax Compliance Account, banks in more than 50 countries are set to begin providing information to the IRS about their American clients.