Offshore Voluntary Disclosure Options

Offshore Voluntary Disclosure Options

Offshore Voluntary Disclosure Options

When a US Person is out of compliance for prior-year reporting of overseas accounts, assets, investments, and income, they have several options available to them in order to get safely into IRS compliance. Collectively, offshore tax and reporting amnesty are referred to as offshore voluntary disclosure – – not to be confused with the OVDP, which was the Offshore Voluntary Disclosure Program that was closed in September 2018 but then re-emerged as part of the traditional voluntary disclosure program. The majority of the options available are for Taxpayers who are considered non-willful (although the traditional voluntary disclosure program (VDP) is still available) and a great opportunity for Taxpayers who qualify as non-willful to get into compliance for either domestic and/or overseas undisclosed money (as long as it is legally-sourced). For Taxpayers who are considering getting into offshore compliance in 2022, let’s take a brief look at the different options.

Streamlined Filing Compliance Procedures (SFCP)

The most popular of the non-willful options are the Streamlined Filing Compliance Procedures (SFCP). The Streamlined Procedures can be further broken down into two options: the Streamline Domestic Offshore Procedures and the Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP)

The Streamlined Domestic Offshore Procedures are for Taxpayers who are not considered foreign residents. To apply, Taxpayers will have previously filed original tax returns so that they can go back and amend those returns and international information reporting forms (such as FBAR and FATCA) to report the foreign money. Applicant then pays a 5% Title 26 Miscellaneous Offshore Penalty based on the value of the undisclosed assets, but not all foreign assets are computed into the penalty base.

Streamlined Foreign Offshore Procedures (SFOP)

For Taxpayers who qualify as Foreign Residents, they may qualify for the foreign version of the program –– Streamlined Foreign Offshore Procedures. Unlike SDOP, in SFOP Taxpayers can file original tax returns as part of their submission and all foreign penalties are waived. The foreign resident rules vary based on whether the Taxpayer is a US Citizen/Lawful Permanent Resident or a Foreign National who meets the substantial presence test.

Delinquent International Information Return Submission Procedures (DIIRSP)

Some Taxpayers will not qualify for the Streamlined Procedures and instead will submit to the Delinquent International Information Return Submission Procedures (DIIRSP). Until November 2020, DIIRSP almost always guaranteed a penalty waiver if the conditions were met. Since that time, the IRS has confirmed that a penalty waiver is not guaranteed.

Delinquent FBAR Submission Procedures (DFSP)

If the only form the Taxpayer missed filing was the FBAR, then the Taxpayer may qualify for the FBAR Delinquency Procedures, in which the IRS is still (generally) offering a penalty waiver. They are very specific requirements in order to qualify for this program, and oftentimes due to unreported foreign income or other substantive changes to the tax return, a Taxpayer will not qualify for DFSP.

Reasonable Cause (RC)

When a Taxpayer is non-willful and able to show reasonable cause and not willful neglect, international information reporting penalties are required to be waived, eliminated, or abated by the IRS. The problem lies in the fact that there is no bright-line test for reasonable cause — and the IRS does not issue a closing letter (like in VDP) or acknowledgment letter (like in SDOP).

IRS Voluntary Disclosure Program (VDP/OVDP)

Taxpayers who are willful (or unable to certify under penalty of perjury that they are non-willful) are pretty much limited in their disclosure options to the IRS Voluntary Disclosure Program (VDP) in order to disclose their offshore accounts, assets, investments, and income. The problem has changed since the old days of OVDP and Taxpayers should carefully evaluate their options first before submitting.

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