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Uncertain offshore calculation, part 1: Are the penalties in the OVDP too pricey?

The ongoing IRS enforcement crackdown on offshore accounts has been remarkably lucrative for Uncle Sam. Since the crackdown began in 2009, it has driven more than 100,000 taxpayers into IRS programs to resolve their offshore compliance issues and generated upwards of $10 billion in back taxes, interest and penalties from those taxpayers.

But are more offshore account holders who chose to enter the Offshore Voluntary Disclosure Program (OVDP) having second thoughts?

In this two-part post, we will explore why someone who entered OVDP might choose to opt out.

Until fairly recently, many taxpayers who entered the Offshore Voluntary Disclosure Program (OVDP) have been willing to pay stiff financial penalties to participate.

There are a couple of key reasons for this. One is that OVDP participation minimizes the risk of criminal prosecution for willful failure to comply with offshore reporting requirements, as long as you commit to cooperating with the IRS going forward.

Making a "quiet disclosure" by simply filing amended returns does not have the same risk-reduction effect on the possibility of criminal prosecution. Neither does using the Streamlined Filing Procedures that are a variation on the OVDP.

Another reason why so many offshore account holders have chosen to enter the OVDP is that it is supposed to enable you to determine, to a reasonable degree, how much it will cost in tax penalties to come into compliance with the filing requirements. There are many such penalties, including the penalty for failure to file FBARs (Report of Foreign Bank and Financial Accounts, now also called FinCen 114).

As we will explain in part two of this post, however, there has been a surprising development regarding OVDP participation: many people who chose OVDP are reconsidering their choice and some have already opted out.

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