The Internal Revenue Service (IRS) recently announced the impending end of the Offshore Voluntary Disclosure Program (OVDP). The program, scheduled to end this September, offers a trade. In exchange for reporting previously undisclosed foreign assets, the IRS will cap some of the potential penalties.
The IRS also notes that participation in the OVDP reduces the risk of criminal prosecution.
What are the penalties that come along with participation in the OVDP? There are generally two penalties. The first is the tax and interest that comes with a review of the foreign asset and can span back up to eight years.
The second fee is referred to as an account based penalty. This penalty results in a fee of 27.5 percent or 50 percent of the highest value of the account during this same eight-year period.
A recent piece in Forbes discusses another option — entering the OVDP with the intention of opting out. It may sound counter-intuitive, but those with large account based penalties could benefit from this strategy. Essentially, the process involves entering the OVDP. The taxpayer would report all foreign assets and come current on all tax obligations and fees. Then, while the IRS takes time to figure out an account based penalty, the taxpayer could choose the opt out exclusion.
The opt out option comes with risks. The exclusion is irrevocable and can result in additional penalties. As such, a taxpayer should discuss this and other options with an attorney before determining the best course of action for tax compliance.