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The OVDP and offshore reporting requirements

It's already understood that the failure to disclose foreign accounts can result in significant penalties. Yet while offshore enforcement concerning foreign accounts was significantly stepped up in 2009, many individuals failed to participate in the IRS Offshore Voluntary Disclosure Program (OVDP).

In prior posts, we discussed the tools the IRS has at its disposal make it easier for them to discover these undisclosed accounts. Under the Foreign Account Tax Compliance Act (FATCA), a whole host of foreign financial institutions are under obligation to report on U.S. citizens with offshore financial accounts. The network continues to grow with each successive year.

We have also spoken about how the OVDP is closing on September 28, 2018. For those still wishing to participate in this program, they need to act quickly. The OVDP may offer taxpayers the opportunity to take advantage of a deal where there is a cap on penalties. On the other hand, taxpayers may also wish to opt out of the program.

Opting out of the OVDP

For a variety of reasons, there may be advantages to taxpayers in opting out of the OVDP. Generally, such individuals decide to opt out after the IRS proposed a miscellaneous offshore penalty for the individual case.

While the OVDP may place cap on penalties, the miscellaneous offshore penalty is still noteworthy. The current 27.5 percent or 50 percent penalty may be applied depending upon the individual circumstances.

Sometimes, taxpayers decide to opt out after coming in full compliance with offshore reporting requirements. This means taxpayers already paid their taxes, interests and any assessed penalties.

However, do understand the opt-out election is irrevocable. Also, opting out could result in a taxpayer facing civil fraud or information return penalties. This could also trigger a criminal prosecution. For those opting out in the past, it could mean delays. In 2009, it typically took 590 days to close one’s case after opting out. That’s why one should carefully consider their options.

For those unaccustomed to dealing with the IRS, it is difficult to determine the advantages and disadvantages the OVDP and other offshore programs possess. Taxpayers sometimes require the strong guidance and possible representation that experienced tax lawyers can provide. Understanding the right option can save one time and expense. It could also prevent continued dealings with the IRS.

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