The Offshore Voluntary Disclosure Initiative is like a double-edged sword. It can be very effective at achieving a taxpayer's goals, but it must be handled with care.
One side of the sword can work to the taxpayer's advantage when faced with serious consequences for failing to make the required Report of Foreign Bank and Financial Accounts (FBAR). For many taxpayers with offshore accounts who should have filed the FBAR form, OVDI offers the best chance they may ever have to get into compliance with the requirements set by the IRS.
The other side of the sword, however, cuts the other way. The OVDI program seeks to get taxpayers to disclose not only bank accounts, but also a number of different types of foreign assets that are not necessarily subject to the FBAR reporting requirement. These assets include real estate holdings, as well as interests in gold and other commodities.
The decision to participate in OVDI may very well be the right one for you. But you should talk it over carefully with an experienced tax attorney so that the program does not become a trap for the unwary.
FBAR Requirements and Consequences
Federal law requires taxpayers to report foreign accounts holding more than $10,000. The reporting procedure involves checking a box on Schedule B of your Form 1040 and filing Form TD F 90-22.1, which is widely known as an FBAR. The form for 2010 is due by June 30, 2011.
The consequences for failing to file a required FBAR are significant for taxpayers who are caught out of compliance. The tax penalty is normally 50 percent of the entire balance in the account or $100,000, whichever is greater, for the years from 2003 to 2010. There is also the matter of paying the tax that was due on income from the foreign account plus interest. And then there is the possibility of criminal prosecution for tax evasion.
OVDI Incentives and Assets
The Offshore Voluntary Disclosure Initiative seeks to get taxpayers to voluntarily disclose their failure to file FBAR to the IRS, in exchange for certain incentives. One of these incentives is a significantly reduced civil penalty. Instead of 50 percent of the account's highest aggregate balance, the penalty for OVDI participants is only 25 percent - and perhaps even less in certain circumstances.
The biggest incentive of all, however, may be removal of the threat of criminal prosecution for tax evasion.
Making a Decision
Keep in mind, however, that the types of assets you will be required to disclose to participate in OVDI go well beyond what you were initially required to report in an FBAR. You should talk with your tax attorney about other assets you have, such as real estate, mutual funds, and commodities such as gold.
Recognizing how broadly the IRS has defined assets subject to OVDI disclosure, some taxpayers may think twice about participation. Others may enter the program, then "opt out" and try to resolve matters in writing, including an agreement on the scope of an IRS audit.
These are questions you should discuss with an experienced tax lawyer. OVDI has a lot of offer, but you don't want to let your guard down too much without thinking through all of your decisions strategically with experienced counsel. Just remember: a double-edged sword can cut both ways.
