U.S. Citizens Overseas are Often Ill Advised to go into the (1) OVDP and sometimes even the (2) the Streamlined Filing Procedure
There have been prior posts discussing what is referred to as the offshore voluntary disclosure program (“OVDP”) and what the IRS later created – the so-called “streamlined program” filing procedure.
For more background, see, GAO Yr2014 Report on Offshore Voluntary Disclosure Program Indicates Less Than 4% of Taxpayers Lived Outside the U.S., posted March 11, 2014.
Importantly, these OVDP and streamlined programs created by the IRS are not creatures of any statutory law, for instance Title 26 (the Internal Revenue Code) or Title 31 (the so-called Bank Secrecy Act); or any law for that matter. There are no court cases or Treasury Regulations that spell out the terms of these programs as part of any legal framework.
I like to say they are similar to the Hasbro rules of “Monopoly”; a game I was fond of as a child. The IRS is like Hasbro in that they can change the rules of the game as they wish, and often do in the form of publicized frequently asked questions (“FAQs”). The IRS submits these rules of their game and ask, encourage and in some cases (in my view) browbeat taxpayers, often times through their advisers, into participating. See some of the various rule changes below –
- IRS OVDP FAQs and Answers 2012
- Transition Rules: Frequently Asked Questions (FAQs)
- IRS 2011 Offshore Voluntary Disclosure Initiative
- January 8, 2010 — added Q&As 53-54
- August 25, 2009 — added Q&A 52
- July 31, 2009 — modified A6, A21 and A22
- June 24, 2009 — modified A26 and added Q&A 31-51
- May 6, 2009 — posted Q&A 1-30
The above reflect just some of the modifications and rules the IRS has made, and keeps making to their rules of their proposed OVDP structure; which again, I repeat, is not part of the law.
Many taxpayers and their advisers, in my view have not thought carefully about the law and its application; but rather have focused on the “Monopoly” rules. They cite and read the FAQs if that is somehow the law! See How is the offshore voluntary disclosure program really working? Not well for USCs and LPRs living overseas posted May 10, 2014 and The 2013 GAO Report of the IRS Offshore Voluntary Disclosure Program, International Tax Journal, CCH Wolters Kluwer, January-February 2014. PDF version here.
Similarly, the streamlined filing procedures is not part of the law, and also has been modified several times by the IRS. Fortunately, the IRS realized that U.S. taxpayers residing outside the U.S. are not the same as those who reside in the U.S. when they created two separate programs last year in 2014.
See, U.S. Taxpayers Residing Outside the United States: The following streamlined procedures are referred to as the Streamlined Foreign Offshore Procedures. Eligibility for the Streamlined Foreign Offshore Procedures
The point of this post is that I have seen numerous cases where U.S. citizens residing around the world were ill advised to participate in the OVDP. In short, if an individual has no criminal tax liability, I think there is little purpose or reason for almost all USC overseas to participate into the OVDP. Analyzing thoughtfully the facts of each case and the law (not the Monopoly rules) is what is important for each individual.
Finally, a clear understanding of what are the Monopoly rules compared to the law is crucial when advising USCs residing overseas. Sometimes, filing through the streamlined procedure might be well advised for a particular taxpayer; e.g., if they would otherwise have substantial late payment and late filing penalties. However, there are plenty of cases where simply filing tax returns pursuant to the law will be preferable in a particular case. This is a process that needs to be thoughtfully considered in each case with a clear understanding of the law – not just the Monopoly rules.
For some related commentary on this topic, see the following posts:
- How Congressional Hearings (Particularly In the Senate) Drive IRS and Justice Department Behavior, Sept 28, 2014
- IRS Attorney – Dan Price, Provides Specific Recommendations for U.S. Citizen Taxpayers Overseas at USD – Procopio International Tax Institute, posted Oct 30, 2015.