The IRS has two main options for those who have either under-reported or failed to report foreign accounts or assets on the FBARs associated with their returns. The first option is the “Offshore Voluntary Disclosure Program” or OVDP, and the second is to take advantage of the Streamlined Domestic Offshore Procedures (SDOP). Each program has benefits and risks, and each situation is highly dependent upon the underlying accounts and the nature with which they were reported.
The choice between OVDP and the SDOP comes down to a few critical issues: criminal tax liability, “willful” versus “non-willful” conduct on the part of the taxpayer, and the penalties resulting from each determination. If the IRS accepts your application for SDOP you can reduce the associated penalty to as little as 5% of the highest aggregated balance of all offshore accounts and assets over a look back period of 8 years. Many CPAs, tax advisors and even well meaning attorneys are recommending this option as it seems to provide an inexpensive way out.
However, acceptance to the SDOP requires a determination by the IRS that the taxpayer did not willfully misrepresent or fail to report their holdings in an attempt to shield themselves from tax liability. This option requires an oversight on the part of the taxpayer that was “non-willful” or inadvertant. The IRS is carefully examining every application, and will not accept SDOP applications simply because the taxpayer claims to have made a mistake here or there. They are looking for patterns of behavior over the course of a few years, and in those cases it becomes more likely that the IRS will find that the taxpayer’s actions were a “willful” attempt to hide income and assets to avoid paying taxes. At this point, the SDOP application is rejected and the taxpayer faces not only heavy penalties and interest (up to 50% of the accounts highest value over the past 8 years), but criminal exposure as well that can result in actual jail time.
Hope is not a defense against the IRS. Decisions regarding FBAR compliance and past returns must be taken seriously and with careful consideration to the facts of your unique situation and the associated risks. If you have filed (or should have filed) FBARs over the past the several years it is important to come clean and make a “full disclosure” to the IRS. Contact the experienced tax attorneys at Allen Barron who can provide a comprehensive assessment of your exposure, and experienced counsel on the best path to resolving FBAR issues and coming into compliance with the IRS. Call 866-631-3470 for a free consultation with an experienced atax ttorney.
