The IRS’s Offshore Voluntary Disclosure Program (OVDP) is designed to assist U.S. taxpayers who have failed to properly report or pay income taxes on offshore financial accounts. When the U.S. government discovers such a failure, substantial penalties may be imposed, sometimes exceeding the account’s value, and criminal charges may also be asserted. Taxpayers timely entering the OVDP receive certain protection from such sanctions; in return, they must pay back taxes for an eight-year disclosure period, as well as a one-time, nonnegotiable penalty of 27.5% of the highest aggregate account value.

On June 18, 2014, the IRS announced modifications to the OVDP, as well as new Streamlined Filing Procedures. Under the revised OVDP, taxpayers holding an account with a foreign financial institution (or account facilitator) that is cooperating with or being investigated by the Department of Justice face an increased 50% penalty on all foreign accounts. A formal list of banks meeting this definition is available on the IRS’s website ( Once the investigation or cooperation becomes public, account holders who have not yet entered the OVDP will be subject to the increased penalty. Because the dates of such announcements are unpredictable, the increased penalty strongly incentivizes taxpayers to promptly enter the OVDP in order to secure the 27.5% penalty.

The OVDP penalty is computed based on the highest aggregate account value at any time during the disclosure years and includes all foreign assets related to “tax noncompliance.” In addition, the OVDP penalty is applied to all non-compliant foreign assets, such as unreported rental real estate. (For example, if a U.S. taxpayer has an overseas rental property and has not reported the rental income on Schedule E, the IRS will include the entire fair market value of the rental property in the OVDP penalty computation.) Affected taxpayers should fully review the material impact of this penalty, along with the requirement to provide property appraisals.

Although a significantly lower offshore penalty is enticing, the streamlined procedures are fraught with risks, particularly regarding further IRS actions.

The Streamlined Filing Program

The Streamlined Filing Program is designed for taxpayers whose failure to report foreign income or accounts is the result of “non-willful conduct.” Domestic taxpayers who qualify are subject to a reduced 5% penalty, and taxpayers living abroad are not subject to any penalty. Even if a taxpayer previously filed amended returns without formerly making a voluntary disclosure (i.e., made a quiet disclosure), such taxpayer can still utilize the program; taxpayers already under audit, however, cannot. Likewise, taxpayers who have entered the OVDP on or after July 1, 2014, cannot switch to or utilize the Streamlined Filing Program.

Domestic Streamlined Program.

The Domestic Streamlined Program requires amended tax returns (including any applicable international information return, e.g., Form 5471 or 3520) for the preceding three years and a Report of Foreign Bank and Financial Accounts (FBAR) for the preceding six years. The offshore penalty is reduced to 5%, and civil penalties under IRC sections 6651 and 6662 are eliminated. (In contrast, the OVDP requires the payment of eight years of back taxes, applicable civil penalties under sections 6651 and 6662, and a 27.5% offshore penalty.) In addition, the penalty is computed by aggregating the foreign financial assets at the year-end value during the preceding six years. Furthermore, other noncompliant foreign assets (such as rental real estate) are not included in the penalty base if they are not required to be reported on either an FBAR or Form 8938. (In contrast, the OVDP penalty is computed based on the highest aggregate value at any time during the disclosure years and includes all foreign assets related to “tax noncompliance.”) Therefore, the computation is more efficient to implement, and removal of duplicate account transfers is unnecessary, thereby simplifying the process.

Foreign Streamlined Program.

U.S. taxpayers living abroad may avoid all penalties under the Foreign Streamlined Program. Taxpayers who, in any one or more of the last three years for which the tax return due date has passed, were physically outside the United States for at least 330 days and did not have a U.S. abode qualify for this program. Under the applicable procedures, taxpayers must file three years of tax returns and six years of FBARs; the required payment is three years of back taxes, with interest, and there is no additional penalty. In all other respects, the Foreign Streamlined Program is similar to the Domestic Streamlined Program.


The streamlined programs are available only to taxpayers whose failure to report was non-willful. The taxpayer must sign a statement under penalty of perjury certifying that the failure to report the foreign account and income was “non-willful.” Unfortunately, the IRS has only provided the following vague guidance concerning the definition of non-will-fulness: “Conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law” (“Eligibility for the Streamlined Domestic Offshore Procedures,” Many taxpayers may be unable to determine whether they safely fit within this standard and should consider whether they are willing to sign the certification statement.

Taxpayers have not fared well on the issue of willfulness in recent court cases, particularly regarding FBARs. Generally, to establish willfulness, the IRS must prove that a taxpayer knew of the FBAR requirement and intentionally violated that requirement. The IRS has asserted in the district courts and the circuit courts of appeals that a taxpayer’s failure to correctly answer Schedule B Part III Line 7 is prima facie evidence of willfulness [see U.S. v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012) and U.S. v. McBride, 2012 WL 5464955 (D. Utah Nov. 8, 2012)].


Although a significantly lower offshore penalty is enticing, the streamlined procedures are fraught with risks, particularly regarding further IRS actions. Taxpayers do not receive a formal closing agreement; as such, any submission is subject to examination under the IRS’s standard selection methods and criteria. If, upon audit, the IRS determines that the taxpayer was willful, additional penalties—and even criminal liability—may apply. Furthermore, although the streamlined programs require tax returns for only a three-year disclosure period, the IRS is not precluded from auditing and imposing penalties outside of that period if willfulness is found. Finally, once a taxpayer makes a disclosure under one of the streamlined programs, that taxpayer is precluded from entering the OVDP. For these reasons, taxpayers must analyze their audit exposure within and outside of the threeyear disclosure period.

Transition Rules

Taxpayers who entered the OVDP prior to July 1, 2014 are eligible to request treatment under the Transition Rules. These taxpayers are allowed to seek the favorable penalty structure of either streamlined procedure while remaining in the OVDP. In order to take advantage of the Transition Rules, eligible taxpayers must submit a formal request, the certification and statement required under the streamlined programs, and all documentation required under the OVDP (if not already submitted). Although a potential lesser FBAR penalty is attractive, taxpayers must still submit amended tax returns for the full eight-year OVDP disclosure period. Furthermore, participation under the Transition Rules does not prevent accuracy-related, failure-to-file, and failure-to-pay penalties from being imposed. The IRS will individually review every transition case and execute a closing letter upon acceptance. If denied, the taxpayer remains in the OVDP and retains the ability to opt out; there is therefore no reason for eligible taxpayers not to attempt to take advantage of this option.

Opting Out of Final Penalty Stage

On May 13, 2015, the IRS issued new guidance regarding FBAR penalties (“Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties,” Under this guidance, a taxpayer who enters the OVDP is allowed to opt out of the final penalty stage without losing the protections afforded under the OVDP. In such instance, the penalty is subject to discretion and negotiation, and mitigating factors may be considered. The new guidance generally limits the application and amount of the penalty by applying the standards described in the Internal Revenue Manual. For example, the new guidance clarifies that IRS auditors will generally assess only one penalty per year even if a taxpayer had multiple accounts. For willful cases, the IRS will limit the penalty to the year with the highest aggregate balance and, generally, will limit the penalty to 50% of the highest aggregate balance. This new guidance removes much of the prior uncertainty of the opt-out regime and must be fully considered before proceeding under any program.

New Delinquent Submission Procedures

Taxpayers who have duly reported foreign income in their original tax returns may generally file late international information returns and late FBARs without any penalties being imposed. For delinquent informational returns, the taxpayer must submit the information return with an amended return (except Forms 3520 and 3520-A, which are exempt from this requirement) and a statement that establishes reasonable cause for failing to file such returns. Reasonable cause is generally met “when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless failed to comply with those obligations” [Internal Revenue Manual (11-25-2011)].

Taxpayers should proceed with caution in considering this option. Generally, the statute of limitations for international information returns does not start to run until the information return is filed. Thus, the disclosure period under this option is not clear. The IRS has informally stated that three years of information returns is sufficient, but it has also stated that the taxpayer is allowed to submit information returns beyond the last three years. Furthermore, the IRS may still impose penalties if it does not accept the taxpayer’s explanation of reasonable cause. Taxpayers whose failure to file informational returns started more than three years ago face the dilemma of deciding whether to pay the OVDP or streamlined penalty or file under the Delinquent Information Return Procedures, with the potential risk of paying penalties for each year for which an information return was required.

A taxpayer who has duly reported all foreign income but failed to file FBARs may be eligible to file late FBARs without any penalties being imposed and without entering either the OVDP or streamlined programs. The taxpayer must not be under a civil examination or a criminal investigation by the IRS, and the IRS must not have previously contacted the taxpayer regarding the late FBARs. To take advantage of this procedure, the taxpayer can simply file the late FBARs with a statement explaining the reason for the late filing. The statute of limitations for an FBAR is six years and begins to run after the date that the FBAR is due. Thus, if a taxpayer failed to file an FBAR for each of the last ten years but duly reported the income from the foreign accounts, the taxpayer would file FBARs for only the past six years under this procedure.

Recent News

The FBAR and its penalty regime have been the subject of public criticism and recent litigation. Senator Rand Paul (R-Ky.) was named as one of seven plaintiffs in a recent lawsuit against the Department of Treasury, the IRS, and the Financial Crimes and Enforcement Network (FinCEN). The lawsuit claims that the intergovernmental disclosure agreements are unconstitutional treaty agreements, that the Foreign Account Tax Compliance Act (FATCA) and FBAR reporting requirements violate the constitutional protection against unreasonable searches and seizures and deny U.S. citizens living abroad equal protection under the law, and that the FATCA and FBAR penalties violate the constitutional protection against excessive fines. Due to Senator Paul’s involvement, the lawsuit may trigger further changes through the courts, Congress, or administratively within the IRS.

Given the lack of guidance and the subjectivity involved in IRS examinations, taxpayers must carefully review all relevant factors and history.

Despite the current outcry against the FBAR requirement, the government’s focus on uncovering foreign assets and income is demonstrated by the recent penalty assessments against complicit foreign banks. Recently, the statute of limiations was increased to six years for omissions of income exceeding $5,000 attributed to foreign bank accounts. In addition, the due date for filing an FBAR has been moved up to April 15 instead of June 30. A six-month extension is also now available.

Which Plan to Choose?

The downside of the streamlined programs is the lack of absolute protection from future penalties or criminal charges. Although no automatic audit is conducted, the IRS could select any return or informational form for further examination. As a result, additional penalties and potential criminal liability are possible if the IRS determines that the taxpayer was willful or lacked reasonable cause. Given the lack of guidance and the subjectivity involved in IRS examinations, taxpayers must carefully review all relevant factors and history. Taxpayers should not utilize the streamlined programs without fully evaluating whether their failure to report was willful or subject to a reasonable cause defense.

The siren’s song of these new procedures must be tempered by an impartial analysis of all the factors. CPAs, by virtue of their training, experience, and knowledge of a particular taxpayer’s history, can play an important role in assisting in this evaluation. To increase the protection afforded their professional advice, in certain situations CPAs should be retained by an attorney through a Kovel letter [see U.S. v. Kovel, 296 F.2d 918 (2d Cir. 1961) or “The Kovel Privilege: How Does It Work?,” Sharon L. McCarthy, The CPA Journal, June 2015].

The IRS continues to closely monitor compliance and explicitly retains the right to modify or terminate the announced programs. The streamlined programs can assist many taxpayers who have not yet come into compliance; taxpayers who fail to utilize them will likely pay substantially higher penalties and interest, and possibly suffer criminal charges.

Robert S. Barnett, JD, CPA is a founding partner of Capell Barnett Matalon & Schoenfeld LLP, New York, N.Y.