An Overview of the 2014 OVDP and Enhanced Streamlined ...OVDP letter to the IRS CI, a ‘‘public disclo-sure’’ event discussed above has already oc-curred. • The undisclosed

An Overview of the 2014 OVDP and EnhancedStreamlined Filing Compliance Proceduresby Alexey Manasuev

On June 18, 2014, the IRS released significantchanges to its offshore voluntary disclosure pro-

gram and enhancements to the streamlined filing com-pliance procedures (SFCP).1 Along with the new rules,the IRS offered transitional treatment to those taxpayerswho are participating in the OVDP and meet certain

requirements.2 Unfortunately, the IRS allowed onlylimited time for those taxpayers to qualify for the tran-sitional treatment. The transitional treatment is ex-tended only to those taxpayers who were ‘‘participat-ing’’ in the OVDP (managed to file their OVDPsubmission and did not enter into a closing agreementwith the IRS) on or before June 30, 2014. The benefitof the transitional treatment is in applying the reducedand more favorable penalty structure of the enhancedSFCP for those taxpayers who, even though participat-ing in the OVDP, are qualifying under the terms of theenhanced SFCP. Another benefit of qualifying for thetransitional treatment is in the taxpayers’ ability toelect the processing of their OVDP cases under the oldrules, in existence before the new rules became effec-tive on July 1, 2014 (see the discussion of significantOVDP changes below).

Taxpayers who may face increased penalties underthe new OVDP rules may still benefit from the old2012 OVDP penalty structure if they filed their pre-clearance OVDP submissions with the IRS offshorevoluntary disclosure coordinator on or before August4, 2014.

For the first time since the IRS released its OVDPinitiative in 2009, the IRS clarified options available toU.S. taxpayers with undisclosed foreign financial assets

1OVDP and SFCP are each referred to as ‘‘program’’ andcollectively as ‘‘programs.’’ IR-2014-73, ‘‘IRS Makes Changes toOffshore Programs, Revisions Ease Burden and Help More Tax-payers Come Into Compliance’’ (June 18, 2014), available at

http://www.irs.gov/uac/Newsroom/IRS-Makes-Changes-to-Offshore-Programs;-Revisions-Ease-Burden-and-Help-More-Taxpayers-Come-into-Compliance. See also Statement of IRSCommissioner John Koskinen, available at http://www.irs.gov/uac/Newsroom/Statement-of-IRS-Commissioner-John-Koskinen.(All URLs are up to date as of July 6, 2014.)

2See Transition Rules: Frequently Asked Questions (FAQs),available at http://www.irs.gov/Individuals/International-Taxpayers/Transition-Rules-Frequently-Asked-Questions-FAQs.

Alexey Manasuev is a part-ner with TaxChambersLLP, a boutique tax lawfirm in Toronto. He is aU.S. tax lawyer and aforeign legal consultantlicensed to provide U.S.tax and legal advice inOntario.E-mail: [email protected]

The views and opinions are those of theauthor and do not necessarily represent theviews and opinions of TaxChambers LLP. Theinformation contained herein is general in na-ture and based on authorities that are subjectto change. Applicability to specific situations isto be determined through consultation withyour tax adviser.

Copyright 2014 TaxChambers LLP. All rightsreserved.

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and accounts to come into compliance with their U.S.tax obligations and foreign bank account report filingobligations. These options are as follows:

• OVDP;

• SFCP (for U.S. taxpayers residing outside theUnited States and U.S. taxpayers residing in theUnited States);

• delinquent FBAR filing procedures; and

• delinquent international information return filingprocedures.

This article summarizes significant changes made bythe IRS to the two programs, comments on a few areasthat remained unaddressed, and shares the author’sviews and recommendations on aspects of the newrules that may present increased challenges and com-plexities for taxpayers.

Practical Tools

Attached to this article are two practical tools. Oneis a set of decision-making trees on options available totaxpayers to become tax compliant under the new rulesannounced by the IRS on June 18, 2014.3 The purposeof the tool is to assist taxpayers in evaluating the op-tions available to them under the new rules and to al-low taxpayers, based on their facts and circumstances,to more easily navigate the new rules.

Another tool is the table containing a side-by-sidecomparison of frequently asked questions (FAQs) un-der the 2012 IRS OVDP4 and the recently announced(on June 18, 2014) FAQs5 under the 2014 IRS OVDP.The purpose of the table is to serve as a practical toolfor tax practitioners to evaluate the changes to theOVDP announced by the IRS in evaluating proceduralalternatives available to taxpayers in resolving theirU.S. tax compliance issues. The table will be of par-ticular interest to those taxpayers and tax advisers whocurrently participate in the 2012 OVDP or whose factsand circumstances may warrant a more favorable pen-alty structure under the SFCP. Although the value ofthe side-by-side comparison is now limited because ofthe passed June 30, 2014, deadline for applying for thetransitional treatment, the side-by-side comparison maystill be of use to some practitioners and U.S. taxpayers

who want to have a quick and easy reference identify-ing the changes to the programs.

Treasury and the IRS should be commended fortheir efforts to simplify and enhance options availableto U.S. taxpayers with undisclosed foreign financialassets, both residing outside the United States and inthe United States, to become U.S. tax compliant. Un-fortunately, some of the new rules may, whether bydesign or inadvertently, prevent many U.S. taxpayersresiding overseas from qualifying for the enhancedSFCP, even though they would have qualified underthe 2012 SFCP terms.

The Good and BadThe good news is that the new rules:

• provide more clarity on options available to U.S.taxpayers to become tax compliant;

• reduce penalties when taxpayers do not willfullyfail to report their foreign financial assets, to paytax, or to file their delinquent U.S. tax returns andrequired information returns;

• expand the SFCP to eliminate the low-compliance-risk threshold and to open the pro-gram to U.S. taxpayers residing in the UnitedStates; and

• invite U.S. taxpayers who previously made ‘‘quietdisclosures’’ to come forward under the SFCP,with some limitations.

However, in several areas the new rules are morerestrictive than the old rules (some of the discussedchanges below are understandable, while too restrictivenonetheless):

• the nonresidency test, as drafted, whether by de-sign or inadvertently, would prevent many U.S.taxpayers residing overseas from qualifying for theenhanced SFCP, even though they would havequalified under the 2012 SFCP (please see thediscussion on the new nonresidency test below fora detailed analysis of this requirement);

• the increased information and documentation re-quirements at the time of applying for the OVDPwould be an additional burden for taxpayers;

• the requirement to pay the full amount of any taxowed, penalties, and interest at the time of apply-ing for the OVDP or SFCP, as applicable, wouldalso be an additional burden for taxpayers;

• the requirement to certify that the failure to paytax or file requisite U.S. tax returns or forms wasdue to non-willful conduct would be an additionalburden for taxpayers because they will have tomake the respective determination before makingthe applicable submission; and

• the limited time provided to taxpayers to qualifyfor the transitional treatment.

In many instances in the newly issued guidance, theIRS emphasized possible examination of the taxpayer’s

3See ‘‘Options Available for U.S. Taxpayers With UndisclosedForeign Financial Assets,’’ available at http://www.irs.gov/Individuals/International-Taxpayers/Options-Available-For-U-S—Taxpayers-with-Undisclosed-Foreign-Financial-Assets.

4The 2012 OVDP FAQs are available at http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers.

5The 2014 OVDP FAQs are available at http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised.

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returns. Although this is not a new requirement per se,the IRS did not include it in its prior guidance. Ac-cordingly, applying for the enhanced SFCP (as opposedto, for example, resolving outstanding U.S. tax issueswith the IRS directly under the existing IRS assess-ment, examination, and collection process) will notprovide taxpayers with any guarantee that their returnswould not be subject to a possible examination.6

What Got InSummarized below are some of the notable changes

to the OVDP and the SFCP.

Overview of OVDP Changes

• Introduction of an increased 50 percent (com-pared with the previous 27.5 percent) miscella-neous offshore penalty on all undisclosed foreignfinancial assets when, at the time of submittingthe pre-clearance letter to the IRS Criminal Inves-tigation division:

— foreign financial institution in which the tax-payer has or had an account or another facili-tator who assisted the taxpayer in establishingor maintaining the taxpayer’s offshore ar-rangement has been publicly identified as be-ing under U.S. government investigation (bythe IRS or the Justice Department) in connec-tion with accounts that are beneficially ownedby a U.S. person;7

— FFI or other facilitator is cooperating with theIRS or the DOJ in connection with accountsthat are beneficially owned by a U.S. person;or

— FFI (or other facilitator) has been identified ina court-approved issuance of a summons seek-ing information about U.S. taxpayers whomay hold financial accounts (a John Doesummons — a summons issued to compel thefinancial institution to identify its U.S. ac-count holders) at the FFI or have accountsestablished or maintained by the facilitator.8

Penalty applies beginning on August 4, 2014,if, at the time of submitting the pre-clearance

OVDP letter to the IRS CI, a ‘‘public disclo-sure’’ event discussed above has already oc-curred.

• The undisclosed assets must have come from legalsources.9

• Reduced 5 percent and 12.5 percent penalties areno longer available under the OVDP.10

• Taxpayers who opt out of the OVDP after July 1,2014, will be subject to the IRS examinationprocess.11

• Additional criminal conspiracy charges added tothe OVDP FAQs as criminal charges that a tax-payer may be subject to if he does not participatein the OVDP and the IRS examines the tax-payer:12

— Conspiracy to defraud the government withrespect to claims (18 U.S.C. section 286). Ifconvicted, a prison term of not more than 10years or a fine of up to $250,000.

— Conspiracy to commit offense or to defraudthe United States (18 U.S.C. section 371). Ifconvicted, a prison term of not more than fiveyears and a fine of up to $250,000.

• Significantly more information is required, includ-ing during the pre-clearance process:

— All account statements must be submitted atthe time of the OVDP submission filing.13

— Electronic submission is encouraged (such ason a CD or USB flash drive).14

• Requirement to pay the tax, interest, offshore pen-alty, accuracy-related penalty, and failure-to-fileand failure-to-pay penalties at the time of theOVDP submission filing.15

• Taxpayers who are unable to pay the full amountmust include with their OVDP submission a pro-posal on payment arrangements and complete thecollection information statements (on Form433-A, ‘‘Collection Information Statement forWage Earners and Self-Employed Individuals,’’ orForm 433-B, ‘‘Collection Information Statementfor Businesses,’’ as applicable).16

6Although being subject to IRS examination, as a generalmatter, is not desirable for any taxpayer (for example, because ofa lengthy process), any taxpayer applying for the procedural al-ternative available to them under the new rules should keep allrelevant records and documentation, as well as be prepared tohave relevant support for the position(s) taken as part of thesubmission.

7The IRS published a list of these FFIs or facilitators (cur-rently, the list has 10 entries, but the IRS will update it on anongoing basis), available at http://www.irs.gov/Businesses/International-Businesses/Foreign-Financial-Institutions-or-Facilitators.

82014 OVDP FAQ 7.2.

92014 OVDP FAQ 12.102014 OVDP FAQ 1.1 (see 2012 OVDP FAQs 52 and 53).112014 OVDP FAQs 49 and 51.122014 OVDP FAQ 6.132014 OVDP FAQ 25.142014 OVDP FAQ 25.2.152014 OVDP FAQ 25.16Id.

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Overview of SFCP Changes• Significant penalty relief provided to U.S. taxpay-

ers qualifying for the SFCP. The following penal-ties will not apply to U.S. taxpayers residing out-side the United States (the IRS clarified that evenif a taxpayer’s returns are ‘‘subsequently selectedfor audit, no penalties would apply, unless theexamination results in a determination that theoriginal tax noncompliance was fraudulent and/orthat the FBAR violation was willful’’)17:— FBAR penalties;

— failure-to-file tax return penalties;

— failure-to-pay tax penalties;

— accuracy-related penalties; and

— information return filing penalties.

• U.S. taxpayers residing in the United States, how-ever, will be subject to a 5 percent penalty basedon the individual’s highest aggregate balance/value of the foreign financial asset18:

— 5 percent miscellaneous offshore penalty ap-plies for failure to report the asset on anFBAR;

— 5 percent miscellaneous offshore penalty ap-plies for failure to report the asset on IRSForm 8938, ‘‘Statement of Foreign FinancialAssets’’; and

— 5 percent miscellaneous offshore penalty ap-plies if the asset was properly reported on atax return, but gross income regarding thatasset was not reported.

• SFCP is now open to some delinquent U.S. tax-payers residing in the United States.19

• Taxpayers must provide a certification under pen-alties of perjury that their failure to report foreignfinancial assets and pay all tax due regardingthose assets was not due to willful conduct.20

• The low compliance risk threshold of $1,500 wasremoved.

• The requirement to complete a risk questionnairewas removed.

• The IRS provided coordination rules for taxpayerscurrently participating in the OVDP (includingthose who apply to the OVDP before July 1,

2014). Such taxpayers may be eligible to transitionto the SFCP, provided they qualify under theSFCP requirements and:

— contact the assigned OVDP examiner; and

— submit a request and any additional docu-ments according to the SFCP requirements(including ‘‘non-willful’’ certification) to theAustin OVDP Unit.21

What Did Not Make ItAlthough the IRS made significant progress on clari-

fying and enhancing the two programs, there are sev-eral areas that have not been addressed and, as such,are left for taxpayers to figure out. Unfortunately, thefiguring out part is likely to continue being a challengefor many taxpayers.

Passive Foreign Investment CompaniesA comprehensive discussion of passive foreign in-

vestment company issues is outside the scope of thisarticle, but a few points are worth mentioning.

A PFIC is a foreign corporation if (1) 75 percent ormore of its gross income for the tax year is passiveincome or (2) at least 50 percent of its assets producepassive income.22 Passive income for PFIC purposesgenerally means ‘‘foreign personal holding companyincome’’ under subpart F (part of the U.S. anti-deferralregime) rules and generally includes dividends, interest,royalties, rents, annuities, certain gains, and other simi-lar income.23 As part of the U.S. anti-deferral regime,PFIC rules were designed to discourage U.S. personsfrom deferring their U.S. tax by subjecting to tax in-come derived from investments in foreign corporationson a current basis and effectively penalizing those U.S.taxpayers who chose to defer that income by imposingthe highest ordinary income tax rate and an interestcharge.24 The rules do not require a U.S. tax avoidancemotive before they apply and catch any U.S. personwho makes an investment in a foreign corporation, nomatter how minimal it may be and regardless of theperson’s common investment strategy, driven in manycases by investment advisers and financial plannerswho often recommend investing in foreign mutualfunds25 (especially when they are not aware of the pu-nitive PFIC regime).

The PFIC rules contain a general ‘‘excess distribu-tion’’ penalty regime26 (triggered by a distribution or adisposition of stock) and elective regimes (qualified

17See the IRS guidance for U.S. taxpayers residing outside theUnited States, available at http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States.

18See the IRS guidance for U.S. taxpayers residing in theUnited States, available at http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States.

19Id.20Id. See also supra note 17.

21See Transition Rules: Frequently Asked Questions (FAQs),supra note 2, at FAQ 6.

22Section 1279(a).23Sections 1297(b)(1) and 954(c).24Section 1291(c)(1).25Mutual and hedge funds are typically PFICs.26Section 1291(a)(1).

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electing fund (QEF)27 and mark-to-market rules).28 Theelections, if done properly, may allow U.S. shareholdersto ‘‘purge’’ PFIC taint and thus avoid the punitive ex-cess distribution regime.29 If elected to be treated as aQEF, the U.S. taxpayer is required to include currentlyin each year’s taxable income a pro rata share of thePFIC’s ordinary earnings and net capital gains. Al-though the taxpayer is subject to current U.S. taxationas a result of the QEF election, he would not be sub-ject to the general excess distribution penalty regime.30

The common challenge under this election is obtainingthe necessary information from the PFIC. The mark-to-market election is another way for the U.S. taxpayer toelect current U.S. taxation by marking the foreign stockto market each tax year and to avoid being subject tothe general excess distribution penalty regime. How-ever, under the statute, that method is limited to thoseassets that are regularly traded on a qualified exchangeor other market (not all PFIC investments may meetthat requirement).31

As a general matter, obtaining the information fromPFICs to determine a U.S. taxpayer’s tax liability maybe very challenging. It also depends on how substantiala particular PFIC investment is (some PFICs would goout of their way to simplify the lives of their signifi-cant U.S. shareholders). Also, there is no de minimissafe harbor that would exempt insignificant investmentsfrom the application of the PFIC regime.32 Althoughthese issues are unlikely to be resolved without con-gressional action, there must be a way to provide reliefto those U.S. taxpayers who reside overseas, come for-ward voluntarily, and whose noncompliance was notdue to willful conduct. Accordingly, providing somePFIC relief as part of a practical approach under theOVDP or the SFCP would be a welcome development.

Indeed, Treasury and the IRS have previously recog-nized U.S. taxpayers’ challenges in identifying PFICinvestments and making complex calculations of U.S.tax liability arising from their holdings in PFICs. As analternative method, the IRS in its 2012 OVDP guid-ance provided the modified mark-to-market method.33

Although the calculations required under the mark-to-market method and the information required to makethe calculations are somewhat manageable, the mark-

to-market method raised several issues in practice. Forexample, one issue is how to apply it to PFICs withshares that do not meet the ‘‘marketable’’ standard.Another issue relates to the availability of the mark-to-market method outside the OVDP or SFCP (once thetaxpayer has resolved his past noncompliance issuesunder one of the programs and is current in his U.S.tax obligations).

U.S. taxpayers residing overseas for legitimate rea-sons, in many cases dual citizens, are frequently ill ad-vised by financial planners and investment adviserswho do not always fully understand the U.S. tax con-nection to make investments in foreign mutual fundsthat are generally treated as PFICs for U.S. federal in-come tax purposes. Such investments are made in mostcases for wealth preservation and net wealth accumula-tion purposes, and U.S. taxpayers who receive invest-ment recommendations do not necessarily attempt toavoid current U.S. taxation of their PFIC investments.In fact, many U.S. taxpayers were and still may be un-aware of the PFIC status of mutual funds in whichthey invest. Even worse, someone who has not evenbeen exposed to U.S. tax and has PFIC investmentsmay be unsuspecting of their U.S. tax ‘‘luggage’’ whenmoving to the United States. Consider, for example,Canadians who move to the U.S. In some cases, theamount of time and resources used to collect the infor-mation from PFICs necessary to calculate potentialU.S. tax liability and the amount of professional fees oftax advisers by far outweigh the amount of any U.S.tax liability arising from PFIC investments.

The author believes that at least in cases when theU.S. taxpayer’s failure to comply with the U.S. tax lawwas due to non-willful conduct and when the taxpayerparticipates in the OVDP or the SFCP, Treasury andthe IRS should provide relief or additional alternativesfor dealing with PFIC issues. As part of potential re-lief, the IRS may consider weighing the administrativeburden imposed on taxpayers and the best way to pro-tect the fisc before requiring the taxpayer to file delin-quent PFIC filings or engage in complex calculations.

Willful Conduct Guidance

To qualify for the SFCP or to file delinquent FBARsunder the delinquent FBAR filing procedures, U.S. tax-payers are now required to complete a certification thatthe failure to file the requisite returns was not due towillful conduct. The IRS clarified that non-willful con-duct is ‘‘due to negligence, inadvertence, or mistake orconduct that is the result of a good faith misunder-standing of the requirements of the law.’’34 A willfulconduct determination is also important later in theprocess if the taxpayer’s case has been selected for IRSexamination.

27Section 1295.28Section 1296.29See reg. section 1.1297-3; temp. reg. section 1.1291-1T.30The election is made on Form 8621, ‘‘Information Return

by a Shareholder of a Passive Foreign Investment Company orQualified Electing Fund.’’

31Section 1296; see also reg. section 1.1296-2(a).32Treasury and the IRS issued final and temporary regula-

tions that provided certain limited exceptions from PFIC report-ing. See T.D. 9650 (Dec 31, 2013); temp. reg. section 1.1298-1T(c).

332012 OVDP FAQ 10. See also 2014 OVDP FAQ 10. 34See supra note 17.

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There is limited guidance on what constitutes willfulconduct or willful violation for FBAR penalty pur-poses, and a determination is highly factual.35 Two re-cently decided cases that addressed the issue of willfulviolations for FBAR purposes are United States v. Wil-liams36 and United States v. McBride.37 Previously, theIRS also issued chief counsel advice.38

The IRS does not plan on providing any additionalguidance for taxpayers, and it suggested they make adetermination of willfulness under the existing tax au-thorities and talk to their tax advisers to determine ifthey meet the non-willful conduct requirement.39

The standard of willfulness under the existing lawappears to be stricter than the standard the IRS seemsto be using for purposes of the SFCP.40 The require-ment to make a non-willful conduct certification at thetime of the SFCP submission (the IRS intends on re-viewing all such certifications) and the need to makethe respective willfulness determination before filingtheir submission with the IRS will no doubt lead toincreased due diligence by taxpayers and their tax ad-visers. Taxpayers who are able to establish non-willfulconduct may still need to carefully review their situa-tion and determine if they can claim a reasonablecause defense for purposes of both filing delinquentFBARs and international information forms. It appearsthat the IRS left the door open to potential non-willfulFBAR violation penalties ($10,000 per violation) asopposed to providing full relief from penalties underthe SFCP.41

U.S. taxpayers making the non-willful conduct certi-fications should carefully review their facts and circum-stances and consult with their U.S. tax advisers tomake the respective determination before they file theirsubmission with the IRS.

Timing and Certainty of ResolutionIn this area, predicting how long the process would

take is close to impossible. It is reasonable, therefore,

for the IRS to not provide specific deadlines or time-line considerations as part of the process. By the sametoken, taxpayers would benefit from understanding, atleast generally, the commitment of time that theyshould expect from going through the process thatwould be applicable to the respective option pursued tobecome U.S. tax compliant. In this respect, some timeframe notice would be very helpful. For example, theIRS could publish general statistics on case processingtimes under the OVDP based on its previous and cur-rent practice.

Another area that remains to be clarified is the reso-lution of the taxpayer’s case under the applicable pro-cedural alternatives to become U.S. tax compliant. TheOVDP provides such resolution by requiring the IRSand the taxpayer to conclude a closing agreement. TheSFCP, however, is silent in this respect. Granted, underthe enhanced SFCP, the IRS indicated that the taxpay-er’s delinquent returns filed under the SFCP would beprocessed in the ordinary course of business (underregular tax return processing procedures) and may besubject to an IRS examination. It would be helpful ifthe IRS provided more certainty about the resolutionof taxpayers’ issues under all options available to U.S.taxpayers under the June 18, 2014, guidance, not limit-ing it only to OVDP cases.

Options to Become Tax Compliant

Along with the changes and enhancements to thetwo programs, the IRS also explained four optionsavailable to taxpayers who want to become U.S. taxcompliant.42 Although, for ease of reference, those op-tions are discussed at a high-level below, please refer todecision-making trees in Appendix A to this article fora more detailed overview.

OVDP

Taxpayers who may be concerned about potentialcriminal prosecution or who failed to disclose their for-eign bank accounts or assets due to willful conductshould seriously consider OVDP as a forum for resolv-ing their non-compliance-related tax issues. Because ofthe increased penalty regime, taxpayers who are other-wise eligible for the OVDP should file their pre-clearance requests before August 4, 2014, to the extentpossible, to still be eligible for the lower 27.5 percentpenalty threshold.43 Taxpayers who file their OVDP

35For a discussion of the ‘‘willful’’ standard in the FBARcontext, see Rufus Rhoades, Rufus Rhoades on An Analysis of theMeaning of ‘‘Willful’’ in the FBAR Context, 2013 Emerging Issues7044 (LexisNexis Emerging Issues Analysis, Sept. 2013).

36110 AFTR 2d 2012-5298 (4th Cir. 2012).37110 AFTR 2d 2012-6600 (DC Utah 2012).38ILM 200603026, Jan. 20, 2006.39See, e.g., Alison Bennett, ‘‘IRS Expands Relief for Some

Foreign Account Disclosures, Tightens Rules for Willful Ne-glect,’’ 33 TMWR 815 (June 23, 2014) (comments by MichaelDanilack, IRS Large Business and International Division deputycommissioner (international)).

40The IRS defined ‘‘non-willful conduct’’ in its June 18, 2014,guidance as ‘‘conduct that is due to negligence, inadvertence, ormistake or conduct that is the result of a good faith misunder-standing of the requirements of the law.’’ See supra notes 17 and18.

41For a willful violation penalty structure, see Rhoades, supranote 35.

42There may be other procedural alternatives for becomingU.S. tax compliant that may be available to taxpayers dependingon their facts and circumstances. However, a discussion of suchother options is outside the scope of this article. Taxpayersshould consult their tax advisers to determine what proceduralalternative best suits the taxpayers’ facts.

43Ideally, such taxpayers would have filed their OVDP re-quests on or before June 30, 2014, to qualify for the transitional

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pre-clearance requests after August 4, 2014, should ex-pect to pay a 50 percent miscellaneous offshore pen-alty.

To qualify for the OVDP, U.S. taxpayers should havefunds invested in undisclosed foreign assets and bankaccounts from legal sources and should meet other re-quirements of the OVDP.44

As part of the eligibility criteria for the OVDP, U.S.taxpayers must agree to provide information about fi-nancial institutions and other facilitators that helpedthe taxpayer establish or maintain an offshore arrange-ment. Notably, facilitators or individuals who assistedtaxpayers in their tax noncompliance are ineligible toparticipate in the OVDP. Also, U.S. taxpayers who ap-ply for the SFCP are ineligible to participate in theOVDP.

The OVDP option is open to both individual tax-payers and businesses.

SFCPThe SFCP is not available to businesses. Only indi-

viduals or estates of individual U.S. taxpayers may par-ticipate in the program. Further, to be eligible for thisoption, taxpayers must certify that the failure to com-ply was due to non-willful conduct and must outline inaccordance with the certification the reasons for notfiling, and if not, add a statement to provide the neces-sary explanation.

Importantly, for a taxpayer to be eligible for theSFCP, the IRS must not have started a civil examina-tion of the taxpayer’s returns for any tax years.

The IRS extended this procedural alternative tothose U.S. taxpayers who made a ‘‘quiet disclosure’’ —filed delinquent returns in the ordinary course of busi-ness, without drawing the IRS’s attention to their file.The IRS stated that such taxpayers can still use thisoption, but will continue to be liable for any penaltiesalready due.

Significantly, the IRS clarified that the delinquenttax returns submitted under SFCP can be selected foran audit if the IRS decides that civil or criminal liabil-ity is appropriate.

As noted above, the IRS clarified that the delinquentreturns submitted under this option will be processedlike any other return submitted to the IRS.

As a welcome enhancement of the program, theIRS opened the SFCP to some U.S. taxpayers residingin the United States (although not without a cost —see the discussion of penalties in the overview of sig-nificant SFCP changes discussed above). Accordingly,the SFCP now is offered to U.S. taxpayers residing out-side the United States and U.S. taxpayers residing inthe United States. Although the IRS provided moreclarity on options available to U.S. taxpayers for be-coming tax compliant, many important questions re-main unanswered. For example, the IRS did not ad-dress the issue of what happens to those U.S. taxpayers(whether residing outside or in the U.S.) whose non-compliance was not due to willful conduct, but whomay not meet some of the eligibility requirements ofthe relevant option (see, for instance, the no-man’s-landdiscussion below).

U.S. Taxpayers Residing Outside the U.S.

To be eligible for this option, in addition to theabove requirements, U.S. taxpayers residing overseasmust meet the nonresidency test and meet other re-quirements, including those that have not changedsince the 2012 SFCP was introduced.45

The discussion below focuses on the nonresidencytest that if applied as currently in effect, would effec-tively create a ‘‘no-man’s land’’ — a category of U.S.noncompliant taxpayers residing overseas who want tocome into U.S. tax compliance and whose noncompli-ance was due to non-willful conduct, but who wouldbe ineligible for the SFCP because they cannot meetthe nonresidency test.

Nonresidency Test

As one of the new requirements for the SFCP, U.S.taxpayers residing outside the United States must meeta nonresidency test. The IRS stated in its guidance thatsection 911 (foreign income exclusion) and its regula-tions apply in making this determination.

Section 911 generally provides a mechanism for U.S.persons to avoid double taxation by allowing them toexclude from their U.S. taxable income the incomeearned in a foreign country (up to an applicable thresh-old), provided that various requirements are met. Sec-tion 911 contains two residency requirements: (1) thebona fide residence test,46 and (2) the physical presencetest.47 In addition to meeting either of the two resi-dence requirements, an individual must have a tax

treatment that under certain facts provides a more favorable pen-alty structure. Unless the IRS extended the deadline for transi-tional treatment relief, the July 1, 2014, deadline is no longerrelevant for the purposes of this article as the article will be pub-lished well beyond that deadline.

44A detailed list of requirements for the OVDP is outside thescope of this article, but all requirements are listed in AppendixB that contains a table with a side-by-side comparison of the2012 and 2014 OVDP FAQs.

45A detailed discussion of all requirements of the SFCP isoutside the scope of this article. However, we discuss some chal-lenges presented by the nonresidency test in some situations be-low.

46Section 911(d)(1)(A).47Section 911(d)(1)(B).

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home in a foreign country.48 Under the bona fide resi-dence test, a U.S. citizen49 must establish to the satisfac-tion of the Treasury secretary that he has been a bonafide resident of a foreign country (or countries) for anuninterrupted period that includes an entire year.50 Un-der the physical presence test, a U.S. citizen or U.S.resident must have been present in a foreign countryduring any period of 12 consecutive months during atleast 330 full days in such period.51

Under the nonresidency test of the SFCP, U.S. tax-payers residing overseas are eligible to participate inthe SFCP if:

• U.S. citizens or lawful permanent residents (that is,‘‘green card holders’’). In any one or more of themost recent three years for which the U.S. tax re-turn due date (or properly applied for extendeddue date) has passed, the individual did not havea U.S. abode and the individual was physicallyoutside the United States for at least 330 full days.

• Non-U.S. citizens or lawful permanent residents. In anyone or more of the last three years for which theU.S. tax return due date (or properly applied forextended due date) has passed, the individual didnot meet the substantial presence test under sec-tion 7701(b)(3).

The IRS gives two examples under the first require-ment discussed above that focus on whether the U.S.taxpayer had his home of abode in the United Statesfor purposes of the nonresidency test. Interestingly, inboth examples, the IRS failed to consider the secondprong of the test — the 330 full-day presence require-ment.

Although the IRS explicitly stated that section 911and its regulations apply for purposes of the SFCP, thebona fide residence test is not part of the current non-residency test of the SFCP. As the discussion belowwill demonstrate, this may be a significant oversight ofthe enhanced SFCP.

For purposes of section 911, when determiningwhether a U.S. citizen established bona fide residencein a foreign country, the courts used the following fac-tors:

• intention of the taxpayer;

• establishment of his home temporarily in the for-eign country for an indefinite period;

• participation in the activities of his chosen com-munity on social and cultural levels, identificationwith the daily lives of the people, and in general,assimilation into the foreign environment;

• physical presence in the foreign country consistentwith his employment;

• nature, extent, and reasons for temporary absencesfrom his temporary foreign home;

• assumption of economic burdens and payment oftaxes to the foreign country;

• status of resident contrasted to that of transient orsojourner;

• treatment accorded his income tax status by hisemployer;

• marital status and residence of his family;

• nature and duration of his employment —whether his assignment abroad could be promptlyaccomplished within a definite or specified time;and

• good faith in making his trip abroad — whetherfor purpose of tax evasion.52

The fact that the taxpayer temporarily leaves hishome country for work, family visits, or vacation, inthe absence of tax evasion motives and in view of allother applicable facts and circumstances, does not initself preclude the taxpayer from meeting the bona fideresidence test.53

The regulations under section 911 also provide thatwhether an individual is a bona fide resident of a for-eign country will be determined by applying, to theextent practical, the principles of section 871 and itsregulations.54 The regulations provide that:

Bona fide residence in a foreign country or coun-tries for an uninterrupted period may be estab-lished, even if temporary visits are made duringthe period to the United States or elsewhere onvacation or business.55

As a general matter, there is nothing wrong withapplying the section 911 standard for determining if aU.S. taxpayer residing outside the United States shouldqualify for the SFCP. However, the IRS borrowed only

48Section 911(d)(1).49Although the statute seems to limit the bona fide residence

test to U.S. citizens, U.S. residents who are citizens of foreigncountries that have in effect an applicable U.S. income tax treatymay also qualify under the bona fide residence test even thoughthey are not U.S. citizens under the nondiscrimination article.For example, for Canadian citizens, the applicable treaty provi-sion would be Article XXV of the Canada-U.S. tax treaty, signedon September 26, 1980 (as amended by protocols). See also Rev.Rul. 91-58, 1991-2 C.B. 340.

50Section 911(d)(1)(A).51Section 911(d)(1)(B).

52Sochurek v. Commissioner, 9 AFTR 2d 883, 886 (7th Cir.1962), rev’g 36 T.C. 131 (1961).

53Id. at 887. See also Rose v. Commissioner, 16 T.C. 232 (1951);Schoneberger v. Commissioner, 74 T.C. 1016, 1026 (1980).

54See reg. section 1.871-2(b) (‘‘an alien actually present in theUnited States who is not a mere transient or sojourner is a resi-dent of the United States for purposes of income tax. Whetherhe is a transient is determined by his intentions with regard tothe length and nature of his stay.’’).

55Reg. section 1.911-2(c).

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one of the tests under section 911 — the physical pres-ence test — composed of the 330 full-day physical ab-sence rule and home of abode requirement.

To demonstrate the intended or unintended resultunder the nonresidency test as currently drafted, let usconsider a few examples (in all the examples we as-sume that no tax evasion motive existed):

• Example 1: Danny is a dual Canadian and U.S.citizen who has been living and working inCanada for the last 10 years. In at least one of themost recent three years, Danny did not have aU.S. abode and was physically outside the UnitedStates for at least 330 full days. Danny earned$80,000 in 2013. He paid taxes in Canada andtimely filed a Canadian income tax return. Cana-dian individual income tax rates are generallyhigher than, or at least as high as, in the UnitedStates. Danny did not file U.S. income tax returnsand would like to become U.S. tax compliant andtake advantage of the SFCP. Danny’s noncompli-ance is not due to willful conduct. If Danny wereto file his delinquent U.S. tax returns under theSFCP, he would not owe any U.S. tax because thesection 911 foreign income exclusion ($99,200 forthe 2014 tax year)56 would exclude the wholeamount of Danny’s income earned in Canadafrom U.S. tax.

• Example 2: The same facts as above apply, exceptthat Danny does not meet the 330 full-day re-quirement. For instance, he may have spent vaca-tion in the United States, is a snowbird, visited hisfamily, or traveled for work to the United Statesand as such was physically present outside theUnited States 310 full days in each of the mostrecent three years. If Danny were to file a U.S.tax return and claim the foreign income exclusionunder section 911, he would not be eligible for thesection 911 relief under the physical presence testbecause he would not meet the physical absencerequirement. However, Danny would still meetthe bona fide residence test and as such qualifyfor the section 911 foreign income exclusion. Evenif the section 911 relief was unavailable, Dannycould claim a foreign tax credit regarding Cana-dian taxes paid to avoid double taxation. Danny,again, is unlikely to owe any U.S. tax (in excess ofCanadian taxes paid).

• Example 3: Assume the same facts as in Example2, but now Danny earns $150,000 and frequentlytravels to the United States, mainly for work. As aresult, in the most recent three years, Danny wasphysically present in Canada for only 320, 310,and 290 full days. Assume that while on businessin the United States, Danny’s employment incomeincludes U.S.-source income (Danny is performing

personal services on behalf of his Canadian em-ployer while physically present in the UnitedStates). Again, Danny pays all Canadian taxesand is tax compliant in Canada. Danny does notmeet the physical presence test under section 911,but he still meets the bona fide residence test.Also, Danny’s income exceeds the foreign incomeexclusion amount. While Danny can claim theforeign income exclusion up to $99,200, the Cana-dian tax paid on the remaining balance of$50,800 should be eligible for the FTC. Danny iseligible to claim the FTC for taxes paid inCanada, even though a portion of his employ-ment income technically has U.S. source.57 Even ifDanny was able to claim only a partial FTC forthe employment taxes paid in Canada, his U.S.tax liability would be quite limited. More impor-tantly, Danny should be able to claim a refund forthe portion of the tax paid in Canada as attribut-able to the U.S.-source income and claim a creditin Canada for the U.S. tax paid in the UnitedStates as a result of the FTC recalculation. In anyevent, any U.S. tax liability of Danny under thesefacts is likely to be low or nonexistent.

Under the current expanded SFCP rules, Dannywould meet only the nonresidency test in Example 1.Danny will fail the nonresidency test in examples 2and 3 and as such would not be eligible for the SFCP.Importantly, Danny would not qualify for the SFCPfor U.S. taxpayers residing in the United States (at aminimum, Danny did not file his U.S. tax returns andas such would not meet the tax return filing require-ment under the program).

Although the reasoning of the IRS may make senseoverall and using only the physical presence test mayallow the IRS to achieve administrative simplicity byavoiding making complex and time-consuming factualdeterminations, it does not appear to make sense froma perspective of sound tax administration. A largegroup of noncompliant U.S. citizens or green cardholders residing overseas who would be eligible for theSFCP, other than for the nonresidency test (and whowould have been eligible under the 2012 SFCP terms),will now be excluded from qualifying for the SFCP(this is especially true for U.S. taxpayers who are Cana-dian citizens or residents; because of close economicand family ties as well as border proximity between the

56Rev. Proc. 2013-35, 2013-47 IRB 537.

57In Danny’s case, under the Canada-U.S. tax treaty, Danny’semployment income would be sourced to Canada (assume Dan-ny’s portion of employment income potentially attributable tothe United States would exceed $10,000) since his presence inthe United States did not exceed in the aggregate 183 days inany 12-month period (we assume that the Canadian employer ofDanny did not have a permanent establishment in the UnitedStates and that Danny’s remuneration was not borne by thatPE). See Article XV.2(b) of the Canada-U.S. tax treaty. Also,Danny, as a Canadian citizen, may benefit from Article XXV ofthe Canada-U.S. tax treaty (nondiscrimination).

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United States and Canada, Canadians regularly crossthe U.S. border and spend lots of time in the UnitedStates, thus in some cases easily triggering the 330 full-day threshold).

There is a hope that the IRS made a mistake or adrafting oversight when the nonresidency test for pur-poses of the SFCP was being designed. An argumentfor an inadvertent mistake by the IRS is supported bythe following:

• The two examples that the IRS provided to illus-trate the application of the nonresidency test un-der the SFCP do not discuss the 330 full-day re-quirement. They focus only on the home ofabode.

• In view of intended enhancement of the SFCP,narrowing the program is inconsistent with thevision that the IRS had when announcing thechanges. IRS Commissioner John Koskinen statedwhen announcing the enhanced SFCP on June18, 2014, that ‘‘we [are] expanding the stream-lined procedures to cover a much broader groupof U.S. taxpayers we believe are out there whohave failed to disclose their foreign accounts butwho aren’t willfully evading their tax obligations.To encourage these taxpayers to come forward,we’re expanding the eligibility criteria, eliminatinga cap on the amount of tax owed to qualify forthe program, and doing away with a questionnairethat applicants were required to complete.’’58

• The IRS specifically refers to section 911 and itsregulations as applying for purposes of the SFCP.Section 911 uses an alternative bona fide resi-dence test in determining whether a U.S. taxpayershould be treated as a ‘‘qualified individual’’ forforeign income exclusion purposes.

• There does not seem to be a good policy reasonfor limiting the nonresidency test solely to thephysical presence test. Even if it was intended, theIRS should distinguish situations when individualincome tax rates in the applicable foreign countryare higher or equal to the U.S. individual incometax rates or when an applicable U.S. income taxtreaty provides relief from sourcing partial em-ployment income to U.S. source when a personhas not met a specific physical presence threshold(as discussed above, in case of Canada, for ex-ample, it is 182 days). If at all, the IRS shoulddistinguish the qualification for the SFCP versusthe issue of determining any outstanding U.S. taxliability. Even if, as a result of disallowing the for-eign income exclusion or limiting FTC, the U.S.taxpayer ends up with a U.S. tax bill, he stillshould be eligible to participate in the SFCP aslong as he meets all other program requirements.

RecommendationThe IRS should take a closer look at the nonresi-

dency test and either add the bona fide residence re-quirement (also extending it to U.S. residents who haveU.S. income tax treaty protection) under section911(d)(1)(A) or, in the alternative, provide a clarifica-tion that the nonresidency test should be based on allfacts and circumstances and that depending on appli-cable facts, even if the U.S. taxpayer did not meet the330 full-day test, he may still qualify for the SFCP. Theformer solution seems to be most effective and wouldprovide for an easy fix. The second solution would beless efficient, but at least would allow some flexibilityin applying the new rules. Again, we are talking aboutU.S. taxpayers whose noncompliance was not due towillful conduct and who have been and are legitimateresidents of foreign countries where they have beenliving and working for a long time.

U.S. Taxpayers Residing in the U.S.Some U.S. taxpayers residing outside the United

States who failed to meet the requirements applicableunder the above option may still qualify for the SFCPif they meet the requirements applicable to U.S. tax-payers residing in the United States. In such case thetaxpayers would be subject to a 5 percent miscella-neous offshore penalty, if applicable. However, underthe new rules, the U.S. taxpayers would not be subjectto accuracy-related penalties, information return penal-ties, or FBAR penalties. Even if the return is selectedfor audit later, the U.S. taxpayer will not be subject tothose penalties, unless the examination results in a de-termination that the return was fraudulent or FBARviolation was willful. Retroactive relief is available fordeferral of specific retirement and savings plans.59

Delinquent FBARsThis option is available to U.S. taxpayers who do

not need to use the OVDP or SFCP, but have delin-quent FBARs. To qualify for this procedural alterna-tive, the U.S. taxpayer may not have been contacted bythe IRS regarding an income tax examination or delin-quent FBARs for the applicable tax years.

Importantly, the IRS will not impose penalties forthe failure to file delinquent FBARs on those U.S. tax-payers who properly reported on their U.S. tax returnsand paid their tax liability arising from the incomefrom undisclosed foreign financial accounts.

FBARs may be selected for audit under regular au-dit selection procedures.

Delinquent International Information ReturnsThis option was available to U.S. taxpayers before

the June 18 changes. However, the IRS, for the first

58Statement of IRS Commissioner John Koskinen, supra note1.

59A detailed discussion of all requirements of SFCP is out-side the scope of this article. However, we discuss some chal-lenges presented by the nonresidency test in some situations be-low.

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time, posted the relevant information on its OVDPwebsite that clarified this procedural alternative andremoved some mystery from the process.

Taxpayers are still expected to show reasonablecause to qualify for no-penalty treatment. Furthermore,U.S. taxpayers applying for this procedural alternativeto become U.S. tax compliant must also certify thatany entity for which the information returns are beingfiled was not engaged in tax evasion. No guidance isprovided as to the reasonable cause standard that theIRS would be using in this respect, but it should notdiffer from a general reasonable cause standard underthe existing tax law.

Delinquent forms 3520 and 3520-A should be filedaccording to the forms’ instructions. Taxpayers mustattach a reasonable cause statement to each delinquentinformation return filed for which the reasonable causedefense is raised.

Taxpayers should consult their U.S. tax adviser onwhether they may meet the reasonable cause exceptionand to develop arguments applicable under their factsand circumstances.

ConclusionThe changes brought to the two programs are im-

portant and are generally favorable to U.S. taxpayers

residing overseas and in the United States. However,the new IRS guidance fails to address some areas. Tax-payers would greatly benefit from additional IRS guid-ance and, possibly, additional relief in areas such asPFIC reporting and non-willful conduct determination.

The nonresidency test for U.S. taxpayers residingoutside the United States under the SFCP should befixed. Either the complete section 911 standard shouldbe applied, with potential application of the bona fideresidence requirement to treaty-protected U.S. residents,or the determination of whether a U.S. taxpayer quali-fies for the nonresidency test should be based on allfacts and circumstances.

Although the modified programs are overall favor-able to U.S. taxpayers, they are going to add to a tax-payer’s administrative burden and compliance costs.Taxpayers will need to make a determination ofwhether their conduct was non-willful and to deter-mine, as applicable, if they can show reasonable causefor failure to comply with their U.S. tax obligations.

U.S. taxpayers would be well advised to closely re-view the new rules and the program eligibility require-ments, consult with their U.S. tax advisers, and seri-ously consider coming forward voluntarily now, whenthey still can. ◆

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8865, 8938, and 8621?

Non‐willful conduct is 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.

Do you have IRS

undisclosed

foreign financial

assets or bank

accounts?

STOP!

No further

action required.

If required, have you filed forms

5471, 5472, 3520, 3520‐A, 926,

If required, have you filed the

required Report of Foreign Bank

and Financial Accounts (FBAR)

(FinCEN Form 114, previously

Form T.D. F 90‐22.1)?

Have you properly reported all your

taxable income?

Have you willfully failed to report

foreign financial assets or bank

accounts and pay all tax due regarding

those assets?

Yes

Yes

Go to Chart B,

Eligibility for

Offshore Voluntary

Disclosure Program

(OVDP).

Go to Chart C,

General Eligibility

for Streamlined

Filing Compliance

Procedures (SFCP).

STOP!

No further

action required.

STOP!

No further

action required.

Yes

Yes

No

No

No

No

No

Go to Chart D,

Eligibility for

Delinquent FBAR

Submission

Procedures.

Go to Chart E,

Eligibility for Delinquent

International

Information Return

Submission Procedures.

Yes

Chart A. Options Available to U.S.Taxpayers With Undisclosed ForeignFinancial Assets or Bank Accounts Under June 18, 2014, Guidance

Appendix A. Flowcharts for Options Available to U.S.Taxpayers to BecomeTax Compliant Under June 18, 2014, Guidance

Source: http://www.irs.gov/Individuals/International-Taxpayers/Options-Available-For-U-S--Taxpayers-with-Undisclosed-Foreign-Financial-Assets.

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Chart B. Eligibility for Offshore Voluntary Disclosure Program (OVDP)

Yes

Yes

Yes

No

Yes

Do you have

funds invested

in undisclosed

foreign assets?

NOT ELIGIBLE

FOR OVDP.

Have you appealed a foreign tax

administrator’s decision authorizing

the providing of account information

to the IRS; and/or

Has the IRS initiated a civil examination

for any year or have you been under

criminal investigation by the CI (Criminal

Investigation)?

Have you made a submission under the

Streamlined Filing Compliance

Procedures (SFCP)?

Has the IRS determined that you,

among other certain taxpayer groups

that have or had accounts held at a

specific financial institution, will be

ineligible for OVDP due to U.S.

government action in connection with

the specific financial institution?

Yes

No

No

No

ELIGIBLE FOR

OVDP.

Funds must have legal source.

Have you been served the notice as

required under existing law?

No

Source: http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program andhttp://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised.

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Are you an

individual

taxpayer (or the

estate of an

individual

taxpayer)?

NOT ELIGIBLE

FOR SFCP.

Are you residing outside the

United States?

Do you have a valid taxpayer

identification number (TIN)?

No

No

Are you eligible

for an SSN?

Apply for ITIN or

submit a

completed ITIN

application along

with the SFCP

submission.

Yes

Apply

for an

SSN.

Yes

No

Businesses (such as

corporations or

partnerships) are

ineligible for SFCP.

Yes

Do you have an individualtaxpayer identificationnumber (ITIN)?

Do you have a valid Social

Security number (SSN)?

Go to Chart C.2,

Eligibility for

Streamlined

Domestic Offshore

Procedures (SDOP).

Go to Chart C.1,

Eligibility for

Streamlined

Foreign Offshore

Procedures (SFOP).

Yes

Are you able to certify that the failure

to report all income, pay all tax, and

submit all required information

returns, including FBARs (FinCEN Form

114, previously Form T.D. F 90‐22.1),

was due to non‐willful conduct?

NoNOT ELIGIBLE

FOR SFCP.

Yes No

Has the IRS started a civil

examination of your returns

for any taxable year?

No

Yes

To apply for an SSN, you must

present:

•Proof of U.S. citizenship

•Proof of age

•Proof that an SSN was never

assigned to you

•Proof of identity

To apply for an ITIN, present the

following to the IRS:

•Valid federal income tax return

•Latest revision of Form W‐7

•Proof of identity

•Foreign status documents

Chart C. General Eligibility for Streamlined FilingCompliance Procedures (SFCP)

Source: http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures.

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Were you physically present outside

the United States for at least 330 full

days in one or more of the most recent

three years for which the U.S. tax

return due date (or properly applied

for extended due date) has passed?

Are you a U.S.

citizen or lawful

permanent

resident (i.e.,

“green card

holder”)?

Did you have a U.S. abode in any one

or more of the most recent three years

for which the U.S. tax return due date

(or properly applied for extended due

date) has passed?

Do you meet the substantial presence

test of IRC section 7701(b)(3) in any

one or more of the last three years for

which the U.S. tax return due date (or

properly applied for extended due

date) has passed?

Yes

Yes

Yes

For joint return filers, both

spouses must meet the

applicable nonresidency

requirement.

ELIGIBLE FOR

SFOP.

No

No

NOT ELIGIBLE

FOR SFOP. Go

to Chart C.2,

SDOP.

No

Yes

NOT ELIGIBLE

FOR SFOP. Go

to Chart C.2,

SDOP.

Taxpayers must complete and sign a statement on

the Certification by U.S. Person Residing Outside of

the United States certifying that:

(1) the taxpayer is eligible for the SFOP;

(2) all required FBARs have now been filed; and

(3) the failure to file tax returns, report all income,

pay all tax, and submit all required information

returns, including FBARs, resulted from non‐willful

conduct.

Taxpayers must submit the original signed statement

and they must attach copies of the statement to each

tax return and information return being submitted

through these procedures. Further, taxpayers should

not attach copies of the statement to FBARs. Failure

to submit this statement, or submission of an

incomplete or otherwise deficient statement, will

result in returns being processed in the normal course

without the benefit of the favorable terms of these

procedures.

Under IRC section 911 and its regulations, which

apply for purposes of these procedures, neither

temporary presence of the individual in the

United States nor maintenance of a dwelling in

the United States by an individual necessarily

mean that the individual’s abode is in the United

States. For more information on the meaning of

“abode,” see IRS Publication 54.

For more information

on the substantial

presence test, see IRS

Publication 519.

Chart C.1. Eligibility for Streamlined Foreign Offshore Procedures (SFOP)

Source: http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States.

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Do you meet the

nonresidency

requirement

under SFOP?

For joint return filers, both

spouses must meet the

applicable nonresidency

requirement.

No

NOT ELIGIBLE

FOR SDOP. Go

to Chart C.1,

SFOP.

Have you previously filed a U.S. tax

return (if required) for each of the

most recent three years for which the

U.S. tax return due date (or properly

applied extended due date) has

passed?

Have you reported gross income from

a foreign financial asset and paid tax as

required by U.S. law?

Have you filed an FBAR (FinCEN Form

114, previously Form T.D. F 90‐22.1)

and/or one or more international

information returns (e.g., forms 3520,

3520‐A, 5471, 5472, 8938, 926, and

8621) regarding the foreign financial

asset?

NoELIGIBLE FOR

SDOP.Yes

The foreign financial asset may

include:

•financial accounts held at

foreign financial institutions;

•financial accounts held at a

foreign branch of a U.S.

financial institution;

•foreign stock or securities not

held in a financial account;

•foreign mutual funds; and

•foreign hedge funds and

foreign private equity funds.

See instructions for FinCEN

Form 114 and the instructions

for Form 8938 for detail.

Taxpayers must complete and sign a

statement on the Certification by U.S.

Person Residing in the United States

certifying that:

(1) you are eligible for the SDOP;

(2) all required FBARs have now been filed;

(3) the failure to report all income, pay all

tax, and submit all required information

returns, including FBARs, resulted from non‐

willful conduct; and

(4) the miscellaneous offshore penalty

amount is accurate.

Taxpayers must maintain their foreign

financial asset information supporting the

self‐certified miscellaneous offshore penalty

computation and be prepared to provide it

upon request. Taxpayers must submit an

original signed statement and attach copies

of the statement to each tax return and

information return being submitted through

these procedures. Further, taxpayers

should not attach copies of the statement

to FBARs. Failure to submit this statement,

or submission of an incomplete or otherwise

deficient statement, will result in returns

being processed in the normal course

without the benefit of the favorable terms

of these procedures.

Yes

Chart C.2. Eligibility for Streamlined Domestic Offshore Procedures (SDOP)

Source: http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States.

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Are you under a

civil examination

or a criminal

investigation by

the IRS?

Have you been contacted by the IRS

about the delinquent FBARs?

No

No

Yes

NOT ELIGIBLE

for Delinquent

FBAR Submission

Procedures.

Yes

ELIGIBLE for

Delinquent FBAR

Submission

Procedures.

Late filing

statement — The

taxpayer should

provide an

explanation of

why FBARs are

filed late.

Chart D. Eligibility for Delinquent FBAR Submission Procedures

Source: http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-FBAR-Submission-Procedures.

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Have you filed

one or more

required

international

information

returns?

Have you already been contacted by

the IRS about the delinquent

information returns?

No

No

Yes

NOT ELIGIBLE for

Delinquent

International

Information Return

Submission

Procedures.

Yes

Are you under a civil examination or a

criminal investigation by the IRS?

No

Do you have reasonable cause for not

timely filing the information returns?No

Yes

ELIGIBLE for

Delinquent

International

Information Return

Submission

Procedures.

Yes

The taxpayer must attach a

statement of all facts

establishing a reasonable

cause for the failure to file. The

reasonable cause statement

must certify that any entity for

which the information returns

are being filed was not

engaged in tax evasion. The

failure to attach a statement

may result in penalties. A

reasonable cause statement

must be attached to each

delinquent information return

filed, for which reasonable

cause is being requested.

Chart E. Eligibility for Delinquent International Information ReturnSubmission Procedures

Source: http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-International-Information-Return-Submission-Procedures.

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Appendix B. Side-by-Side Comparison of the 2012 and 2014 IRS Offshore Disclosure Program FAQs

Source: 2014 OVDP FAQ, available at http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised.

2012 OVDP FAQ, available at http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers.

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Underlined bold — new text.Underlined italics — deleted text.

# Questions(2014 OVDP

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Questions(2012 OVDP

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Answers (2014 OVDP FAQ) Answers (2012 OVDP FAQ)

1 Is this a newoffshorevoluntarydisclosureprogram?

Why did theIRS announcea newoffshorevoluntarydisclosureprogram atthis time?

No. This is a continuation of the programintroduced in this modified program, it may bereferred to as the 2014 OVDP. The IRS’s priorOffshore Voluntary Disclosure Program (2009OVDP), and Offshore Voluntary DisclosureInitiative (2011 OVDI), and the 2012 OVDP havedemonstrated the value of uniform penaltystructures for taxpayers who come forwardvoluntarily and report their previously undisclosedforeign accounts and assets. These initiatives haveenabled the IRS to centralize the civil processingof offshore voluntary disclosures and to resolve avery large number of cases without examination.Because the implementation of the ForeignAccount Tax Compliance Act (FATCA) and theIRS and Department of Justice offshoreenforcement efforts continue to raise the risk ofdetection of taxpayers with undisclosed foreignaccounts and assets for the foreseeable future, ithas been determined that 2012 OVDP should bemodified and made available to taxpayers whowish to voluntarily disclose their offshore accountsand assets to avoid prosecution and limit theirexposure to civil penalties but have not yet doneso.

Unlike the 2009 OVDP and the 2011 OVDI, the2014 OVDP has no set deadline for taxpayers toapply.

However, the terms of this program could changeat any time. For example, the IRS may increasepenalties or limit eligibility in the program for allor some taxpayers or defined classes of taxpayers— or decide to end the program entirely at anytime.

The IRS’s prior Offshore Voluntary DisclosureProgram (2009 OVDP), and Offshore VoluntaryDisclosure Initiative (2011 OVDI), which closed onSeptember 9, 2011, demonstrated the value of auniform penalty structure for taxpayers who cameforward voluntarily and reported their previouslyundisclosed foreign accounts and assets. Theseinitiatives enabled the IRS to centralize the civilprocessing of offshore voluntary disclosures and toresolve a very large number of cases withoutexamination. Because the IRS and Department ofJustice offshore enforcement efforts are expected tocontinue raising the risk of detection of taxpayerswith undisclosed foreign assets for the foreseeablefuture, it has been determined that a similar programshould be available to taxpayers who wish tovoluntarily disclose their offshore accounts andassets to avoid prosecution and limit their exposureto civil penalties but have not yet done so. Unlikethe 2009 OVDP and the 2011 OVDI, there is no setdeadline for taxpayers to apply. However, the termsof this program could change at any time goingforward. For example, the IRS may increasepenalties or limit eligibility in the program for allor some taxpayers or defined classes of taxpayers— or decide to end the program entirely at anypoint. This new program, the Offshore VoluntaryDisclosure Program (OVDP) will be available until furthernotice to taxpayers who come forward and completecertain requirements. The terms of the program will alsobe offered to taxpayers who made offshore voluntarydisclosures after the deadline for the 2011 OVDI.

1.1 Were anysignificantchangesmade to the2012 OVDP?If so, whatare they?

Changes have been made to the 2012 OVDP,including some which may be consideredsignificant.

A 50% offshore penalty applies if either a foreignfinancial institution at which the taxpayer has orhad an account or a facilitator who helped thetaxpayer establish or maintain an offshorearrangement has been publicly identified as beingunder investigation or as cooperating with agovernment investigation. See FAQ 7.2.

As described below, FAQ 17 concerning filingdelinquent Report of Foreign Bank and FinancialAccounts (commonly known as an FBAR) hasbeen replaced and superseded. See ‘‘OptionsAvailable For U.S. Taxpayers with UndisclosedForeign Financial Assets’’.

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Appendix B. Side-by-Side Comparison of the 2012 and 2014 IRS Offshore Disclosure Program FAQs (continued)


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As described below, FAQ 18 concerning filingcertain delinquent international informationreturns has been replaced and superseded. See‘‘Options Available For U.S. Taxpayers withUndisclosed Foreign Financial Assets’’.

The reduced penalty structure under former FAQs52 and 53 has been eliminated due to theexpansion of the Streamlined Filing ComplianceProcedures. See ‘‘Options Available For U.S. Tax-payers with Undisclosed Foreign Financial Assets’’for a discussion of the various options for taxpayerswith international tax compliance issues.

FAQs 31 through 41 pertaining to the asset base towhich the offshore penalty applies have beenmodified to promote clarity and consistency ofapplication.

FAQ 23 has been modified to require additionalinformation for preclearance by CriminalInvestigation.

The Offshore Voluntary Disclosures Letter andattachment have been modified.FAQ 7 has been modified to require that the off-shore penalty be paid at the time of the OVDPsubmission.

FAQ 25 has been modified to require that accountstatements be provided for all foreign financialaccounts regardless of account balance and to pro-vide that voluminous documents not requiringoriginal signatures may be submitted on CD orDVD.The following FAQs have been deleted as moot:16, 17, 18, 19, 51.1, 51.2, 52, and 53.

1.2 What is theeffective dateof thesemodifiedFAQs?

These modified FAQs are effective for all newsubmissions made on or after July 1, 2014.

1.3 If I appliedto OVDPprior to theeffective dateof thesemodifiedFAQs and mycase has notyet beenresolved bymeans of aclosingagreement(Form 906),may I requestconsiderationunder theseFAQs?

Yes. A taxpayer who made an OVDP submissionprior to July 1, 2014 may elect to have his caseconsidered under these FAQs. A taxpayer or hisrepresentative must communicate that request inwriting to the examiner assigned his case andprovide all documents and information requiredby these FAQs. See FAQ 25. If no examiner hasbeen assigned, send the documents andinformation to:

Internal Revenue Service3651 S. I H 35 Stop 4301 AUSCAustin, TX 78741Attn: OVDP Determination

1.4 If I appliedto OVDPprior to theeffective dateof the

See the separate set of Frequently AskedQuestions for information about eligibility andthe process for requesting transitional treatmentunder the terms of the Streamlined FilingCompliance Procedures in your OVDP case.

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expandedStreamlinedFilingComplianceProcedures,may I requestconsiderationunder thoseprocedures?

2 What is theobjective ofthis program?

What is theobjective ofthis program?

The objective remains the same as the 2009 OVDP,the 2011 OVDI, and the original 2012 OVDP: tobring taxpayers that have used undisclosed foreignaccounts and assets, including those held throughundisclosed foreign entities, to avoid or evade taxinto compliance with United States tax and relatedlaws.

The objective remains the same as the 2009 OVDPand 2011 OVDI — to bring taxpayers that haveused undisclosed foreign accounts and undisclosedforeign entities to avoid or evade tax intocompliance with United States tax laws.

3 How doesthis programdiffer fromthe IRS’slongstandingvoluntarydisclosurepractice orthe 2009OVDP and2011 OVDI?

How doesthis programdiffer fromthe IRS’slongstandingvoluntarydisclosurepractice orthe 2009OVDP and2011 OVDI?

The Voluntary Disclosure Practice is alongstanding practice of IRS CriminalInvestigation whereby CI takes timely, accurate,and complete voluntary disclosures into account indeciding whether to recommend to theDepartment of Justice that a taxpayer becriminally prosecuted. It enables noncomplianttaxpayers to resolve their tax liabilities andminimize their chance of criminal prosecution.When a taxpayer truthfully, timely, and completelycomplies with all provisions of the voluntarydisclosure practice, the IRS will not recommendcriminal prosecution to the Department of Justicefor any issue relating to tax noncompliance orfailure to file Report of Foreign Bank andFinancial Accounts (commonly known as anFBAR reported on FinCEN Form 114, previouslyForm TD F 90-22.1).

This current offshore voluntary disclosure programis a counterpart to Criminal Investigation’sVoluntary Disclosure Practice. Like itspredecessors, the 2009 OVDP, which ran fromMarch 23, 2009 through October 15, 2009, and the2011 OVDI, which ran from February 8, 2011through September 9, 2011, it addresses the civilside of a taxpayer’s voluntary disclosure of foreignaccounts and assets by defining the number of taxyears covered and setting the civil penalties thatwill apply. Unlike the 2009 OVDP and the 2011OVDI, there is no set deadline for taxpayers toapply. However, the terms of this program maychange at any time. For example, the IRS mayincrease penalties or limit eligibility in the programfor all or some taxpayers or defined classes oftaxpayers or decide to end the program entirely atany time.

The Voluntary Disclosure Practice is alongstanding practice of IRS CriminalInvestigation whereby CI takes timely, accurate,and complete voluntary disclosures into account indeciding whether to recommend to theDepartment of Justice that a taxpayer becriminally prosecuted. It enables noncomplianttaxpayers to resolve their tax liabilities andminimize their chance of criminal prosecution.When a taxpayer truthfully, timely, and completelycomplies with all provisions of the voluntarydisclosure practice, the IRS will not recommendcriminal prosecution to the Department of Justice.

This current offshore voluntary disclosure programis a counter-part to Criminal Investigation’sVoluntary Disclosure Practice. Like itspredecessors, the 2009 OVDP, which ran fromMarch 23, 2009 through October 15, 2009, and the2011 OVDI, which ran from February 8, 2011through September 9, 2011, it addresses the civilside of a taxpayer’s voluntary disclosure of foreignaccounts and assets by defining the number of taxyears covered and setting the civil penalties thatwill apply. Unlike the 2009 OVDP and the 2011OVDI, there is no set deadline for taxpayers toapply. However, the terms of this program couldchange at any time going forward. For example, theIRS may increase penalties or limit eligibility inthe program for all or some taxpayers or definedclasses of taxpayers — or decide to end theprogram entirely at any point.

4 Why should Imake avoluntarydisclosure?

Why should Imake avoluntarydisclosure?

Taxpayers holding undisclosed foreign accountsand assets, including those held throughundisclosed foreign entities, should make avoluntary disclosure because it enables them tobecome compliant, avoid substantial civil penalties,and generally eliminate the risk of criminalprosecution for all issues relating to taxnoncompliance and failing to file FBARs. Incontrast, taxpayers simply filing amended returnsor filing through the Streamlined Filing

Taxpayers with undisclosed foreign accounts orentities should make a voluntary disclosure becauseit enables them to become compliant, avoidsubstantial civil penalties and generally eliminatethe risk of criminal prosecution. Making avoluntary disclosure also provides the opportunityto calculate, with a reasonable degree of certainty,the total cost of resolving all offshore tax issues.Taxpayers who do not submit a voluntarydisclosure run the risk of detection by the IRS and

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Compliance Procedures do not eliminate the riskof criminal prosecution. Making a voluntarydisclosure also provides the opportunity tocalculate, with a reasonable degree of certainty, thetotal cost of resolving all offshore tax issues.Taxpayers who do not submit a voluntarydisclosure run the risk of detection by the IRS andthe imposition of substantial penalties, includingthe fraud penalty and foreign information returnpenalties, and an increased risk of criminalprosecution. The IRS remains actively engaged inidentifying those with undisclosed foreignfinancial accounts and assets. Moreover,increasingly this information is available to the IRSunder tax treaties, through submissions bywhistleblowers, and from other sources and willbecome more available under the FATCA andForeign Financial Asset Reporting (IRC § 6038D).

the imposition of substantial penalties, includingthe fraud penalty and foreign information returnpenalties, and an increased risk of criminalprosecution. The IRS remains actively engaged inferreting out the identities of those with undisclosedforeign accounts. Moreover, increasingly thisinformation is available to the IRS under taxtreaties, through submissions by whistleblowers,and will become more available under the ForeignAccount Tax Compliance Act (FATCA) and ForeignFinancial Asset Reporting (new IRC § 6038D).

5 What aresome of thecivil penaltiesthat mightapply if Idon’tparticipate inthe OVPDand the IRSexamines me?

What aresome of thecivil penaltiesthat mightapply if Idon’t come inunder theOVPD andthe IRSexamines me?How do theywork?

Depending on a taxpayer’s particular facts andcircumstances, the following penalties could apply:

• A penalty for failing to file FBARs. UnitedStates citizens, residents and certain otherpersons must annually report their direct orindirect financial interest in, or signatureauthority (or other authority that iscomparable to signature authority) over, afinancial account that is maintained with afinancial institution located in a foreigncountry if, for any calendar year, theaggregate value of all foreign financialaccounts exceeded $10,000 at any time duringthe year. The civil penalty for willfully failingto file an FBAR can be as high as the greaterof $100,000 or 50 percent of the total balanceof the foreign financial account per violation.See 31 U.S.C. §5321(a)(5). Non-willfulviolations that the IRS determines were notdue to reasonable cause are subject to a$10,000 penalty per violation.

• Beginning with the 2011 tax year, a penaltyfor failing to file Form 8938 reporting thetaxpayer’s interest in certain foreign financialassets, including financial accounts, certainforeign securities, and interests in foreignentities, as required by IRC § 6038D. Thepenalty for failing to file each one of theseinformation returns is $10,000, with anadditional $10,000 added for each month thefailure continues beginning 90 days after thetaxpayer is notified of the delinquency, up toa maximum of $50,000 per return.

• A penalty for failing to file Form 3520,Annual Return to Report Transactions WithForeign Trusts and Receipt of Certain ForeignGifts. Taxpayers must also report varioustransactions involving foreign trusts, includingcreation of a foreign trust by a United Statesperson, transfers of property from a UnitedStates person to a foreign trust and receipt ofdistributions from foreign trusts under IRC §6048. This return also reports the receipt ofgifts from foreign entities under IRC §6039F.The penalty for failing to file each one of

Depending on a taxpayer’s particular facts andcircumstances, the following penalties could apply:

• A penalty for failing to file the Form TD F 90-22.1 (Report of Foreign Bank and FinancialAccounts, commonly known as an ‘‘FBAR’’).United States citizens, residents and certainother persons must annually report their director indirect financial interest in, or signatureauthority (or other authority that iscomparable to signature authority) over, afinancial account that is maintained with afinancial institution located in a foreigncountry if, for any calendar year, theaggregate value of all foreign accountsexceeded $10,000 at any time during the year.Generally, the civil penalty for willfully failingto file an FBAR can be as high as the greaterof $100,000 or 50 percent of the total balanceof the foreign account per violation. See 31U.S.C. § 5321(a)(5). Non-willful violationsthat the IRS determines were not due toreasonable cause are subject to a $10,000penalty per violation.

• Beginning with the 2011 tax year, a penaltyfor failing to file form 8938 reporting thetaxpayer’s interest in certain foreign financialassets, including financial accounts, certainforeign securities and interests in foreignentities, as required by I.R.C. §6038D. Thepenalty for failing to file each one of theseinformation returns is $10,000, with anadditional $10,000 added for each month thefailure continues beginning 90 days after thetaxpayer is notified of the delinquency, up toa maximum of $50,000 per return.

• A penalty for failing to file Form 3520,Annual Return to Report Transactions WithForeign Trusts and Receipt of Certain ForeignGifts. Taxpayers must also report varioustransactions involving foreign trusts, includingcreation of a foreign trust by a United Statesperson, transfers of property from a UnitedStates person to a foreign trust and receipt ofdistributions from foreign trusts under IRC §6048.This return also reports the receipt of

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these information returns, or for filing anincomplete return, is the greater of $10,000 or35 percent of the gross reportable amount,except for returns reporting gifts, where thepenalty is five percent of the gift per month,up to a maximum penalty of 25 percent ofthe gift.

• A penalty for failing to file Form 3520-A,Information Return of Foreign Trust With aU.S. Owner. Taxpayers must also reportownership interests in foreign trusts, byUnited States persons with various interests inand powers over those trusts under IRC §6048(b). The penalty for failing to file eachone of these information returns or for filingan incomplete return, is the greater of$10,000 or 5 percent of the gross value oftrust assets determined to be owned by theUnited States person.

• A penalty for failing to file Form 5471,Information Return of U.S. Persons withRespect to Certain Foreign Corporations.Certain United States persons who areofficers, directors or shareholders in certainforeign corporations (including InternationalBusiness Corporations) are required to reportinformation under IRC §§ 6035, 6038 and6046. The penalty for failing to file each oneof these information returns is $10,000, withan additional $10,000 added for each monththe failure continues beginning 90 days afterthe taxpayer is notified of the delinquency, upto a maximum of $50,000 per return.

• A penalty for failing to file Form 5472,Information Return of a 25% Foreign-OwnedU.S. Corporation or a Foreign CorporationEngaged in a U.S. Trade or Business.Taxpayers may be required to reporttransactions between a 25 percentforeign-owned domestic corporation or aforeign corporation engaged in a trade orbusiness in the United States and a relatedparty as required by IRC §§ 6038A and6038C. The penalty for failing to file each oneof these information returns, or to keepcertain records regarding reportabletransactions, is $10,000, with an additional$10,000 added for each month the failurecontinues beginning 90 days after the taxpayeris notified of the delinquency.

• A penalty for failing to file Form 926, Returnby a U.S. Transferor of Property to a ForeignCorporation. Taxpayers are required to reporttransfers of property to foreign corporationsand other information under IRC § 6038B.The penalty for failing to file each one ofthese information returns is ten percent of thevalue of the property transferred, up to amaximum of $100,000 per return, with nolimit if the failure to report the transfer wasintentional.

gifts from foreign entities under section6039F.The penalty for failing to file each oneof these information returns, or for filing anincomplete return, is the greater of $10,000 or35 percent of the gross reportable amount,except for returns reporting gifts, where thepenalty is five percent of the gift per month,up to a maximum penalty of 25 percent ofthe gift.

• A penalty for failing to file Form 3520-A,Information Return of Foreign Trust With aU.S. Owner. Taxpayers must also reportownership interests in foreign trusts, byUnited States persons with various interests inand powers over those trusts under IRC §6048(b).The penalty for failing to file eachone of these information returns or for filingan incomplete return, is the greater of$10,000 or 5 percent of the gross value oftrust assets determined to be owned by theUnited States person.

• A penalty for failing to file Form 5471,Information Return of U.S. Persons withRespect to Certain Foreign Corporations.Certain United States persons who areofficers, directors or shareholders in certainforeign corporations (including InternationalBusiness Corporations) are required to reportinformation under IRC §§ 6035, 6038 and6046.The penalty for failing to file each oneof these information returns is $10,000, withan additional $10,000 added for each monththe failure continues beginning 90 days afterthe taxpayer is notified of the delinquency, upto a maximum of $50,000 per return.

• A penalty for failing to file Form 5472,Information Return of a 25% Foreign-OwnedU.S. Corporation or a Foreign CorporationEngaged in a U.S. Trade or Business.Taxpayers may be required to reporttransactions between a 25 percent foreign-owned domestic corporation or a foreigncorporation engaged in a trade or business inthe United States and a related party asrequired by IRC §§ 6038A and 6038C. Thepenalty for failing to file each one of theseinformation returns, or to keep certain recordsregarding reportable transactions, is $10,000,with an additional $10,000 added for eachmonth the failure continues beginning 90 daysafter the taxpayer is notified of thedelinquency.

• A penalty for failing to file Form 926, Returnby a U.S. Transferor of Property to a ForeignCorporation. Taxpayers are required to reporttransfers of property to foreign corporationsand other information under IRC § 6038B.The penalty for failing to file each one ofthese information returns is ten percent of thevalue of the property transferred, up to amaximum of $100,000 per return, with nolimit if the failure to report the transfer was

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• A penalty for failing to file Form 8865,Return of U.S. Persons With Respect toCertain Foreign Partnerships. United Statespersons with certain interests in foreignpartnerships use this form to report interestsin and transactions of the foreignpartnerships, transfers of property to theforeign partnerships, and acquisitions,dispositions and changes in foreignpartnership interests under IRC §§ 6038,6038B, and 6046A. Penalties include $10,000for failure to file each return, with anadditional $10,000 added for each month thefailure continues beginning 90 days after thetaxpayer is notified of the delinquency, up toa maximum of $50,000 per return, and tenpercent of the value of any transferredproperty that is not reported, subject to a$100,000 limit.

• Fraud penalties imposed under IRC §§ 6651(f)or 6663. Where an underpayment of tax, or afailure to file a tax return, is due to fraud, thetaxpayer is liable for penalties that, althoughcalculated differently, essentially amount to 75percent of the unpaid tax.

• A penalty for failing to file a tax returnimposed under IRC § 6651(a)(1). Generally,taxpayers are required to file income taxreturns. If a taxpayer fails to do so, a penaltyof 5 percent of the balance due, plus anadditional 5 percent for each month orfraction thereof during which the failurecontinues may be imposed. The penalty shallnot exceed 25 percent.

• A penalty for failing to pay the amount of taxshown on the return under IRC § 6651(a)(2).If a taxpayer fails to pay the amount of taxshown on the return, he or she may be liablefor a penalty of .5 percent of the amount oftax shown on the return, plus an additional .5percent for each additional month or fractionthereof that the amount remains unpaid, notexceeding 25 percent.

• An accuracy-related penalty onunderpayments imposed under IRC § 6662.Depending upon which component of theaccuracy-related penalty is applicable, ataxpayer may be liable for a 20 percent or 40percent penalty.

intentional.

• A penalty for failing to file Form 8865,Return of U.S. Persons With Respect toCertain Foreign Partnerships. United Statespersons with certain interests in foreignpartnerships use this form to report interestsin and transactions of the foreignpartnerships, transfers of property to theforeign partnerships, and acquisitions,dispositions and changes in foreignpartnership interests under IRC §§ 6038,6038B, and 6046A. Penalties include $10,000for failure to file each return, with anadditional $10,000 added for each month thefailure continues beginning 90 days after thetaxpayer is notified of the delinquency, up toa maximum of $50,000 per return, and tenpercent of the value of any transferredproperty that is not reported, subject to a$100,000 limit.

• Fraud penalties imposed under IRC §§ 6651(f)or 6663. Where an underpayment of tax, or afailure to file a tax return, is due to fraud, thetaxpayer is liable for penalties that, althoughcalculated differently, essentially amount to 75percent of the unpaid tax.

• A penalty for failing to file a tax returnimposed under IRC § 6651(a)(1). Generally,taxpayers are required to file income taxreturns. If a taxpayer fails to do so, a penaltyof 5 percent of the balance due, plus anadditional 5 percent for each month orfraction thereof during which the failurecontinues may be imposed. The penalty shallnot exceed 25 percent.

• A penalty for failing to pay the amount of taxshown on the return under IRC § 6651(a)(2).If a taxpayer fails to pay the amount of taxshown on the return, he or she may be liablefor a penalty of .5 percent of the amount oftax shown on the return, plus an additional .5percent for each additional month or fractionthereof that the amount remains unpaid, notexceeding 25 percent.

• An accuracy-related penalty onunderpayments imposed under IRC § 6662.Depending upon which component of theaccuracy-related penalty is applicable, ataxpayer may be liable for a 20 percent or 40percent penalty.

6 What aresome of thecriminalcharges Imight face ifI don’tparticipate inthe OVDPand the IRSexamines me?

What aresome of thecriminalcharges Imight face ifI don’t comein underOVDP andthe IRSexamines me?

Possible criminal charges related to tax mattersinclude tax evasion (IRC §7201), filing a falsereturn (IRC §7206(1)) and failure to file an incometax return (IRC §7203). Willfully failing to file anFBAR and willfully filing a false FBAR are bothviolations that are subject to criminal penaltiesunder 31 U.S.C. §5322. Additional possiblecriminal charges include conspiracy to defraud thegovernment with respect to claims (18 U.S.C. §286) and conspiracy to commit offense or todefraud the United States (18 U.S.C. §371).

Possible criminal charges related to tax returnsinclude tax evasion (26 U.S.C. § 7201), filing a falsereturn (26 U.S.C. § 7206(1)) and failure to file anincome tax return (26 U.S.C. §7203). Willfullyfailing to file an FBAR and willfully filing a falseFBAR are both violations that are subject tocriminal penalties under 31 U.S.C. § 5322.

A person convicted of tax evasion is subject to aprison term of up to five years and a fine of up to$250,000. Filing a false return subjects a person toa prison term of up to three years and a fine of up

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A person convicted of tax evasion is subject to aprison term of up to five years and a fine of up to$250,000. Filing a false return subjects a person toa prison term of up to three years and a fine of upto $250,000. A person who fails to file a tax returnis subject to a prison term of up to one year and afine of up to $100,000. Failing to file an FBARsubjects a person to a prison term of up to tenyears and criminal penalties of up to $500,000. Aperson convicted of conspiracy to defraud thegovernment with respect to claims is subject to aprison term of up to not more than 10 years or afine of up to $250,000. A person convicted ofconspiracy to commit offense or to defraud theUnited States is subject to a prison term of notmore than five years and a fine of up to $250,000.

to $250,000. A person who fails to file a tax returnis subject to a prison term of up to one year and afine of up to $100,000. Failing to file an FBARsubjects a person to a prison term of up to tenyears and criminal penalties of up to $500,000.

KEY FEATURES OF PROGRAM

7 What are therequirementsof theOffshoreVoluntaryDisclosureProgram?

What are therequirementsof theOffshoreVoluntaryDisclosureProgram?

Under the terms of the Offshore VoluntaryDisclosure Program, taxpayers must:

• Provide all documents required by FAQ 25;

• Cooperate in the voluntary disclosure process,including providing information on foreignaccounts and assets, institutions andfacilitators, and signing agreements to extendthe period of time for assessing Title 26liabilities and FBAR penalties;

• Pay 20-percent accuracy-related penaltiesunder IRC § 6662(a) on the full amount ofyour offshore-related underpayments of taxfor all years;

• Pay failure-to-file penalties under IRC §6651(a)(1), if applicable;

• Pay failure-to-pay penalties under IRC §6651(a)(2), if applicable;

• Pay, in lieu of all other penalties that mayapply to the undisclosed foreign accounts,assets and entities, including FBAR andoffshore-related information return penaltiesand tax liabilities for years prior to thevoluntary disclosure period, a miscellaneousTitle 26 offshore penalty equal to 27.5 percent(or 50 percent in circumstances described inFAQ 7.2) of the highest aggregate value ofOVDP assets as defined in FAQ 35 during theperiod covered by the voluntary disclosure(the 27.5 percent and 50 percent penalties aretogether referred to in these FAQs as the‘‘offshore penalty’’);

• Submit full payment of any Title 26 taxliabilities for years included in the offshoredisclosure period, applicable interest, anoffshore penalty, accuracy-related penaltiesfor offshore-related underpayments, and, ifapplicable, the failure-to-file andfailure-to-pay penalties or, if the taxpayer isunable to make full payment, make goodfaith arrangements with the IRS to pay in full(see FAQ 20 for more information) (note: thesuspension of interest provisions of IRC §

Under the terms of the Offshore VoluntaryDisclosure Program, taxpayers must:

• Provide copies of previously filed original (and, ifapplicable, previously filed amended) federal incometax returns for tax years covered by the voluntarydisclosure;

• Provide complete and accurate amended federalincome tax returns (for individuals, Form 1040X, ororiginal Form 1040 if delinquent) for all tax yearscovered by the voluntary disclosure, with applicableschedules detailing the amount and type ofpreviously unreported income from the account orentity (e.g., Schedule B for interest and dividends,Schedule D for capital gains and losses, Schedule Efor income from partnerships, S corporations, estatesor trusts and, for years after 2010, Form 8938,Statement of Specified Foreign Financial Assets).

• File complete and accurate original or amendedoffshore-related information returns (see FAQ 29 forcertain dissolved entities) and Form TD F 90-22.1(Report of Foreign Bank and Financial Accounts,commonly known as an ‘‘FBAR’’) for tax yearscovered by the voluntary disclosure;

• Cooperate in the voluntary disclosure process,including providing information on offshorefinancial accounts, institutions and facilitators,and signing agreements to extend the periodof time for assessing Title 26 liabilities andFBAR penalties;

• Pay 20% accuracy-related penalties under IRC§ 6662(a) on the full amount of youroffshore-related underpayments of tax for allyears;

• Pay failure to file penalties under IRC § 6651(a)(1), if applicable;

• Pay failure to pay penalties under IRC § 6651(a)(2), if applicable;

• Pay, in lieu of all other penalties that mayapply to your undisclosed foreign assets andentities, including FBAR and offshore-relatedinformation return penalties and tax liabilities

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6404 (g) do not apply to interest due in thisprogram);

• Execute a Closing Agreement on FinalDetermination Covering Specific Matters,Form 906; and

• Agree to cooperate with IRS and Departmentof Justice offshore enforcement efforts, ifrequested, by providing information aboutfinancial institutions and other facilitatorswho helped the taxpayer establish ormaintain an offshore arrangement.

for years prior to the voluntary disclosureperiod, a miscellaneous Title 26 offshorepenalty, equal to 27.5% (or in limited cases 12.5%(see FAQ 53) or 5% (see FAQ 52)) of the highestaggregate balance in foreign bank accounts/entitiesor value of foreign assets during the periodcovered by the voluntary disclosure;

• Submit full payment of any Title 26 taxliabilities for years included in the offshoredisclosure period and all tax, interest,accuracy-related penalties for underpayments relatedto offshore accounts and entities, and, ifapplicable, the failure to file and failure to paypenalties with the required submissions set forth inFAQ 25 or make good faith arrangements withthe IRS to pay in full, the tax, interest, and thesepenalties (see FAQ 20 for more informationregarding a taxpayer’s ability to fully pay) (thesuspension of interest provisions of IRC §6404(g) do not apply to interest due in thisprogram); and

• Execute a Closing Agreement on FinalDetermination Covering Specific Matters,Form 906.

• Agree to cooperate with IRS offshoreenforcement efforts by providing informationabout offshore financial institutions, offshoreservice providers, and other facilitators, ifrequested.

• Provide the information listed in FAQ 54, if thetaxpayer has a Canadian registered retirementsavings plan (RRSP) or registered retirement incomefund (RRIF), did not make a timely electionpursuant to Article XVIII(7) of the U.S.-Canadaincome tax treaty to defer U.S. income tax on incomeearned by the RRSP or RRIF that has not beendistributed, and would now like to make an election.

7.1 What if Ihaveunreportedincome froma domesticsource orsome otherundisclosedincome taxliability thatis not relatedto foreignfinancialaccounts?

What if Ihaveunreportedincome froma domesticsource orsome otherundisclosedincome taxliability thatis not relatedto offshoreaccounts orassets?

As was the case with the 2009 OVDP and the2011 OVDI, the OVDP is available to taxpayerswho have both foreign and domestic issues todisclose. The Voluntary Disclosure Practicerequires a complete, accurate, and truthfuldisclosure. Consequently, in addition to disclosingall items relating to foreign financial accounts,OVDP submissions must correct any previouslyunreported income from domestic sources,inappropriate deductions or credits claimed, orother incomplete, inaccurate or untruthful itemson the originally filed returns. The offshorepenalty structure only resolves liabilities andpenalties related to offshore noncompliance.Domestic portions of a voluntary disclosure aresubject to examination. See FAQ 24.

As was the case with the 2009 OVDP and the2011 OVDI, the OVDP is available to taxpayerswho have both offshore and domestic issues todisclose. The Voluntary Disclosure Practicerequires an accurate and complete disclosure.Consequently, if there are undisclosed income taxliabilities from domestic sources in addition to thoserelated to offshore accounts and assets, they must also bedisclosed in the OVDP. (See FAQ 24.)

7.2 What if thegovernmentisinvestigatingthe foreignfinancialinstitutionwhere I hold

Beginning on August 4, 2014, any taxpayer whohas an undisclosed foreign financial account willbe subject to a 50-percent miscellaneous offshorepenalty if, at the time of submitting thepreclearance letter to IRS Criminal Investigation:an event has already occurred that constitutes apublic disclosure that either (a) the foreignfinancial institution where the account is held, or

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my accountor anotherfacilitatorwho assistedinestablishingormaintainingmy offshorearrangement?

another facilitator who assisted in establishing ormaintaining the taxpayer’s offshore arrangement,is or has been under investigation by the IRS orthe Department of Justice in connection withaccounts that are beneficially owned by a U.S.person; (b) the foreign financial institution orother facilitator is cooperating with the IRS or theDepartment of Justice in connection withaccounts that are beneficially owned by a U.S.person or (c) the foreign financial institution orother facilitator has been identified in a court-approved issuance of a summons seekinginformation about U.S. taxpayers who may holdfinancial accounts (a ‘‘John Doe summons’’) atthe foreign financial institution or have accountsestablished or maintained by the facilitator.Examples of a public disclosure include, withoutlimitation: a public filing in a judicial proceedingby any party or judicial officer; or publicdisclosure by the Department of Justice regardinga Deferred Prosecution Agreement orNon-Prosecution Agreement with a financialinstitution or other facilitator.

A list of foreign financial institutions orfacilitators meeting this criteria is available.

Once the 50-percent miscellaneous offshorepenalty applies to any of the taxpayer’s accountsor assets in accordance with the terms set forth inthe paragraph above, the 50-percent miscellaneousoffshore penalty will apply to all of the taxpayer’sassets subject to the penalty (see FAQ 35),including accounts held at another institution orestablished through another facilitator for whichthere have been no events constituting publicdisclosures of (a) or (b) above.

8. How does theoffshorepenaltyframeworkwork? Canyou providean example?

How does theOffshorePenaltyframeworkwork? Canyou give us anexample?

The offshore penalty applies to OVDP assets asdefined in FAQ 35. The values of OVDP assets areaggregated for each year and the offshore penaltyis calculated at the applicable rate (either 27.5percent or 50 percent) of the highest year’saggregate value during the period covered by thevoluntary disclosure. If the taxpayer has multipleOVDP assets where the highest value of someOVDP assets is in different years, the values ofOVDP assets are aggregated for each year and asingle offshore penalty is calculated at theapplicable rate of the highest year’s aggregatevalue. For example, assume the taxpayer had thefollowing amounts in a foreign financial accountover the period covered by his voluntarydisclosure. It is assumed for purposes of theexample that the $1,000,000 was in the account

The values of foreign accounts and other foreign assetsare aggregated for each year and the penalty iscalculated at 27.5 percent of the highest year’saggregate value during the period covered by thevoluntary disclosure. If the taxpayer has multipleaccounts or assets where the highest value of someaccounts or assets is in different years, the values ofaccounts and other assets are aggregated for eachyear and a single penalty is calculated at 27.5percent of the highest year’s aggregate value. Forexample, assume the taxpayer has the followingamounts in a foreign account over the periodcovered by his voluntary disclosure. It is assumedfor purposes of the example that the $1,000,000was in the account before 2003 and was notunreported income in 2003.

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before 2005 and was not unreported income in2005.

Year Amount onDeposit

InterestIncome

AccountBalance

2005

2006

2007

2008

2009

2010

2011

2012

$1,000,000 $50,000 $1,050,000

$50,000 $1,100,000

$50,000 $1,150,000

$50,000 $1,200,000

$50,000 $1,250,000

$50,000 $1,300,000

$50,000 $1,350,000

$50,000 $1,400,000

(NOTE: This example does not provide forcompound interest, and assumes the taxpayer is inthe 35-percent tax bracket, does not have aninvestment in a Passive Foreign InvestmentCompany (PFIC) and files a return but does notinclude the foreign financial account or theinterest income on the return. This examplefurther assumes that the taxpayer is subject to a27.5 percent offshore penalty.)

If the taxpayer in the above example comesforward and his voluntary disclosure is acceptedby the IRS, he faces this potential scenario:

He would pay $553,000 plus interest. Thisincludes:

• Tax of $140,000 (8 years at $17,500) plusinterest,

• An accuracy-related penalty of $28,000 (i.e.,$140,000 x 20%), and

• A miscellaneous offshore penalty (see FAQ 7)of $385,000 (i.e., $1,400,000 x 27.5%).

If the taxpayer didn’t come forward, whenthe IRS discovered his tax and FBARnoncompliance, he would have to paysubstantially more in penalties. The taxpayerwould also be liable for interest and possiblyadditional penalties, and an examinationcould lead to criminal prosecution.

The civil liabilities outside the OffshoreVoluntary Disclosure Program potentiallyinclude:

• The tax, accuracy-related penalties, and, ifapplicable, the failure-to-file andfailure-to-pay penalties, plus interest, asdescribed above,

• FBAR penalties totaling up to $3,825,000 forwillful failures to file complete and correctFBARs (2007 - $575,000, 2008 - $600,000,2009 - $625,000, 2010 - $650,000, and 2011 -$675,000, and 2012 - $700,000),

Year Amount onDeposit

InterestIncome

AccountBalance

2003

2004

2005

2006

2007

2008

2009

2010

$1,000,000 $50,000 $1,050,000

$50,000 $1,100,000

$50,000 $1,150,000

$50,000 $1,200,000

$50,000 $1,250,000

$50,000 $1,300,000

$50,000 $1,350,000

$50,000 $1,400,000

(NOTE: This example does not provide forcompounded interest, and assumes the taxpayer isin the 35-percent tax bracket, does not have aninvestment in a Passive Foreign InvestmentCompany (PFIC), files a return but does notinclude the foreign account or the interest incomeon the return, and the maximum applicable penaltiesare imposed.)

If the taxpayers in the above example comeforward and their voluntary disclosure is acceptedby the IRS, they face this potential scenario:

They would pay $518,000 plus interest. Thisincludes:

• Tax of $140,000 (8 years at $17,500) plusinterest,

• An accuracy-related penalty of $28,000 (i.e.,$140,000 x 20%), and

• An additional penalty, in lieu of the FBAR andother potential penalties that may apply, of$385,000 (i.e., $1,400,000 x 27.5%).

If the taxpayers didn’t come forward, when theIRS discovered their offshore activities, they would faceup to $4,543,000 in tax, accuracy-related penalty, andFBAR penalty. The taxpayers would also be liablefor interest and possibly additional penalties, andan examination could lead to criminal prosecution.

The civil liabilities outside the Offshore VoluntaryDisclosure Program potentially include:

• The tax, accuracy-related penalties, and, ifapplicable, the failure to file and failure to paypenalties, plus interest, as described above,

• FBAR penalties totaling up to $3,825,000 forwillful failures to file complete and correctFBARs (2005 - $575,000, 2006 - $600,000,2007 - $625,000, 2008 - $650,000, and 2009 -$675,000, and 2010 - $700,000),

• The potential of having the fraud penalty (75percent) apply, and

• The potential of substantial additionalinformation return penalties if the foreignaccount or assets is held through a foreign

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• The potential of having the fraud penalty (75percent) apply, and

• The potential of substantial additionalinformation return penalties if the foreignfinancial account is held through a foreignentity such as a trust or corporation andrequired information returns were not filed.

In addition, if the taxpayer is not in OVDP andthe foreign noncompliance started before 2005, theService may examine tax years prior to 2005.

entity such as a trust or corporation andrequired information returns were not filed.

Note that if the foreign activity started before 2003, theService may examine tax years prior to 2003 if thetaxpayer is not part of the OVDP.

9. What yearsare includedin the OVDPdisclosureperiod?

What yearsare includedin the OVDPdisclosureperiod?

The voluntary disclosure period is the most recenteight tax years for which the due date has alreadypassed. Thus, for taxpayers who submit avoluntary disclosure prior to the due date (orproperly extended due date) for the 2013 tax year,the disclosure must include each of the tax years2005 through 2012 in which they have undisclosedOVDP assets. For taxpayers who submit avoluntary disclosure after the due date (orproperly extended due date) for 2013, thedisclosure must include each of the tax years 2006through 2013 in which they have undisclosedOVDP assets. For disclosures made in successiveyears, any additional years for which the due datehas passed must be included, but a correspondingnumber of years at the beginning of the periodwill be excluded, so that each disclosure includesan eight year period.

The eight-year voluntary disclosure period doesnot include fully tax compliant years. Fortaxpayers who establish that they began filingtimely, original, compliant returns that fullyreported previously undisclosed OVDP assets (seeFAQ 35) before making the voluntary disclosure,the voluntary disclosure period will begin with theeighth year preceding the most recent year forwhich the return filing due date has not yetpassed, but will not include the compliant years.For example, for a taxpayer who had historicallyfiled income tax returns omitting the income froma securities account in Country A, who beganreporting that income on his timely, original taxand information reporting returns for 2009through 2012 without making a voluntarydisclosure, and who files a voluntary disclosure inJanuary 2014, the voluntary disclosure period willbe 2005 through 2008.

For calendar year taxpayers the voluntary disclosureperiod is the most recent eight tax years for whichthe due date has already passed. The eight yearperiod does not include current years for which there hasnot yet been non-compliance. Thus, for taxpayers whosubmit a voluntary disclosure prior to April 15, 2012(or other 2011 due date under extension), the disclosuremust include each of the years 2003 through 2010in which they have undisclosed foreign accountsand/or undisclosed foreign entities. Fiscal year taxpayersmust include fiscal years ending in calendar years 2003through 2010. For taxpayers who disclose after thedue date (or extended due date) for 2011, thedisclosure must include 2004 through 2011. Fordisclosures made in successive years, anyadditional years for which the due date has passedmust be included, but a corresponding number ofyears at the beginning of the period will beexcluded, so that each disclosure includes an eightyear period.

For taxpayers who establish that they began filingtimely, original, compliant returns that fullyreported previously undisclosed offshore accounts orassets before making the voluntary disclosure, thevoluntary disclosure period will begin with theeighth year preceding the most recent year forwhich the return filing due date has not yetpassed, but will not include the compliant years.For example, a taxpayer who had historically filedincome tax returns omitting the income from asecurities account in Country A, who beganreporting that income on his timely, original taxand information reporting returns for 2009 and2010 without making a voluntary disclosure, andwho files a voluntary disclosure in January 2012,the voluntary disclosure period will be 2003through 2008.

10. What are myoptions if myOVDP assetinvolvespassiveforeigninvestmentcompany(PFIC)issues?

What are myoptions if myaccountinvolvespassiveforeigninvestmentcompany(PFIC)issues?

A significant number of cases submitted under the2009 OVDP and 2011 OVDI involved PFICinvestments. A lack of historical information onthe cost basis and holding period of many PFICinvestments makes it difficult for taxpayers toprepare statutory PFIC computations and for theService to verify them. As a result, resolution ofvoluntary disclosure cases could be undulydelayed. Therefore, for purposes of this program,the Service is offering taxpayers an alternative tothe statutory PFIC computation that will resolvePFIC issues on a basis that is consistent with theMark to Market (MTM) methodology authorizedin IRC § 1296 but will not require completereconstruction of historical data.

To date, a significant number of cases submittedunder the 2009 OVDP and 2011 OVDI involvePFIC investments. A lack of historical informationon the cost basis and holding period of manyPFIC investments makes it difficult for taxpayersto prepare statutory PFIC computations and forthe Service to verify them. As a result, resolutionof voluntary disclosure cases could be undulydelayed. Therefore, for purposes of this program,the Service is offering taxpayers an alternative tothe statutory PFIC computation that will resolvePFIC issues on a basis that is consistent with theMark to Market (MTM) methodology authorizedin Internal Revenue Code § 1296 but will not requirecomplete reconstruction of historical data.

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The terms of this alternative resolution are:

• If elected, the alternative resolution will applyto all PFIC investments in cases that havebeen accepted into this program. The initialMTM computation of gain or loss under thismethodology will be for the first year of theOVDP application, but could be made afterthat year depending on when the first PFICinvestment was made. For example, for theearliest disclosures under this program, thefirst year of the OVDP application will be thecalendar year ending December 31, 2005.This will require a determination of the basisfor every PFIC investment, which should beagreed between the taxpayer and the Servicebased on the best available evidence.

• A tax rate of 20 percent will be applied to theMTM gain(s), MTM net gain(s) and gainsfrom all PFIC dispositions during thevoluntary disclosure period under the OVDP,in lieu of the rate contained in IRC§1291(a)(1)(B) for the amount allocable to thecurrent year and IRC §1291(c)(2) for thedeferred tax amount(s) allocable to any othertaxable year.

• A rate of 7 percent of the tax computed forPFIC investments marked to market in thefirst year of the OVDP application will beadded to the tax for that year, in lieu of theinterest charge mechanism described in IRC§§ 1291(c) and 1296(j).

• MTM losses will be limited to unreversedinclusions (generally, previously reportedMTM gains less allowed MTM losses) on aninvestment-by-investment basis in the samemanner as IRC § 1296. During the voluntarydisclosure period under the OVDP, theseMTM losses will be treated as ordinary losses(IRC § 1296(c)(1)(B)) and the tax benefit islimited to the tax rate applicable to the MTMgains derived during the voluntary disclosureperiod (20%). MTM and/or disposition lossesin any subsequent year on PFIC assets withbasis that was adjusted upward as a result ofthe alternate resolution in voluntary disclosureyears, will be treated as capital losses. Anyunreversed inclusions at the end of thevoluntary disclosure period will be reduced tozero and the MTM method will be applied toall subsequent years in accordance with IRC §1296 as if the taxpayer had acquired thePFIC stock on the last day of the last year ofthe voluntary disclosure period at its MTMvalue and made an IRC § 1296 election forthe first year beginning after the voluntarydisclosure period. Thus, any subsequent yearlosses on disposition of PFIC stock assets inexcess of unreversed inclusions arising afterthe end of the voluntary disclosure period willbe treated as capital losses.

• Regular and Alternative Minimum Tax areboth to be computed without the PFIC

The terms of this alternative resolution are:

• If elected, the alternative resolution will applyto all PFIC investments in cases that havebeen accepted into this program. The initialMTM computation of gain or loss under thismethodology will be for the first year of theOVDP application, but could be made afterthat year depending on when the first PFICinvestment was made. For example, for theearliest disclosures under this program, thefirst year of the OVDP application will be thecalendar year ending December 31, 2003. Thiswill require a determination of the basis forevery PFIC investment, which should beagreed between the taxpayer and the Servicebased on the best available evidence.

• A tax rate of 20% will be applied to theMTM gain(s), MTM net gain(s) and gainsfrom all PFIC dispositions during thevoluntary disclosure period under the OVDP,in lieu of the rate contained in IRC §1291(a)(1)(B) for the amount allocable to thecurrent year and IRC §1291(c)(2) for thedeferred tax amount (s) allocable to any othertaxable year.

• A rate of 7% of the tax computed for PFICinvestments marked to market in the first yearof the OVDP application will be added to thetax for that year, in lieu of the interest chargemechanism described in IRC §§ 1291(c) and1296(j).

• MTM losses will be limited to unreversedinclusions (generally, previously reportedMTM gains less allowed MTM losses) on aninvestment-by-investment basis in the samemanner as IRC § 1296. During the voluntarydisclosure period under the OVDP, theseMTM losses will be treated as ordinary losses(IRC 1296(c)(1)(B)) and the tax benefit islimited to the tax rate applicable to the MTMgains derived during the voluntary disclosureperiod (20%). MTM and/or disposition lossesin any subsequent year on PFIC assets withbasis that was adjusted upward as a result ofthe alternate resolution in voluntary disclosureyears, will be treated as capital losses. Anyunreversed inclusions at the end of thevoluntary disclosure period will be reduced tozero and the MTM method will be applied toall subsequent years in accordance with IRC §1296 as if the taxpayer had acquired thePFIC stock on the last day of the last year ofthe voluntary disclosure period at its MTMvalue and made an IRC § 1296 election forthe first year beginning after the voluntarydisclosure period. Thus, any subsequent yearlosses on disposition of PFIC stock assets inexcess of unreversed inclusions arising afterthe end of the voluntary disclosure period willbe treated as capital losses.

• Regular and Alternative Minimum Tax areboth to be computed without the PFIC

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dispositions or MTM gains and losses. Thetax from the PFIC transactions (20% plus the7% for the first year, if applicable) is added to(or subtracted from) the applicable total tax(either regular or AMT, whichever is higher).The tax and interest (i.e., the 7% for the firstyear of the voluntary disclosure) computedunder the OVDP alternative MTM can beadded to the applicable total tax (eitherregular or AMT, whichever is higher) andplaced on the amended return in the margin,with a supporting schedule.

• Underpayment interest and penalties on thedeficiency are computed in accordance withthe Internal Revenue Code and the terms ofthe OVDP.

• For any PFIC investment retained beyond thevoluntary disclosure period, the taxpayer mustcontinue using the MTM method, but willapply the normal statutory rules of IRC §1296 as well as the provisions of IRC §§1291-1298, as applicable.

Before electing the alternative PFIC resolution, ataxpayer with PFIC investments should consult histax advisors to ensure that the issue is material inhis case and that the alternative is in factpreferable to the statutory computation in hissituation. If the taxpayer does not elect to use thealternative PFIC computation, the PFIC provisionsof IRC §§ 1291-1298 apply.

dispositions or MTM gains and losses. Thetax from the PFIC transactions (20% plus the7% for the first year, if applicable) is added to(or subtracted from) the applicable total tax(either regular or AMT, whichever is higher).The tax and interest (i.e., the 7% for the firstyear of the voluntary disclosure) computedunder the OVDP alternative MTM can beadded to the applicable total tax (eitherregular or AMT, whichever is higher) andplaced on the amended return in the margin,with a supporting schedule.

• Underpayment interest and penalties on thedeficiency are computed in accordance withthe Internal Revenue Code and the terms ofthe OVDP.

• For any PFIC investment retained beyond thevoluntary disclosure period, the taxpayer mustcontinue using the MTM method, but willapply the normal statutory rules of section1296 as well as the provisions of IRC §§1291-1298, as applicable.

Before electing the alternative PFIC resolution,taxpayers with PFIC investments should consulttheir tax advisors to ensure that the issue ismaterial in their cases and that the alternative is infact preferable to the statutory computation in theirsituation. If the taxpayer does not elect to use thealternative PFIC computation, the PFIC provisionsof §§ 1291-1298 apply.

11. Previouslydeleted.

ELIGIBILITY FOR THIS PROGRAM

12. Who iseligible tomake avoluntarydisclosureunder thisprogram?

Who iseligible tomake avoluntarydisclosureunder thisprogram?

Taxpayers who have legal source funds invested inundisclosed OVDP assets (see FAQ 35) and meetthe requirements of IRM 9.5.11.9 are eligible toapply for IRS Criminal Investigation’s VoluntaryDisclosure Practice and the OVDP penalty regime.The OVDP is available only to address thetaxpayer’s own liability. Individuals whofacilitated the tax noncompliance of others are noteligible to participate in OVDP.

Taxpayers who have made a submission under theStreamlined Filing Compliance Procedures are noteligible to participate in OVDP. See FAQ 21 forother ways a taxpayer may be rendered ineligibleto participate in the OVDP.

Taxpayers who have undisclosed offshore accounts orassets and meet the requirements of IRM 9.5.11.9are eligible to apply for IRS CriminalInvestigation’s Voluntary Disclosure Practice andthe OVDP penalty regime. But see FAQ 21 forways in which a taxpayer may be renderedineligible.

13. Are entities,such ascorporations,partnershipsand trustseligible tomakevoluntarydisclosures?

Are entities,such ascorporations,partnershipsand trustseligible tomakevoluntarydisclosures?

Yes. Entities are eligible to participate in theOVDP.

Yes, entities are eligible to participate in theOVDP.

14. I’m currentlyunder

I’m currentlyunder

No. If the IRS has initiated a civil examination forany year, regardless of whether it relates to

No. If the IRS has initiated a civil examination,regardless of whether it relates to undisclosed

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examination.May Iparticipate inthe OVDP?

examination.Can I come inundervoluntarydisclosure?

undisclosed OVDP assets (see FAQ 35), thetaxpayer will not be eligible to participate in theOVDP. A taxpayer under criminal investigation byCI is also ineligible. In these circumstances, thetaxpayer or the taxpayer’s representative shoulddiscuss undisclosed financial accounts and assetswith the agent.

foreign accounts or undisclosed foreign entities, thetaxpayer will not be eligible to come in under theOVDP. Taxpayers under criminal investigation byCI are also ineligible. The taxpayer or thetaxpayer’s representative should discuss the offshoreaccounts with the agent.

15. What if ataxpayer hasalready filedamendedreturnsreportingincome fromOVDP assetswithoutmaking avoluntarydisclosure(i.e. ‘‘quietdisclosure’’)?

What if thetaxpayer hasalready filedamendedreturnsreporting theadditionalunreportedoffshoreincome,withoutmaking avoluntarydisclosure(i.e. quietdisclosure)?

The IRS is aware that some taxpayers have made‘‘quiet disclosures’’ by filing amended returns, byfiling delinquent FBARs, and paying any relatedtax and interest for previously unreported incomefrom OVDP assets (see FAQ 35) without otherwisenotifying the IRS. Taxpayers who have alreadymade ‘‘quiet disclosures’’ are encouraged toparticipate in the OVDP by submitting anapplication, along with copies of their previouslyfiled returns (original and amended), and all otherrequired documents and information (see FAQ 25)to the IRS’s Voluntary Disclosure Coordinator (seeFAQ 24). Taxpayers are encouraged to availthemselves of the protection from criminalprosecution and the favorable penalty structureoffered under the OVDP. Unlike a voluntarydisclosure through the OVDP, quiet disclosuresprovide no protection from criminal prosecutionand may lead to civil examination and theimposition of all applicable penalties.

The IRS is aware that some taxpayers haveattempted so-called ‘‘quiet’’ disclosures by filingamended returns and paying any related tax andinterest for previously unreported offshore incomewithout otherwise notifying the IRS. Taxpayerswho have already made ‘‘quiet’’ disclosures areeligible to take advantage of the penalty frameworkapplicable to this program by submitting anapplication, along with copies of their previouslyfiled returns (original and amended) to the IRS’sVoluntary Disclosure Coordinator (see FAQ 24).

Taxpayers are strongly encouraged to come forwardunder the OVDP to make timely, accurate, and completedisclosures. Those taxpayers making ‘‘quiet’’ disclosuresshould be aware of the risk of being examined andpotentially criminally prosecuted for all applicable years.

16. Consolidatedinto FAQ 15.

Some taxpayershave madequietdisclosures byfiling amendedreturns. Willthe IRS auditthesetaxpayers? Ifso, will they beeligible for the27.5 percentoffshorepenalty? Is theIRS reallygoing toprosecutesomeone whofiled anamended returnand correctlyreported alltheir income?

The IRS is reviewing amended returns and could selectany amended return for examination. The IRS hasidentified, and will continue to identify, amended taxreturns reporting increases in income. The IRS will closelyreview these returns to determine whether enforcementaction is appropriate. If a return is selected forexamination, the 27.5 percent offshore penalty would notbe available. When criminal behavior is evident and thedisclosure does not meet the requirements of a voluntarydisclosure under IRM 9.5.11.9, the IRS may recommendcriminal prosecution to the Department of Justice.

17. Deleted.FAQ 17 hasbeen replacedandsupersededby section 3in ‘‘OptionsAvailable ForU.S.TaxpayerswithUndisclosedForeign

I have properlyreported all mytaxable incomebut I onlyrecently learnedthat I shouldhave been filingFBARs in prioryears to reportmy personalforeign bankaccount or toreport the fact

The purpose for the voluntary disclosure practice is toprovide a way for taxpayers who did not report taxableincome in the past to come forward voluntarily and resolvetheir tax matters. Thus, if you reported, and paid tax on,all taxable income but did not file FBARs, do not use thevoluntary disclosure process.

For taxpayers who reported, and paid tax on, all theirtaxable income for prior years but did not file FBARs, youshould file the delinquent FBARs according to the FBARinstructions and include a statement explaining why theFBARs are filed late. Through June 30, 2013, you mayfile electronically or by sending paper forms to Department

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Assets.’’ Ifyou havecircumstancescovered byformer FAQ17, youshould notuse OVDPand shouldsee section 3of the‘‘OptionsAvailable ForU.S.TaxpayerswithUndisclosedForeignAccounts.’’

that I havesignatureauthority overbank accountsowned by myemployer. MayI come forwardunder this newprogram tocorrect this?

of Treasury, Post Office Box 32621, Detroit, MI48232-0621. After June 30, 2013, you must fileelectronically. If you are unable to file electronically, youmay contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or (if calling from outside the United States)1-703-905-3975 to determine possible alternatives fortimely reporting. The IRS will not impose a penalty forthe failure to file the delinquent FBARs if there are nounderreported tax liabilities and you have not previouslybeen contacted regarding an income tax examination or arequest for delinquent returns. Non-resident taxpayersshould also review the Filing Compliance Procedures forNon-Resident U.S. Taxpayers if they do not qualify forthe procedures described in this FAQ.

NOTE: Taxpayers filing FBARs electronically do notcurrently have the technological ability to include astatement explaining why the FBARs are filed late. Untilsuch time that they have the ability, it is sufficient to filethe FBARs electronically, retain the statement, and submitthe statement to the Service upon request.

18. Deleted.FAQ 18 hasbeen replacedandsupersededby section 4in ‘‘OptionsAvailable ForU.S.TaxpayerswithUndisclosedForeignAssets.’’ Ifyou havecircumstancescovered byformer FAQ18, youshould notuse OVDPand shouldsee section 3of the‘‘OptionsAvailable ForU.S.TaxpayerswithUndisclosedForeignAccounts.’’

Question 17states that ataxpayer whoonly failed tofile an FBARshould not usethis process.What about ataxpayer whoonly hasdelinquentForm 5471s orForm 3520sbut no tax due?Does thattaxpayer falloutside thisvoluntarydisclosureprocess?

A taxpayer who has failed to file tax information returns,such as Form 5471 for controlled foreign corporations(CFCs) or Form 3520 for foreign trusts but who hasreported, and paid tax on, all their taxable income withrespect to all transactions related to the CFCs or foreigntrusts, should file delinquent information returns with theappropriate service center according to the instructions forthe form and attach a statement explaining why theinformation returns are filed late. (The Form 5471 shouldbe submitted with an amended return showing no changeto income or tax liability.)

Include at the top of the first page of each informationreturn ‘‘OVDI — FAQ #18’’ to indicate that the returnsare being submitted under this procedure. This is veryimportant to ensure your returns are processed throughthis procedure.

The IRS will not impose a penalty for the failure to file thedelinquent Forms 5471 and 3520 if there are nounderreported tax liabilities and you have not previouslybeen contacted regarding an income tax examination or arequest for delinquent returns.

Non-resident taxpayers should also review the New FilingCompliance Procedures for Non-Resident U.S. Taxpayersif they do not qualify for the procedures described in thisFAQ.

19. Deleted. Is a taxpayerwho previouslysought reliefunder theIRS’straditionalVoluntaryDisclosurePractice beforethe OVDP wasannounced

A taxpayer who made a voluntary disclosure afterSeptember 9, 2011 but before January 9, 2012 is eligiblefor the OVDP, provided that he or she otherwise meets therequirements of IRM 9.5.11.9.

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eligible for theterms of theOVDP?

20. If I don’thave theability to fullpay, can Istillparticipate inthis program?

If I don’thave theability to fullpay can I stillparticipate inthis program?

Yes. The terms of this program require thetaxpayer to pay with his submission the tax,interest, offshore penalty, and accuracy-relatedpenalty, and, if applicable, the failure-to-file andfailure-to-pay penalties. However, it is possible fora taxpayer who is unable to make full payment ofthese amounts to request the IRS to consider otherpayment arrangements. If you cannot pay the totalamount of tax, interest, offshore penalty, andother penalties required, submit your proposedpayment arrangement and a completed CollectionInformation Statement (Form 433-A, CollectionInformation Statement for Wage Earners andSelf-employed Individuals, or Form 433-B,Collection Information Statement for Businesses,Collection Information Statement for Businesses,as appropriate). The burden will be on thetaxpayer to establish inability to pay, to thesatisfaction of the IRS, based on full disclosure ofall assets and income sources, domestic andforeign, under the taxpayer’s control. Assumingthat the IRS determines that the inability to fullypay is genuine, the taxpayer must work out otherfinancial arrangements, acceptable to the IRS, toresolve all outstanding liabilities to be entitled tothe penalty structure of this program.

Yes. The terms of this program require thetaxpayer to pay the tax, interest, andaccuracy-related penalty, and, if applicable thefailure to file and failure to pay penalties with theirsubmission. However, it is possible for a taxpayerwho is unable to make full payment of theseamounts to request the IRS to consider otherpayment arrangements (see FAQ 25). The burdenwill be on the taxpayer to establish inability to pay,to the satisfaction of the IRS, based on fulldisclosure of all assets and income sources,domestic and offshore, under the taxpayer’s control.Assuming that the IRS determines that theinability to fully pay is genuine, the taxpayer mustwork out other financial arrangements, acceptableto the IRS, to resolve all outstanding liabilities, inorder to be entitled to the penalty relief under thisprogram.

21. If the IRShas served aJohn Doesummons ormade a treatyrequestseekinginformationthat mayidentify ataxpayer asholding anundisclosedOVDP asset,does thatmake thetaxpayerineligible tomake avoluntarydisclosureunder thisprogram?

If the IRShas served aJohn Doesummons ormade a treatyrequestseekinginformationthat mayidentify ataxpayer asholding anundisclosedforeign accountor undisclosedforeign entity,does thatmake thetaxpayerineligible tomake avoluntarydisclosureunder thisprogram?

No. The mere fact that the Service served a JohnDoe summons, made a treaty request, or has takensimilar action does not make every member of theJoe Doe class or group identified in the treatyrequest or other action ineligible to participate. Butsuch activity may subject a taxpayer to a higheroffshore penalty at the rate of 50 percent. SeeFAQ 7.2.

Once the Service or the Department of Justiceobtains information under a John Doe summons,treaty request, or other similar action that providesevidence of a specific taxpayer’s noncompliancewith the tax laws or Title 31 reportingrequirements, that particular taxpayer will becomeineligible for OVDP and Criminal Investigation’sVoluntary Disclosure Practice. For this reason, ataxpayer concerned that a party subject to a JohnDoe summons, treaty request, or similar actionwill provide information about him to the Serviceshould apply to make a voluntary disclosure assoon as possible.

Furthermore, there are two other ways in which anotherwise eligible taxpayer will become ineligible.First, if a taxpayer appeals a foreign taxadministrator’s decision authorizing the providingof account information to the IRS and fails toserve the notice as required under existing law, see18 U.S.C. 3506, of any such appeal and/or otherdocuments relating to the appeal on the AttorneyGeneral of the United States at the time suchnotice of appeal or other document is submitted,the taxpayer will be ineligible to participate.Second, the IRS may determine that certain

No. The mere fact that the Service served a JohnDoe summons, made a treaty request or has takensimilar action does not make every member of theJoe Doe class or group identified in the treatyrequest or other action ineligible to participate.However, once the Service or the Department ofJustice obtains information under a John Doesummons, treaty request or other similar actionthat provides evidence of a specific taxpayer’snoncompliance with the tax laws or Title 31reporting requirements, that particular taxpayerwill become ineligible for OVDP and CriminalInvestigation’s Voluntary Disclosure Practice. Forthis reason, a taxpayer concerned that a partysubject to a John Doe summons, treaty request orsimilar action will provide information about himto the Service should apply to make a voluntarydisclosure as soon as possible.

Furthermore, there are two other ways in which ataxpayer will become ineligible. First, if a taxpayerappeals a foreign tax administrator’s decisionauthorizing the providing of account informationto the IRS and fails to serve the notice as requiredunder existing law, see 18 U.S.C. 3506, of anysuch appeal and/or other documents relating tothe appeal on the Attorney General of the UnitedStates at the time such notice of appeal or otherdocument is submitted, the taxpayer will beineligible to participate. Second, the IRS mayannounce that certain taxpayer groups that have orhad accounts at specific financial institutions willbe ineligible due to U.S. government actions inconnection with the specific financial institution.Such announcements will provide notice of the prospective

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taxpayer groups that have or had accounts held ata specific financial institution will be ineligible dueto U.S. government actions in connection with thespecific financial institution.

date upon which eligibility for specific taxpayer groups willbe posted to the IRS website.

OVDP PROCESS

22. Can myrepresentativetalk to theIRS withoutrevealing myidentity?

Can myrepresentativetalk to theIRS withoutrevealing myidentity?

Yes, but hypothetical situations present thepotential for misunderstandings. Hypotheticalsrarely contain all relevant facts. Posing ahypothetical does not satisfy the requirements formaking a voluntary disclosure. If the IRS receivesinformation relating specifically to the taxpayer’sundisclosed OVDP assets (see FAQ 35) while thehypothetical question is pending, the taxpayer maybecome ineligible to make a voluntary disclosure.

If practitioners have questions about the terms ofthe voluntary disclosure program, they shouldcontact the IRS OVDP Hotline at (267) 941-0020or find more information on the 2012 OffshoreVoluntary Disclosure Program page.

Yes, but hypothetical situations present a potentialfor misunderstanding that exists when there is noassurance that the hypothetical contains all relevantfacts. In addition, posing a situation as a hypotheticaldoes not satisfy the requirements for making avoluntary disclosure. If the IRS receivesinformation relating specifically to the taxpayer’sundisclosed foreign accounts or undisclosed foreignentities while the hypothetical question is pending,the taxpayer may become ineligible to make avoluntary disclosure.

If practitioners have questions about the terms ofthe voluntary disclosure program, they shouldcontact the IRS OVDP Hotline at (267) 941-0020or find more information on the 2012 OffshoreVoluntary Disclosure Program page.

23. How do Irequestpreclearancebefore Isubmit myoffshorevoluntarydisclosure?

How do Irequestpre-clearancebefore Isubmit myoffshorevoluntarydisclosure?

For the OVDP, the preclearance process is asfollows:

1. Taxpayers or representatives send afacsimile to the IRS — CriminalInvestigation Lead Development Center(LDC) with:

(a) Applicant identifying informationincluding complete names, dates ofbirth (if applicable), tax identificationnumbers, addresses, and telephonenumbers.

(b) Identifying information of allfinancial institutions at whichundisclosed OVDP assets (see FAQ35) were held. Identifying informationfor financial institutions includescomplete names (including all DBAsand pseudonyms), addresses, andtelephone numbers.

(c) Identifying information of all foreignand domestic entities (e.g.,corporations, partnerships, limitedliability companies, trusts,foundations) through which theundisclosed OVDP assets (see FAQ 35)were held by the taxpayer seeking toparticipate in the OVDP; this does notinclude any entities traded on a publicstock exchange. Information must beprovided for both current anddissolved entities. Identifyinginformation for entities includescomplete names (including all DBAsand pseudonyms), employeridentification numbers (if applicable),addresses, and the jurisdiction inwhich the entities were organized.

For the OVDP, pre-clearance may be requested asfollows:

1. Taxpayers or representatives send afacsimile to the IRS — CriminalInvestigation Lead Development Center(LDC) with:

(a) identifying information (name, date ofbirth, social security number and address)and

(b) an executed power of attorney (ifrepresented)

at (267) 941-1115 to request pre-clearance beforemaking an offshore voluntary disclosure. In thecase of jointly filed returns, if each spouseintends to apply for OVDP, each spouse shouldrequest pre-clearance.

2. Criminal Investigation will then notifytaxpayers or their representatives via faxwhether or not they are cleared to make anoffshore voluntary disclosure.

3. Taxpayers deemed cleared should follow the stepsoutlined below (FAQ 24) within 45 days fromreceipt of the fax notification to make an offshorevoluntary disclosure.

Pre-clearance does not guarantee a taxpayeracceptance into the OVDP. Taxpayers musttruthfully, timely, and completely comply with allprovisions of the OVDP.

Taxpayers or representatives with questionsregarding pre-clearance may call the IRS-CI OVDPhotline at (267) 941-1607. For all other offshorevoluntary disclosure questions call the IRS OVDPHotline at (267) 941-0020.

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(d) Executed power of attorney forms (ifrepresented).

The LDC fax number to requestpreclearance before making an offshorevoluntary disclosure is (267) 941-1115.In the case of jointly filed returns, ifeach spouse intends to apply forOVDP, each spouse should requestpreclearance.

2. Criminal Investigation will notify taxpayersor their representatives via fax whether ornot they are eligible to make an offshorevoluntary disclosure. It may take up to 30days for Criminal Investigation to notifytaxpayers or their representatives of thedecision.

Preclearance does not guarantee a taxpayeracceptance into the OVDP. Taxpayers pre-clearedfor OVDP must follow the steps outlined below(FAQ 24) within 45 days from receipt of the faxnotification to make an offshore voluntarydisclosure. Taxpayers must truthfully, timely, andcompletely comply with all provisions of theOVDP. Taxpayers or representatives with questionsregarding preclearance may call the IRS-CI OVDPHotline at (267) 941-1607. For all other offshorevoluntary disclosure questions call the IRS OVDPHotline at (267) 941-0020.

24. How do Imake anoffshorevoluntarydisclosure,and whereshould Isubmit myoffshorevoluntarydisclosure todeterminewhether I amconditionallyacceptedunder thisprogram?

How do Imake anoffshorevoluntarydisclosureand whereshould Isubmit myoffshorevoluntarydisclosure todeterminewhether I ampreliminarilyacceptedunder thisprogram?

For the OVDP, submit an offshore voluntarydisclosure as follows:

1. Taxpayers or their representatives shouldmail their Offshore Voluntary DisclosureLetter and attachment to the followingaddress:

Internal Revenue ServiceVoluntary Disclosure Coordinator1-D04-1002970 Market StreetPhiladelphia, PA 19104

2. Criminal Investigation will review theOffshore Voluntary Disclosure Letter andnotify taxpayers or representatives by mailor facsimile whether their offshorevoluntary disclosures have beenpreliminarily accepted as timely ordeclined. Criminal Investigation intends tocomplete its work within 45 days of receiptof a complete Offshore VoluntaryDisclosure Letter.

Once a taxpayer’s disclosure has beenpreliminarily accepted by CI as timely, thetaxpayer must complete the submission andcooperate with the civil examiner in the resolutionof the civil liability before the disclosure isconsidered complete.

All non-offshore voluntary disclosures not coveredunder this program should follow the domesticvoluntary disclosure instructions at the bottom ofthe How to make an Offshore Voluntary

For the OVDP, an offshore voluntary disclosure issubmitted as follows:

1. Taxpayers or their representatives shouldmail their Offshore Voluntary DisclosureLetter and attachment to the followingaddress:

Internal Revenue ServiceVoluntary Disclosure Coordinator1-D04-1002970 Market StreetPhiladelphia, PA 19104

2. Criminal Investigation will review theOffshore Voluntary Disclosures letterreceived and notify taxpayers orrepresentatives by mail or facsimilewhether their offshore voluntary disclosurehave been preliminarily accepted ordeclined. It is intended that CriminalInvestigation will complete its work within45 days of receipt of a complete OffshoreVoluntary Disclosures letter.

Preliminary acceptance into the OVDP is conditionedupon the information provided by the taxpayer being, andremaining, truthful, timely, and complete.

All non-offshore voluntary disclosures not coveredunder this program should follow the domesticvoluntary disclosure instructions at the bottom ofthe How to make an Offshore VoluntaryDisclosure page.

Taxpayers who are making both an offshorevoluntary disclosure and a domestic voluntary

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Disclosure page.

Taxpayers who are making both an offshorevoluntary disclosure and a domestic voluntarydisclosure should follow the process for offshorevoluntary disclosures, but indicate on the OffshoreVoluntary Disclosure Letter that they are alsomaking a domestic voluntary disclosure.

disclosure should follow the process for offshorevoluntary disclosures, but indicate on the OffshoreVoluntary Disclosure Letter that they are alsomaking a domestic voluntary disclosure.

24.1 What shouldI do if myspouse alsowishes tomake avoluntarydisclosureunderOVDP?

What shouldI do if myspouse alsowishes tomake avoluntarydisclosureunderOVDP?

In situations where spouses both desire toparticipate in OVDP, they may do so jointly orseparately. If spouses make a joint submission,they must include all required information anddocuments for each spouse and clearly indicate theintention to disclose jointly. If spouses makeseparate submissions, each spouse must completeand submit all required information anddocuments. See FAQs 22 through 25.

In situations where spouses both desire toparticipate in OVDP, they may do so jointly orseparately. If the joint approach is chosen, the spousesshould be sure to include all required informationand documents for each spouse and clearlyindicate the intention to disclose jointly. If theseparate approach is chosen, each spouse shouldseparately complete and submit all requiredinformation and documents. See FAQs 22 through25.

25. After I amnotified byCI that mydisclosure ispreliminarilyaccepted astimely, whatotherinformationwill I berequired toprovide?

After I amnotified byCI that mydisclosure ispreliminarilyaccepted,what otherinformationwill I have toprovide?

The letter from CI will instruct the taxpayer or hisrepresentative to submit the full voluntarydisclosure submission to the Austin Campuswithin 90 days of the date of the timelinessdetermination. The voluntary disclosuresubmission must be sent in two separate parts.

1. Payment to the Department of Treasury inthe total amount of tax, interest, offshorepenalty, accuracy-related penalty, and, ifapplicable, the failure-to-file andfailure-to-pay penalties, for the voluntarydisclosure period must be sent withinformation identifying the taxpayer name,taxpayer identification number, and yearsto which the payments relate. To ensurepayments are properly posted to thetaxpayer’s account, separate checks shouldbe made for each tax year which wouldinclude all applicable tax, interest,accuracy-related penalties, andfailure-to-file and failure-to-pay penalties.The offshore penalty should be paid by aseparate check. These payments areadvance payments; consequently, anycredit or refund of the payments is subjectto the limitations of IRC § 6511. If youcannot pay the total amount of tax,interest, offshore penalty, and otherpenalties as described above, submit yourproposed payment arrangement and acompleted Collection InformationStatement (Form 433-A, CollectionInformation Statement for Wage Earnersand Self-employed Individuals, or Form433-B, Collection Information Statementfor Businesses, as appropriate) (see FAQ20). Send letters containing the taxpayer’sidentifying information and all checks in asingle envelope to:

Internal Revenue Service3651 S. I H 35Stop 1919 AUSCAustin, TX 78741

The letter from CI will instruct the taxpayer ortheir representative to submit the full voluntarydisclosure submission to the Austin Campuswithin 90 days of the date of the letter. Thevoluntary disclosure submission must be sent intwo separate parts.

1. A check payable to the Department ofTreasury in the total amount of tax,interest, accuracy-related penalty, and, ifapplicable, the failure to file and failure topay penalties, for the voluntary disclosureperiod must be sent along with informationidentifying the taxpayer name, taxpayeridentification number, and years to whichthe payment relates to the following address. Ifyou cannot pay the total amount of tax,interest, and penalties as described above,submit your proposed paymentarrange-ment and a completed CollectionInformation Statement (Form 433-A,Collection Information Statement for WageEarners and Self-employed Individuals, orForm 433-B, Collection InformationStatement for Businesses, as appropriate)(see FAQ 20).

Internal Revenue Service3651 S. I H 35 Stop 1919 AUSCAustin, TX 78741ATTN: Offshore Voluntary DisclosureProgram

2. All other required items listed below mustbe sent to:

Internal Revenue Service3651 S. I H 35 Stop 4301 AUSCAustin, TX 78741ATTN: Offshore Voluntary DisclosureProgram. Copies of previously filed original (and, if

applicable, previously filed amended) federalincome tax returns for tax years covered bythe voluntary disclosure;

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ATTN: Offshore Voluntary DisclosureProgram

2. All other required items listed below mustbe sent to:

Internal Revenue Service3651 S. I H 35Stop 4301 AUSCAustin, TX 78741ATTN: Offshore Voluntary DisclosureProgram

1. All applicants: Copies of previously filedoriginal (and, if applicable, previously filedamended) federal income tax returns fortax years covered by the voluntarydisclosure;

2. All applicants: Complete and accurateamended federal income tax returns (forindividuals, Form 1040X) or original Form1040 (if delinquent) for all tax yearscovered by the voluntary disclosure, withapplicable schedules detailing the amountand type of previously unreported incomefrom foreign financial accounts ordomestic sources (e.g., Schedule B forinterest and dividends, Schedule D forcapital gains and losses, Schedule E forincome from partnerships, S corporations,estates or trusts and, for years after 2010,Form 8938, Statement of Specified ForeignFinancial Assets). For taxpayers whobegan filing timely, original, compliantreturns that fully reported previouslyundisclosed foreign financial accountsbefore making the voluntary disclosure forcertain years of the offshore disclosureperiod, copies of the previously filedreturns for the compliant years. If you aresubmitting a copy of a previously filedreturn, write ‘‘COPY’’ on the top of thefirst page of the return.

3. All applicants: Copy of your completedand signed Offshore Voluntary DisclosureLetter (including enclosures andattachments) submitted to CriminalInvestigation.

4. All applicants: A completed ForeignAccount or Asset Statement for eachpreviously undisclosed OVDP asset duringthe voluntary disclosure period.

5. All applicants: A completed and signedTaxpayer Account Summary With PenaltyCalculation.

6. All applicants: Properly completed andsigned agreements to extend the period oftime to assess tax (including tax penalties)and to assess FBAR penalties. Theagreements to extend the period of time toassess tax and FBAR penalties must followthe instructions provided. Failure toextend the period of time to assess tax and

. For taxpayers who began filing timely, original,compliant returns that fully reported previouslyundisclosed offshore accounts or assets before makingthe voluntary disclosure for certain years of theoffshore disclosure period, copies of the previouslyfiled returns for the compliant years.. Complete and accurate amended federalincome tax returns (for individuals, Form1040X, or original Form 1040 if delinquent)for all tax years covered by the voluntarydisclosure, with applicable schedules detailingthe amount and type of previouslyunreported income from the offshore account orentity or domestic source (e.g., Schedule B forinterest and dividends, Schedule D for capitalgains and losses, Schedule E for income frompartnerships, S corporations, estates or trustsand, for years after 2010, Form 8938,Statement of Specified Foreign FinancialAssets).. A completed Foreign Account or AssetStatement for each previously undisclosedforeign account or asset during the voluntarydisclosure period, available on our 2012 OffshoreVoluntary Disclosure Program page. Properlycompleted and signed Taxpayer AccountSummary With Penalty Calculation, alsoavailable at the previous link.. For those applicants disclosing offshorefinancial accounts with an aggregate highestaccount balance in any year of $500,000 or more,copies of offshore financial account statementsreflecting all account activity for each of thetax years covered by your voluntarydisclosure. For those applicants disclosing offshorefinancial accounts with an aggregate highest accountbalance of less than $500,000, copies of offshorefinancial account statements reflecting all accountactivity for each of the tax years covered by yourvoluntary disclosure must be readily available uponrequest.

• Properly completed and signed agreements to extendthe period of time to assess tax (including taxpenalties) and to assess FBAR penalties.

Please see the submission requirements on the 2012Offshore Voluntary Disclosure Program, for a completedescription of the forms and other information that mustbe submitted.

You may also be contacted by an examiner with arequest for specific additional information if neededto process your voluntary disclosure. The examinerwill certify that your voluntary disclosure iscorrect, accurate, and complete by reviewing yourrecords along with your amended or delinquentincome tax returns. The examiner will also verifythe tax, interest, and civil penalties you owe.

A full and complete submission is required foracceptance into the program.

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assess FBAR penalties according to theinstructions will render your OVDPsubmission incomplete.

7. All applicants disclosing foreign financialaccounts: Copies of filed Reports ofForeign Bank and Financial Accounts(commonly known as FBARs reported onFinCEN Form 114, previously Form TD F90-22.1) for foreign financial accountsmaintained during the period of yourvoluntary disclosure. See FAQs 44-46 forfurther information on FBAR filingrequirements, including the requirementthat FBARs be filed electronically.

8. All applicants: Copies of statements for allfinancial accounts reflecting all accountactivity for each of the tax years coveredby your voluntary disclosure. For OVDPassets (see FAQ 35) other than foreignfinancial accounts, provide all relevantdocuments pertaining to the asset. Forexample, if a taxpayer has foreign issuedlife insurance with cash value, provide alldocuments governing the policy and, ifany, all legal and tax opinions issued to thetaxpayer relating to the policy.

9. All applicants disclosing foreign entities:A statement identifying all foreignentities, whether held directly orindirectly, for the tax years included in thevoluntary disclosure, and a statementconcerning ownership or control of suchentities.

10. All applicants disclosing foreign entities:If foreign entities held OVDP assets (seeFAQ 35), provide complete and accurateinformation returns (or amended returns,if applicable) required to be filed,including but not limited to Forms 3520,3520-A, 5471, 5472, 926, 8865, and 8938for all tax years included in the voluntarydisclosure. If the taxpayer requests thatthe Service waive information reportingrequirements, the taxpayer must submit acompleted and signed ‘‘Statement onAbandoned Entities’’ form. See FAQ 29.

11. Applicants with estate and gift tax issues:If the taxpayer is a decedent’s estate, or isan individual who participated in thefailure to report an OVDP asset (see FAQ35) in a required gift or estate tax return,either as executor or advisor, providecomplete and accurate amended estate orgift tax returns (original estate or gift taxreturns if not previously filed) for taxyears included in the voluntary disclosurecorrecting the underreporting oromission of OVDP assets (see FAQ 35).

12. Applicants with Passive ForeignInvestment Company (PFIC) issues: Astatement whether the amended ordelinquent returns involve PFIC issues

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during the tax years covered by theOVDP period, and if so, whether thetaxpayer chooses to elect the alternativeto the statutory PFIC computation thatresolves PFIC issues on a basis that isconsistent with the mark to market(MTM) methodology authorized in IRC §1296 but does not require completereconstruction of historical data. SeeFAQ 10.

13. Applicants with Canadian registeredretirement savings plans (RRSPs) orregistered retirement income funds(RRIFs) who wish to make late electionsto defer U.S. tax on earnings: Provide thedocuments required in FAQ 54.

14. You may also be contacted by anexaminer for specific additionalinformation to process your voluntarydisclosure. The examiner will certify thatyour voluntary disclosure is correct,accurate, and complete by reviewing yourrecords along with your amended ordelinquent income tax returns. Theexaminer will also verify the tax, interest,and civil penalties you owe.

15. A complete submission is required foracceptance into the program.

Taxpayers may submit voluminousdocuments not requiring originaltaxpayer signatures (e.g., bankstatements, entity organizationdocuments, etc.) on a compact disc (CD)or a USB removable storage device (flashdrive). See FAQ 25.2.

25.1 What if Icannot makea completesubmissionby the datespecified inthe letterfromCriminalInvestigation?

What if Icannot makea completesubmissionby the datespecified inthe letterfromCriminalInvestigation?

A taxpayer may request an extension of thedeadline to complete his submission. A taxpayerrequesting an extension must submit his name,address, date of birth, social security number, andtelephone number and should submit as much ofthe information described in FAQ 25 as possiblewith his written request for extension, including ata minimum the properly completed and signedagreements to extend the period of time to assesstax (including tax penalties) and to assess FBARpenalties.

Requests for up to a 90-day extension must includea statement of those items that are missing, thereasons why they are not included, and the stepstaken to secure them. Requests for extensions mustbe made in writing and sent to the Austin Campuson or before the date specified in the letter fromCriminal Investigation for completing thevoluntary disclosure:

Internal Revenue Service3651 S. I H 35 Stop 4301 AUSCAustin, TX 78741ATTN: Offshore Voluntary Disclosure Program

A taxpayer may request an extension of thedeadline to complete his or her submission. Ataxpayer requesting an extension must submit hisname, address, date of birth, and social securitynumber and should submit as much of theinformation described in FAQ 25 as possible withhis written request for extension, including at aminimum the properly completed and signedagreements to extend the period of time to assesstax (including tax penalties) and to assess FBARpenalties.

Requests for up to a 90 day extension must includea statement of those items that are missing, thereasons why they are not included, and the stepstaken to secure them. Requests for extensions mustbe made in writing and sent to the Austin Campuson or before the date specified in the letter fromCriminal Investigation for completing thevoluntary disclosure:

Internal Revenue Service3651 S. I H 35 Stop 4301 AUSCAustin, TX 78741ATTN: Offshore Voluntary Disclosure Program

25.2 Are there anyrequirements

Yes. These procedures may be used only byprofessional firms with established record

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or proceduresforsubmittingdocumentson a compactdisc (CD) ora USBremovablestoragedevice (flashdrive)?

retention policies.

1. The representative must submit anoriginal, signed paper Agreement forDigital Submission of OVDPDocumentation. A copy of the Form 2848must be attached. There must be onesigned agreement for each taxpayer. Theonly exception is that married taxpayerswho are submitting joint returns for allyears included in the disclosures maysubmit only one Agreement for DigitalSubmission of OVDP documentation.

2. All other required OVDP documents otherthan the Agreement for DigitalSubmission of OVDP documentation maybe submitted digitally.

3. All required OVDP documents, or as manyas possible, should be transferred to a CDor flash drive.

4. All required OVDP required OVDPdocuments being submitted digitally mustbe submitted in a format that does notpermit editing or changing the storedinformation without warning, e.g. .PDF.The preferred format is .PDF.

5. The digital documents should not bepassword protected. Documents submittedon a CD or flash drive will be handled inthe same secure manner as paperdocuments.

6. The digital documents should be arrangedin separate folders in the same sequence asa paper submission would be assembled.

7. The CD or flash drive must be labeledwith the last four digits only of thetaxpayer’s Taxpayer IdentificationNumber.

26. Who willprocess myvoluntarydisclosureafter I havesubmitted theinformationdescribed inFAQ 25?

Who willprocess myvoluntarydisclosureafter I havesubmitted theinformationdescribed inFAQ 25?

After you send in your full and completesubmission as described in FAQ 25, your case willbe assigned to a civil examiner to complete thecertification of your tax returns for accuracy, andcompleteness. If you have also made a domesticvoluntary disclosure as part of your offshorevoluntary disclosure, the domestic disclosure willbe treated as a disclosure under the VoluntaryDisclosure Practice and may be assigned to adifferent examiner.

After you send in your full and completesubmission as described in FAQ 25, your case willbe assigned to a civil examiner to complete thecertification of your tax returns for accuracy,completeness and correctness. If you have also madea domestic voluntary disclosure as part of youroffshore voluntary disclosure, the domesticdisclosure will be treated as a disclosure under theVoluntary Disclosure Practice and may be assignedto a different examiner.

27. Will myvoluntarydisclosure besubject to anexamination?

Will myvoluntarydisclosure besubject to anexamination?

Normally, no examination will be conducted withrespect to an offshore voluntary disclosure madeunder this program, although the Service reservesthe right to conduct an examination. The normalprocess is to assign the voluntary disclosure to anexaminer to certify the accuracy and completenessof the voluntary disclosure. The certificationprocess is less formal than an examination anddoes not carry with it all the rights and legalconsequences of an examination. For example, theexaminer will not send the usual taxpayer notices,the certification process will not constitute a

Normally, no examination will be conducted withrespect to an offshore voluntary disclosure madeunder this initiative, although the Service reservesthe right to conduct an examination. The normalprocess is to assign the voluntary disclosure to anexaminer to certify the accuracy and completenessof the voluntary disclosure. The certificationprocess is less formal than an examination anddoes not carry with it all the rights and legalconsequences of an examination. For example, theexaminer will not send the usual taxpayer notices,the certification process will not constitute a

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‘‘second examination’’ if one or more years in thevoluntary disclosure has previously been examined,and the taxpayer will not have appeal rights withrespect to the Service’s determination. However,the examiner has the right to ask any relevantquestions, request any relevant documents, andeven make third party contacts, if necessary, tocertify the accuracy of the amended returns,without converting the certification to anexamination. If you have also made a domesticvoluntary disclosure as part of your offshorevoluntary disclosure, the domestic disclosure willbe treated as a disclosure under the VoluntaryDisclosure Practice and an examination may beopened for that part of the disclosure.

‘‘second examination’’ if one or more years in thevoluntary disclosure has previously been examined,and the taxpayer will not have appeal rights withrespect to the Service’s determination. However,the examiner has the right to ask any relevantquestions, request any relevant documents, andeven make third party contacts, if necessary tocertify the accuracy of the amended returns,without converting the certification to anexamination. If you have also made a domesticvoluntary disclosure as part of your offshorevoluntary disclosure, the domestic disclosure willbe treated as a disclosure under the Voluntarydisclosure Practice and an examination may beopened for that part of the disclosure.

28. How longshould theprocess takebefore it iscompleted?

How longshould theprocess takebefore it iscompleted?

Because every case is different, there is no way topredict how long the process will take for you.However, the IRS has taken certain steps toimprove our efficiency in processing cases.Moreover, there are certain steps you can take toexpedite matters. If you have not already done so,you should have delinquent or amended taxreturns prepared now because they must besubmitted with your package by the date specifiedin the letter from Criminal Investigation forcompleting the voluntary disclosure. You shouldalso gather all other documents and informationrequired for the OVDP. See FAQ 25. Caseassignments to specific examiners are delayedwhen required documents are not timely provided.Once the case is assigned to an examiner to certifyyour completed voluntary disclosure, most casesshould be resolved expeditiously. The OVDPgenerally operates on a first-come, first-servedbasis.

Because every case is different, there is no way topredict how long the process will take for you.However, the IRS has taken certain steps toimprove our efficiency in processing cases.Moreover, there are certain steps you can take toexpedite matters. If you have not already done so,you should have delinquent or amended taxreturns prepared now because they must besubmitted with your package by the date specifiedin the letter from Criminal Investigation forcompleting the voluntary disclosure. You shouldalso start gathering all of your foreign accountstatements and other documentation for all of the yearscovered by your voluntary disclosure. You may view adescription of the submission requirements necessary toprocess your voluntary disclosure at irs.gov. Once theexaminer has all the information needed to certifyyour voluntary disclosure, most cases should becompleted expeditiously. The OVDP will operate ona first-come, first-served basis. As a result, completesubmissions are likely to close much faster.

29. My OVDPassets wereheld in thename of aforeign entitythat Icontrolled.However, thesole purposeof the entitywas toconceal myownership ofthe assets,and I intendto abandonthe entitynow that Iam making avoluntarydisclosure.Do I stillhave to filethedelinquentinformationreturns forthe entity?

My offshoreassets wereheld in thename of aforeign entitythat Icontrolled.However, thesole purposeof the entitywas toconceal myownership ofthe assets,and I intendto dissolve theentity nowthat I ammaking avoluntarydisclosure.Do I stillhave to filethedelinquentinformationreturns forthe entity?

A taxpayer who holds OVDP assets (see FAQ 35)through a foreign entity he controls, such as acorporation or a trust, is required to fileinformation returns for that entity (e.g., Form 5471for a foreign corporation and Forms 3520 and3520-A for a foreign trust), regardless of whetherthe taxpayer honored the form of the entity in hisdealings with the OVDP assets. However, in caseswhere the taxpayer certifies under penalty ofperjury that the entity had no purpose other thanto conceal the taxpayer’s ownership of assets andliquidates and abandons the entity, the Servicemay agree to waive the requirement thatdelinquent information returns be filed if itconcludes it is in the Service’s interest to do so.Taxpayers wishing to request the Service todisregard a foreign entity will be required tocertify under penalty of perjury that the entity hadno purpose other than to conceal the taxpayer’sownership of assets and that it has been liquidatedand abandoned by filing a Statement onAbandoned Entities.

A taxpayer who holds assets through a foreignentity he or she controls, such as a corporation or atrust, is required to file information returns for thatentity (e.g., Form 5471 for a foreign corporationand Forms 3520 and 3520-A for a foreign trust),regardless of whether the taxpayer honored theform of the entity in his or her dealings with theassets. However, in cases where the taxpayercertifies under penalty of perjury that the entityhad no purpose other than to conceal thetaxpayer’s ownership of assets, and where thetaxpayer dissolves the entity, the Service may agreeto waive the requirement that delinquentinformation returns be filed if it concludes it is inthe Service’s interest to do so. Taxpayers wishingto request the Service to disregard a foreign entityshould submit a Statement on Dissolved Entities.

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30. What shouldI do if I amhavingdifficultyobtaining myrecords fromoverseas?

What shouldI do if I amhavingdifficultyobtaining myrecords fromoverseas?

If you are having difficulty obtaining records,carefully document your attempts. For phoneconversations, note the date, time, and duration ofthe call; note the complete name of the employeeof the foreign financial institution with whom youspeak. For correspondence, make a photocopy ofall correspondence to and from the foreignfinancial institution. We recommend using adelivery or postal service that provides deliveryconfirmation or a return receipt for allcorrespondence sent to foreign financialinstitutions. Provide your documentation relatingto your attempts to obtain records to the examinerhandling your case, or if your case is not yetassigned, contact the IRS OVDP Hotline at (267)941-0020. Our experience with offshore cases inrecent years has shown that taxpayers areultimately successful in retrieving copies ofstatements and other records from foreignfinancial institutions.

If you are having difficulty, speak with your agent orif your case is not yet assigned, contact the IRSOVDP Hotline at (267) 941-0020. Our experiencewith offshore cases in recent years has shown thattaxpayers are ultimately successful in retrievingcopies of statements and other records fromforeign banks.

CALCULATION OF OFFSHORE PENALTY

31. Whendeterminingthe highestvalue of eachOVDP assetfor each yearwhatexchange rateshould beused?

Whendeterminingthe highestamount ineachundisclosedforeign accountfor each yearor the highestasset balance ofall undisclosedforeign entitiesfor each year,whatexchange rateshould beused?

Convert foreign currency by using the foreigncurrency exchange rate at the end of the yearregardless of when during the year the highestvalue was reached. In valuing currency of acountry that uses multiple exchange rates, use therate that would apply if the currency in theaccount were converted into United States dollarsat the close of the calendar year. Each OVDPasset is to be valued separately.

Convert foreign currency by using the foreigncurrency exchange rate at the end of the yearregardless of when during the year the highestaccount balance was reached. In valuing currency ofa country that uses multiple exchange rates, usethe rate that would apply if the currency in theaccount were converted into United States dollarsat the close of the calendar year. Each account is tobe valued separately.

32. If ataxpayer’sviolationincludesunreportedforeignindividualaccounts andbusinessaccounts (foran activebusiness),does theoffshorepenaltyinclude thebusinessaccounts?

If ataxpayer’sviolationincludesunreportedforeignindividualaccounts andbusinessaccounts (foran activebusiness),does the 27.5percentoffshorepenaltyinclude thebusinessaccounts?

Yes. Assuming that there is unreported grossincome with respect to all the accounts, they allwill be included in the penalty base. No distinctionis drawn based on whether the account is abusiness account or a savings or investmentaccount.

Yes. Assuming that there is unreported incomewith respect to all the accounts, they all will beincluded in the penalty base. No distinction isdrawn based on whether the account is a businessaccount or a savings or investment account.

33. Is there a deminimisunreportedincomeexception

Is there a deminimisunreportedincomeexception to

No. No amount of unreported gross income isconsidered de minimis for purposes of determiningwhether there has been tax noncompliance withrespect to an OVDP asset. Even one dollar ofunreported gross income from an OVDP asset will

No. No amount of unreported income isconsidered de minimis for purposes of determiningwhether there has been tax non-compliance withrespect to an account or asset and whether the accountor asset should be included in the base for the 27.5 percent

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relating totax non-complianceand theoffshorepenalty?

the 27.5 percentpenalty?

bring it into the offshore penalty base. penalty.

34. If the lookback period iseight years,what doesthe taxpayerdo if thetaxpayer heldforeign realestate, sold itbefore thevoluntarydisclosureperiod, anddid notreport thegain on hisreturn for theyear of sale?Does thetaxpayercompute theoffshorepenalty onthe highestaggregatebalance inthe voluntarydisclosureperiod?What, ifanything,does theServiceexpect ataxpayer todo withrespect to taxnoncompli-ance in a yearprior to thevoluntarydisclosureperiod?

If the lookback period iseight years,what doesthe taxpayerdo if thetaxpayer heldforeign realestate, sold itbefore thevoluntarydisclosureperiod, anddid notreport thegain on hisreturn for theyear of sale?Does thetaxpayercompute the27.5 percent onthe highestaggregatebalance inthe voluntarydisclosureperiod?What, ifanything,does IRSexpect thetaxpayer todo withrespect to theprior year ofsale?

Gain realized on a foreign transaction occurringbefore the voluntary disclosure period does notneed to be included as part of the voluntarydisclosure. If the proceeds of the transaction wererepatriated and were not offshore during thevoluntary disclosure period, they will not beincluded in the base for the offshore penalty. Onthe other hand, if the proceeds remained offshoreduring any part of the voluntary disclosure period,they will be included in the base for the offshorepenalty. The purpose of the OVDP is to bringtaxpayers into compliance for the voluntarydisclosure period with the expectation thatcompliance will continue into the future. Inexchange for coming forward through OVDP, thetaxpayer agrees to pay the tax, interest, andaccuracy-related (or delinquency) penalty for thevoluntary disclosure period, plus a miscellaneousoffshore penalty in lieu of all other liabilities andpenalties that may apply.

Gain realized on a foreign transaction occurringbefore the voluntary disclosure period does notneed to be included as part of the voluntarydisclosure. If the proceeds of the transaction wererepatriated and were not offshore during thevoluntary disclosure period, they will not beincluded in the base for the 27.5 percent offshorepenalty. On the other hand, if the proceedsremained offshore during any part of the voluntarydisclosure period, they will be included in the basefor the penalty.

35. What kindsof assets doesthe offshorepenalty applyto?

What kindsof assets doesthe 27.5percentoffshorepenalty applyto?

The offshore penalty is intended to apply to all ofthe taxpayer’s offshore holdings that are related inany way to tax non-compliance, regardless of theform of the taxpayer’s ownership or the characterof the asset (‘‘OVDP assets’’). OVDP assetsinclude all assets directly or indirectly owned bythe taxpayer, including financial accounts holdingcash, securities or other custodial assets; tangibleassets such as real estate or art; and intangibleassets such as patents or stock or other interests ina U.S. or foreign business. If such assets areindirectly held or controlled by the taxpayerthrough an entity, the penalty may be applied tothe taxpayer’s interest in the entity or, if theService determines that the entity is an alter ego or

The offshore penalty is intended to apply to all ofthe taxpayer’s offshore holdings that are related inany way to tax non-compliance, regardless of theform of the taxpayer’s ownership or the characterof the asset. The penalty applies to all assets directlyowned by the taxpayer, including financialaccounts holding cash, securities or other custodialassets; tangible assets such as real estate or art;and intangible assets such as patents or stock orother interests in a U.S. or foreign business. If suchassets are indirectly held or controlled by thetaxpayer through an entity, the penalty may beapplied to the taxpayer’s interest in the entity or, ifthe Service determines that the entity is an alterego or nominee of the taxpayer, to the taxpayer’s

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nominee of the taxpayer, to the taxpayer’s interestin the underlying assets. Tax noncomplianceincludes failure to report gross income from theassets, as well as failure to pay U.S. tax that wasdue with respect to the funds used to acquire theasset.

interest in the underlying assets. Taxnoncompliance includes failure to report incomefrom the assets, as well as failure to pay U.S. taxthat was due with respect to the funds used toacquire the asset. See FAQ 52, category 3, for a limitedexception to this rule.

35.1 If a taxpayerholds OVDPassetsthrough anentity or aseries ofentities, maythe taxpayerapplyvaluationdiscountssuch as adiscountreflectinglack ofmarketability,a discountfor holding aminorityinterest, or adiscount forholding atenants incommoninterest?

No. The offshore penalty will be applied to thetaxpayer’s interest in the underlying OVDP assetswithout regard to valuation discounts.

36. A taxpayerownsvaluable landand artworklocated in aforeignjurisdiction.This propertyproduces noincome andthere were noreportingrequirementsregarding thisproperty.Must thetaxpayerreport theland andartwork andpay theoffshorepenalty?What if thepropertyproducedincome thatthe taxpayerdid notreport?

A taxpayerownsvaluable landand artworklocated in aforeignjurisdiction.This propertyproduces noincome andthere were noreportingrequirementsregarding thisproperty.Must thetaxpayerreport theland andartwork andpay a 27.5percentpenalty?What if thepropertyproducedincome thatthe taxpayerdid notreport?

The answer to the first question depends onwhether the non-income producing assets wereacquired with funds improperly non-taxed. Theoffshore penalty is intended to apply to offshoreassets that are related to tax non-compliance.Thus, if offshore assets were acquired with fundsthat were subject to U.S. tax but on which no suchtax was paid, the offshore penalty would applyregardless of whether the assets are producingcurrent income. Assuming that the assets wereacquired with after-tax funds or from funds thatwere not subject to U.S. taxation, if the assets havenot yet produced any gross income, there has beenno U.S. taxable event and no reporting obligationto disclose. The taxpayer will be required to reportany current income from the property or gain fromits sale or other disposition at such time in thefuture as the income is realized. Because there hasnot been tax noncompliance, the offshore penaltywould not apply to those assets.

In answer to the second question, if the assetsproduced gross income subject to U.S. tax duringthe voluntary disclosure period which was notreported, the assets will be included in the penaltycomputation regardless of the source of the fundsused to acquire the assets. If the foreign assetswere held in the name of an entity such as a trustor corporation, there would also have been aninformation return filing obligation that may needto be disclosed. See FAQ 5.

The answer to the first question depends onwhether the non-income producing assets wereacquired with funds improperly non-taxed. Theoffshore penalty is intended to apply to offshoreassets that are related to tax non-compliance.Thus, if offshore assets were acquired with fundsthat were subject to U.S. tax but on which no suchtax was paid, the offshore penalty would applyregardless of whether the assets are producingcurrent income. Assuming that the assets wereacquired with after tax funds or from funds thatwere not subject to U.S. taxation, if the assets havenot yet produced any income, there has been noU.S. taxable event and no reporting obligation todisclose. The taxpayer will be required to reportany current income from the property or gain fromits sale or other disposition at such time in thefuture as the income is realized. Because there hasnot been tax noncompliance, the 27.5 percentoffshore penalty would not apply to those assets.

In answer to the second question, if the assetsproduced income subject to U.S. tax during thevoluntary disclosure period which was notreported, the assets will be included in the penaltycomputation regardless of the source of the fundsused to acquire the assets. If the foreign assetswere held in the name of an entity such as a trustor corporation, there would also have been aninformation return filing obligation that may needto be disclosed. See FAQ 5.

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37. If a taxpayertransferredfunds fromoneunreportedforeignfinancialaccount toanotherduring thevoluntarydisclosureperiod, willhe have topay theoffshorepenalty onbothaccounts?

If a taxpayertransferredfunds fromoneunreportedforeignaccount toanotherduring thevoluntarydisclosureperiod, willhe have topay a 27.5percentoffshorepenalty onbothaccounts?

No. If the taxpayer can establish that funds weretransferred from one account to another, anyduplication will be removed before calculating theoffshore penalty. However, the burden will be onthe taxpayer to establish duplication.

No. If the taxpayer can establish that funds weretransferred from one account to another, anyduplication will be removed before calculating the27.5 percent penalty. However, the burden will be onthe taxpayer to establish the extent of theduplication.

38. If, in additionto other non-compliance, ataxpayer hasfailed to filean FBAR toreport anaccount overwhich thetaxpayer hassignatureauthority butno beneficialinterest (e.g.,an accountowned by hisemployer),will thatforeignfinancialaccount beincluded inthe base forcalculatingthe taxpayer’soffshorepenalty?

If, in additionto other non-compliance, ataxpayer hasfailed to filean FBAR toreport anaccount overwhich thetaxpayer hassignatureauthority butno beneficialinterest (e.g.,an accountowned by hisemployer),will thatforeignaccount beincluded inthe base forcalculatingthe taxpayer’s27.5 percentoffshorepenalty?

No. The account the taxpayer has mere signatureauthority over will be treated as unrelated to thetax noncompliance the taxpayer is voluntarilydisclosing. The taxpayer may cure the FBARdelinquency for this account at any time prior tobeing contacted by the IRS regarding an incometax examination or delinquent returns by filing theFBAR with an explanatory statement. See section3 of ‘‘Options Available For U.S. Taxpayers withUndisclosed Foreign Financial Assets’’ forinstructions. The answer might be different if: (1)the account over which the taxpayer has signatureauthority is held in the name of a related person,such as a family member or an entity controlledby the taxpayer; (2) the account is held in thename of a foreign entity for which the taxpayerhad a Title 26 reporting obligation; or (3) theaccount was related in some other way to thetaxpayer’s tax noncompliance (e.g., was used bythe taxpayer as a conduit). In these cases, thetaxpayer may have an OVDP asset to which theoffshore penalty applies. See FAQ 35.

No. The account the taxpayer has mere signatureauthority over will be treated as unrelated to thetax noncompliance the taxpayer is voluntarilydisclosing. The taxpayer may cure the FBARdelinquency for the account the taxpayer does not ownby filing the FBAR with an explanatory statement beforebeing contacted regarding an income taxexamination or a request for delinquent returns. Theanswer might be different if: (1) the account overwhich the taxpayer has signature authority is heldin the name of a related person, such as a familymember or a corporation controlled by the taxpayer;(2) the account is held in the name of a foreigncorporation or trust for which the taxpayer had aTitle 26 reporting obligation; or (3) the accountwas related in some other way to the taxpayer’stax noncompliance. In these cases, if the taxpayeris determined to have a direct or indirect beneficial interestin the account(s), the taxpayer will be liable for the 27.5percent offshore penalty if there is unreported income onthe account. On the other hand, if there is no unreportedincome with respect to the account, no penalty will beimposed.

39. Parents havea jointlyownedforeignaccount onwhich theyhave madetheir childrensignatories;the childrenhave anFBAR filingrequirementbut noincome. Howshould thefamily

If parentshave a jointlyownedforeignaccount onwhich theyhave madetheir childrensignatories,the childrenhave anFBAR filingrequirementbut noincome.Should thechildren just file

Signatories with no ownership interest in theaccount, such as the children in this scenario,should file delinquent FBARs with explanatorystatements. See section 3 of ‘‘Options AvailableFor U.S. Taxpayers with Undisclosed ForeignFinancial Assets’’ for instructions. As for theparents, only one offshore penalty will be appliedwith respect to voluntary disclosures relating to thesame foreign financial account. In the example,the parents will be jointly required to pay a singleoffshore penalty (at the applicable offshorepenalty rate of either 27.5 percent or 50 percent)on the account. This can be satisfied by oneparent paying the total offshore penalty or by eachpaying a portion, at the taxpayers’ option.However, any joint owner of a foreign financialaccount who does not make a voluntary disclosure

For those signatories with no ownership interest inthe account, such as the children in these facts, theyshould file delinquent FBARs as previously describedin FAQ 17. As for the parents, only one 27.5 percentoffshore penalty will be applied with respect tovoluntary disclosures relating to the same account.In the example, the parents will be jointly requiredto pay a single 27.5 percent penalty on the account.This can be through one parent paying the totalpenalty or through each paying a portion, at thetaxpayers’ option. However, any joint accountowner who does not make a voluntary disclosuremay be examined and subject to all appropriatepenalties.

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correct this,and how willthe offshorepenalty beapplied?

delinquentFBARs andhave theparents submita voluntarydisclosure? Willboth parents bepenalized 27.5percent each?Will eachparent have a27.5 percentpenalty on 50percent of thebalance?

may be examined and subject to all applicablepenalties.

40. If multipletaxpayers areco-owners ofan OVDPasset, whowill be liablefor theoffshorepenalty?

If multipletaxpayers areco-owners ofan offshoreaccount, whowill be liablefor theoffshorepenalty?

In the case of co-owners, each taxpayer whomakes a voluntary disclosure will be liable for thepenalty on his percentage ownership of thehighest value of the OVDP asset. The burden willbe on the disclosing taxpayer claiming ownershipof less than 100 percent of the OVDP asset toestablish the extent of his ownership. Hisvoluntary disclosure is effective as to his taxliability only. It does not cover the otherco-owners. The IRS may examine any co-ownerwho does not make a voluntary disclosure.Co-owners examined by the IRS will be subject toall applicable penalties.

In the case of co-owners, each taxpayer whomakes a voluntary disclosure will be liable for thepenalty on his percentage of the highest aggregatebalance in the account. The burden will be on thedisclosing taxpayer claiming ownership of lessthan 100 percent of the account to establish theextent of his ownership. His voluntary disclosureis effective as to his tax liability only. It does notcover the other co-owners. The IRS may examineany co-owner who does not make a voluntarydisclosure. Co-owners examined by the IRS will besubject to all appropriate penalties.

41. If there aremultipleindividualswithsignatureauthorityover anOVDP assetheld in thename of atrust, doeseveryoneinvolved needto filedelinquentFBARs? Ifso, musteveryone paythe offshorepenalty?

If there aremultipleindividualswithsignatureauthorityover a trustaccount, doeseveryoneinvolved needto filedelinquentFBARs? Ifso, couldeveryone besubject to a27.5 percentoffshorepenalty?

Only one offshore penalty will be applied withrespect to voluntary disclosures relating to thesame OVDP asset. The penalty may be allocatedamong the taxpayers with beneficial ownershipmaking the voluntary disclosures in any way theychoose. The reporting requirements for filing anFBAR, however, do not change. Therefore, everyperson who is required to file an FBAR must fileone.

Only one 27.5 percent offshore penalty will beapplied with respect to voluntary disclosuresrelating to the same account. The penalty may beallocated among the taxpayers with beneficialownership making the voluntary disclosures in anyway they choose. The reporting requirements forfiling an FBAR, however, do not change.Therefore, every individual who is required to filean FBAR must file one.

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STATUTE OF LIMITATIONS

42. How can theIRS proposeadjustmentsto tax formore thanthree yearswithouteither anagreementfrom thetaxpayer or astatutoryexception tothe normalthree-yearstatute oflimitationsfor makingthoseadjustments?

How can theIRS proposeadjustmentsto tax formore thanthree yearswithouteither anagreementfrom thetaxpayer or astatutoryexception tothe normalthree-yearstatute oflimitationsfor makingthoseadjustments?

As a condition to participate in the OVDP andreceive the benefits of the OVDP’s penaltystructure, the taxpayer must agree to theassessment of tax and penalties for all voluntarydisclosure years. If the taxpayer does not agree tothe tax, interest, and penalties proposed by thevoluntary disclosure examiner, the case will bereferred to the field for a complete examination ofall issues. In that examination, normal statute oflimitations rules will apply. If no exception to thenormal three-year statute applies, the IRS will onlybe able to assess tax, penalty and interest for threeyears. However, if the period of limitations wasopen because, for example, the IRS can prove asubstantial omission of gross income, six years ofliability may be assessed. Similarly, if there was afailure to file certain information returns, such asForm 3520, Form 5471, or Form 8938, the statuteof limitations will not have begun to run. If theIRS can prove fraud, there is no statute oflimitations for assessing tax. In addition, thestatute of limitations for assessing FBAR penaltiesis six years from the date of the violation, whichwould be the date that an unfiled FBAR was dueto have been filed. 31 U.S.C. § 5321(b)(1).

Agreeing to assessment of tax and penalties for allvoluntary disclosure years is part of the resolutionoffered by the IRS for resolving offshore voluntarydisclosures. The taxpayer must agree to assessment of theliabilities for those years in order to get the benefit of thereduced penalty framework. If the taxpayer does notagree to the tax, interest and penalty proposed bythe voluntary disclosure examiner, the case will bereferred to the field for a complete examination ofall issues. In that examination, normal statute oflimitations rules will apply. If no exception to thenormal three-year statute applies, the IRS will onlybe able to assess tax, penalty and interest for threeyears. However, if the period of limitations wasopen because, for example, the IRS can prove asubstantial omission of gross income, six years ofliability may be assessed. Similarly, if there was afailure to file certain information returns, such asForm 3520, Form 5471, or Form 8938, the statuteof limitations will not have begun to run. If theIRS can prove fraud, there is no statute oflimitations for assessing tax. In addition, thestatute of limitations for asserting FBAR penaltiesis six years from the date of the violation, whichwould be the date that an unfiled FBAR was dueto have been filed. 31 U.S.C. § 5321(b)(1).

43. Will I berequired tocomplete andsignagreements toextend theperiod oftime to assesstax (includingtax penalties)and to assessFBARpenalties forany yearsthat areotherwise setto expirewhile myvoluntarydisclosure isbeingprocessed bythe IRS?

Will I berequired tocomplete andsignagreements toextend theperiod oftime to assesstax (includingtax penalties)and to assessFBARpenalties forany yearsthat areotherwise setto expirewhile myapplication isbeingprocessed bythe IRS?

Yes. Properly completed and signed agreements toextend the period of time to assess tax (includingtax penalties) and to assess FBAR penalties arerequired to be submitted as part of the voluntarydisclosure package (see FAQ 25).

Yes. Properly completed and signed agreements toextend the period of time to assess tax (includingtax penalties) and to assess FBAR penalties arerequired to be submitted as part of the voluntarydisclosure package (see FAQ 25).

FBAR QUESTIONS

44. If I had anFBARreportingobligation foryears coveredby thevoluntarydisclosure,what versionof the FBARshould I use

If I had anFBARreportingobligation foryears coveredby thevoluntarydisclosure,what versionof the FormTD F 90-22.1

Taxpayers are required to file FBARselectronically at FinCEN’s website. On the coverpage of the electronic form, select ‘‘Other’’ as thereason for filing late. An explanation box willappear. In the explanation box, enter ‘‘OVDP.’’Taxpayers who are unable to file electronicallymay contact FinCEN’s Regulatory Helpline at1-800-949-2732 or 1-703-905-3975 (if calling fromoutside the United States) to determine possiblealternatives to electronic filing.

After June 30, 2013, taxpayers must file FBARselectronically. Taxpayers who are unable to fileelectronically may contact FinCEN’s RegulatoryHelpline at 1-800-949-2732 or (if calling fromoutside the United States) 1-703-905-3975 todetermine possible alternative for timely reporting.Through June 30, 2013, taxpayers may file electronicallyor by paper.

Taxpayers should use the most current version of FormTD F 90-22.1, for filing delinquent FBARs to report

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to report myinterests inforeignfinancialaccounts?

should I useto report myinterests inforeignaccounts?

foreign accounts maintained in prior years. At this time,the most current version is the one that was revised inJanuary 2012. The taxpayer may, however, rely on theinstructions for the prior version of the form (revised inJuly 2000) for purposes of determining who must file toreport foreign accounts maintained during the 2009 andprior calendar years. Taxpayers may rely on FBARguidance that was applicable for the calendar year that isbeing reported (e.g., IRS Announcement 2010-16 or IRSNotice 2010-23) in determining their FBAR reportingobligations.

45. A taxpayerhas twoforeignfinancialaccounts. NoFBARs werefiled. Thetaxpayerreported allincome fromone accountbut not theother.Mechanically,how does thetaxpayerreport this?

A taxpayerhas twooffshoreaccounts. NoFBARs werefiled. Thetaxpayerreported allincome fromone accountbut not theother.Mechanically,how does thetaxpayerreport this?Does thetaxpayer reportboth accountsas a voluntarydisclosure orbifurcate it intoa delinquentFBAR filing forthe reportedaccount and avoluntarydisclosure forthe unreportedaccount?

Taxpayers are required to file a single FBARreporting all foreign financial accounts meetingthe reporting requirement. The taxpayer shouldmake a voluntary disclosure for the omittedincome and file the delinquent FBARs withrespect to both accounts. The account with noincome tax issue is unrelated to the taxpayer’s taxnoncompliance, so no penalty will be imposedwith respect to that account.

Because the annual FBAR requirement is to file a singlereport reporting all foreign accounts meeting thereporting requirement, it is not possible to bifurcate thecorrected filing. The taxpayer should make avoluntary disclosure for the omitted income andinclude the delinquent FBARs with respect to bothaccounts. The account with no income tax issue isunrelated to the taxpayer’s tax noncompliance, sono penalty will be imposed with respect to thataccount.

46. If a taxpayeris uncertainaboutwhether he isrequired tofile an FBARwith respectto aparticularforeignfinancialaccount, howcan thetaxpayer gethelp with thisquestion?

If a taxpayeris uncertainaboutwhether he isrequired tofile an FBARwith respectto aparticularforeignaccount, howcan thetaxpayer gethelp with thisquestion?

Information about FBAR filing requirements isavailable on FinCEN’s website.Help with questions about FBAR filingrequirements is also available by telephone ore-mail. Call 1-866-270-0733 (toll free within theUnited States) or 1-313-234-6146 (not a toll-freenumber) from 8 a.m. to 4:30 p.m. Eastern time,except for weekends and federal holidays. Submitwritten questions by e-mail addressed to FBARQuestions. Do not call the IRS OVDP Hotlinewith questions about whether you have an FBARfiling requirement. The purpose of the IRS OVDPHotline is to answer questions about how to makevoluntary disclosures and what penalties apply.

Help with questions about FBAR filingrequirements is available by telephone or e-mail.Call 1-866-270-0733 (toll free within the UnitedStates) or 1-313-234-6146 (not a toll-free number)from 8 a.m. to 4:30 p.m. Eastern time, except forweekends and federal holidays. You can also submitwritten questions about the FBAR rules by e-mailaddressed to [email protected]. Theinstructions to the FBAR Form are at the end of the form.Do not call the IRS OVDP Hotline with questionsabout whether you have an FBAR filingrequirement. The purpose of the VoluntaryDisclosure Hotline is to answer questions about howto make voluntary disclosures and what penaltiesapply, assuming a taxpayer was required to file.

TAXPAYER REPRESENTATIVES

47. I have aclient whomay beeligible to

I have aclient whomay beeligible to

The IRS anticipates that taxpayers will seekqualified tax and legal advice and representation inconnection with considering and making avoluntary disclosure. If a taxpayer seeks the advice

The IRS anticipates that taxpayers will seekqualified tax and legal advice and representation inconnection with considering and making avoluntary disclosure. If a taxpayer seeks the advice

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make avoluntarydisclosure.What are myresponsibilitiesto my clientunderCircular 230?

make avoluntarydisclosure.What are myresponsibilitiesto my clientunderCircular 230?

of a tax practitioner, the practitioner must exercisedue diligence in determining the correctness of anyoral or written representations made to the clientabout the program and the implications for thattaxpayer of going forward. If the taxpayer decidesto proceed with the disclosure, the practitionermust exercise due diligence in determining thecorrectness of any oral or written representationsthat the practitioner makes during therepresentation to the Department of the Treasury.The practitioner must avoid giving, orparticipating in giving, false or misleadinginformation to the Department of the Treasury orgiving a false or misleading opinion to thetaxpayer. If the taxpayer decides not to make thevoluntary disclosure despite the taxpayer’snoncompliance with United States tax laws,Circular 230 requires the practitioner to advise theclient of the fact of the client’s noncompliance andthe consequences of the client’s noncompliance. Apractitioner whose client declines to make fulldisclosure of the existence of, or any taxableincome from, a foreign financial account during ataxable year, may not prepare the client’s incometax return for that year without being in violationof Circular 230.

of a tax practitioner, the practitioner must exercisedue diligence in determining the correctness of anyoral or written representations made to the clientabout the program and the implications for thattaxpayer of going forward. If the taxpayer decidesto proceed with the disclosure, the practitionermust exercise due diligence in determining thecorrectness of any oral or written representationsthat the practitioner makes during therepresentation to the Department of the Treasury;and must avoid giving, or participating in giving,false or misleading information to the Departmentof the Treasury or giving a false or misleadingopinion to the taxpayer. If the taxpayer decides notto make the voluntary disclosure despite thetaxpayer’s noncompliance with United States taxlaws, Circular 230 requires the practitioner toadvise the client of the fact of the client’snoncompliance and the consequences of theclient’s noncompliance. A practitioner whose clientdeclines to make full disclosure of the existence of,or any taxable income from, a foreign financialaccount during a taxable year, may not prepare theclient’s income tax return for that year withoutbeing in violation of Circular 230.

48. Are therespecialconsiderationsforcompletingForm 2848,Power ofAttorney andDeclarationof Repre-sentative?

Are therespecialconsiderationsforcompletingForm 2848,Power ofAttorney andDeclarationof Repre-sentative?

Yes. In addition to being authorized to representthe taxpayer for tax years within the voluntarydisclosure period, the power of attorney mustspecifically authorize you to represent the taxpayerfor income tax, civil penalties, and FBARs. See asample power of attorney.

Yes. In addition to being authorized to representthe taxpayer for tax years within the voluntarydisclosure period, the power of attorney mustspecifically authorize you to represent the taxpayerfor income tax, civil penalties and FBARs. See asample power of attorney. at irs.gov.

CASE RESOLUTION

49. If thetaxpayer andthe IRScannot agreeto the termsof the OVDPclosingagreement,willmediationwith Appealsbe an optionwith respectto the termsof the closingagreement?

If thetaxpayer andthe IRScannot agreeto the termsof the OVDPclosingagreement,willmediationwith Appealsbe an optionwith respectto the termsof the closingagreement?

No. The penalty framework for offshore voluntarydisclosure and the agreement to limit tax exposureto an eight year period are nonnegotiable termsunder the OVDP. If any part of the closingagreement is unacceptable to the taxpayer, thetaxpayer may opt out and the case will beexamined and all applicable penalties will beimposed (see FAQ 51). After a full examination,any tax and penalties imposed by the Service maybe appealed, but the Service’s decision on theterms of the OVDP closing agreement may not beappealed.

No. The penalty framework for offshore voluntrydisclosure and the agreement to limit tax exposureto an eight year period are package terms under theOVDP. If any part of the offshore penalty isunacceptable to the taxpayer, the case will beexamined and all applicable penalties will beimposed (see FAQ 51). After a full examination,any tax and penalties imposed by the Service onexamination may be appealed, but the Service’sdecision on the terms of the OVDP closingagreement may not.

50. Willexaminershave anydiscretion tosettle offshorevoluntarydisclosurecases?

Willexaminershave anydiscretion tosettle offshorevoluntarydisclosurecases?

No. Offshore voluntary disclosure examiners donot have discretion to settle cases for amounts lessthan what is properly due and owing. However,because the offshore penalty is a proxy for theFBAR penalty, civil fraud penalty, other penaltiesimposed under the Internal Revenue Code, andpotential liabilities for years prior to the voluntarydisclosure period, there may be cases where a

No. Offshore voluntary disclosure examiners donot have discretion to settle cases for amounts lessthan what is properly due and owing. However,because the 27.5 percent offshore penalty is a proxyfor the FBAR penalty, other penalties imposedunder the Internal Revenue Code, and potentialliabilities for years prior to the voluntary disclosureperiod, there may be cases where a taxpayer

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taxpayer making a voluntary disclosure would oweless outside of the OVDP. Under no circumstanceswill taxpayers be required to pay a penalty greaterthan what they would otherwise be liable forunder the maximum penalties imposed underexisting statutes for the years included in thedisclosure period.

Examiners will compare the amount due underthis offshore program to the tax, interest, andapplicable penalties (at their maximum levels andwithout regard to issues relating to reasonablecause, willfulness, mitigation factors, or othercircumstances that may reduce liability) for allyears within the disclosure period that a taxpayerwould owe outside of the OVDP. The taxpayerwill pay the lesser amount. If the taxpayerdisagrees with the result, the taxpayer may requestthat the case be referred for an examination of allrelevant years and issues (see FAQ 51).

making a voluntary disclosure would owe less ifthe special offshore initiative did not exist. Under nocircumstances will taxpayers be required to pay apenalty greater than what they would otherwise beliable for under the maximum penalties imposedunder existing statutes. For example, if a taxpayer had$100,000 in an offshore bank account in only one yearand foreign income-producing real estate with a fairmarket value of $1,000,000, only the bank account wouldbe subject to the FBAR penalty. Consequently, themaximum FBAR penalty would only be $100,000 (thatis, the greater of $100,000 or 50% of the amount in theforeign account), which is substantially less than theoffshore penalty of $302,500 (27.5% of $1,100,000). Ifthis FBAR penalty, plus tax, interest and all otherapplicable penalties, are less than what is due under thisoffshore initiative, the taxpayer will only pay the lesseramount.

Examiners will compare the amount due underthis offshore initiative to the tax, interest, andapplicable penalties (at their maximum levels andwithout regard to issues relating to reasonablecause, willfulness, mitigation factors, or othercircumstances that may reduce liability) for all openyears that a taxpayer would owe in the absence ofthe OVDP penalty regime. The taxpayer will pay thelesser amount. If the taxpayer disagrees with theresult, the taxpayer may request that the case bereferred for an examination of all relevant yearsand issues (see FAQ 51).

51. If, aftermaking avoluntarydisclosure, ataxpayerdisagreeswith theapplication ofthe offshorepenalty, whatcan thetaxpayer do?

If, aftermaking avoluntarydisclosure, ataxpayerdisagreeswith theapplication ofthe offshorepenalty, whatcan thetaxpayer do?

If the offshore penalty is unacceptable to ataxpayer, that taxpayer must indicate in writing hisdecision to withdraw from or opt out of theprogram. Once made, this election is irrevocable.An ‘‘opt out’’ is an election made by a taxpayer tohave his case handled under the standard auditprocess. Some taxpayers may prefer this approach;in some cases the results under the OVDP mayappear too severe given the facts of the case. Inother cases, this is less clear. In these less clearcases, the IRS will protect its interests and theintegrity of the voluntary disclosure program. Inthese cases, the IRS will likely conduct full scopeexaminations. We anticipate that opting out willbe appropriate for a discrete minority of cases.Moreover, to the extent that issues are found in afull-scope examination that were not disclosed bythe taxpayer, those issues may be the subject ofreview by Criminal Investigation. In either case,opting out is at the sole discretion of the taxpayerand the taxpayer will not be treated in a negativefashion merely because he chooses to opt out.

The specific procedures for opting out are set forthin a separate guide titled Opt Out and RemovalGuide for the 2009 OVDP, 2011 OVDI, and nowthe OVDP.

Taxpayers are reminded that, even after opting outof the Service’s civil settlement structure, theyremain within Criminal Investigation’s VoluntaryDisclosure Practice. Therefore, taxpayers are stillrequired to cooperate fully with the examiner byproviding all requested information and records

If the offshore penalty is unacceptable to ataxpayer, that taxpayer must indicate in writing thedecision to withdraw from or opt out of theprogram. Once made, this election is irrevocable.An opt out is an election made by a taxpayer tohave his or her case handled under the standardaudit process. It should be recognized that in a givencase, the opt out option may reflect a preferred approach.That is, there may be instances in which the resultsunder the applicable voluntary disclosure programappear too severe given the facts of the case. Therewill be other instances where this is less clear. In thelatter cases, the Service will look to ensure that the bestinterests of the Service and the integrity of thevoluntary disclosure program remain intact. In thesecases, it is expected that full scope examinations willoccur if opt out is initiated. It is expected that opt outwill be appropriate for a discrete minority of cases.Moreover, to the extent that issues are found upona full scope examination that were not disclosedby the taxpayer, those issues may be the subject ofreview by Criminal Investigation. In either case,opting out is at the sole discretion of the taxpayerand the taxpayer should not be treated in a negativefashion merely because he or she chooses to optout.

The specific procedures for opting out are set forthin a separate guide titled Opt Out and RemovalGuide for the 2009 OVDP, 2011 OVDI, and nowthe OVDP. The guide is posted to the website.

Taxpayers are reminded that, even after opting outof the Service’s civil settlement structure, they

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and must still pay or make arrangements to paythe tax, interest, and penalties they are ultimatelydetermined to owe. If a taxpayer does notcooperate and make payment arrangements, or ifafter examination, issues exist that were notdisclosed prior to opt out, the case may be referredback to Criminal Investigation.

remain within Criminal Investigation’s VoluntaryDisclosure Practice.

Therefore, taxpayers are still required to cooperatefully with the examiner by providing all requestedinformation and records and must still pay ormake arrangements to pay the tax, interest, andpenalties they are ultimately determined to owe. Ifa taxpayer does not cooperate and make paymentarrangements, or if after examination, issues existthat were not disclosed prior to opt out, the casemay be referred back to Criminal Investigation.

51.1 Deleted Under whatcircumstancesmight ataxpayerconsider optingout of the civilsettlementstructure of theOVDP?

The following scenarios are provided to illustrate the effectof a taxpayer opting out of the civil settlement structure.Opting out of the civil settlement structure does not affectthe status of a taxpayer’s voluntary disclosure underCriminal Investigation’s Voluntary Disclosure Practice, solong as the taxpayer is fully cooperative in the examinationprocess, by providing all requested foreign records andsubmitting to interviews, as requested, and as long as nonew issues are uncovered that were previously notdisclosed. The facts of each example were chosen toillustrate particular issues and do not represent a fullanalysis of a taxpayer’s particular situation.

Consequently, they may not be relied upon in dealing withany taxpayer’s actual case. For all of the followingexamples, assume a 35% tax rate on all unreported incomeand assume a voluntary disclosure started in January2012 for a voluntary disclosure period of 2003 through2010.

Example 1 — Unreported Income But No Tax Deficiency

The taxpayer, a U.S. citizen who worked and resided inCountry A, had a brokerage account in Country A that heopened in 1999. The account had a high balance of $2million and generated income of $150,000 each year. Thetaxpayer did not report any of the income on his U.S.return because he mistakenly assumed he only had toreport it on a Country A tax return. The taxpayer’samended Form 1040 returns showed that, after applyingthe foreign tax credit for taxes paid to the government ofCountry A, he had no tax deficiency with respect to theunreported income. Because the taxpayer had unreportedincome, he does not qualify for FAQ 17. In addition,assume the taxpayer does not otherwise qualify for areduced penalty under FAQ 52 or 53.

The Offshore Penalty under OVDP is $550,000 (i.e.,27.5% of $2 million), even though there was no tax owedto the U.S. Government and no other indication ofwrongdoing.

If the taxpayer elected to opt out and, upon examination,IRS determined that the FBAR violation was not willful,he would be subject to an FBAR penalty of up to $10,000per year ($60,000 total for six years). If IRS determinesthat the violation was due to reasonable cause (forexample, the taxpayer reasonably acted on the writtenadvice of an independent legal advisor after havingdisclosed the account to the advisor), the taxpayer wouldbe subject to no FBAR penalty.

The penalty for a non-willful failure to file an FBARwould apply with respect to FBARs that were due on orafter June 30, 2006. For this example, this would include

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FBARs that were filed to report foreign financial accountsmaintained during calendar years 2005 through 2010.

CivilSettlementStructure

Opt out and 6years non-

willful FBARpenalty

Income TaxDue (notincludinginterest

20% Accuracy-relatedpenalty

27.5%OffshorePenaltyFBARPenalty

Total

0 0

0 0

$550,000 0

0 $60,000

$550,000 $60,000

Example 2 — Unreported Income and Failure to FileFBAR

The taxpayer is a U.S. citizen, who lived abroad in 2007,2008 and 2009. While living abroad, the taxpayer openedan account in 2007 with a bank located in Country X.

Assume that the highest account balance during the threeyears (2007, 2008 and 2009) was $200,000. The taxpayerfiled U.S. income tax returns for all years but only filed anFBAR for 2008 and 2009, not for 2007.

The taxpayer was unaware of his FBAR filing obligationuntil having his return professionally prepared in 2008.The taxpayer failed to report approximately $2,000 ofinterest income from the account, and, is therefore, unableto simply file a delinquent FBAR for 2007 as provided inFAQ 17. The tax deficiency was $700. In addition,assume the taxpayer does not otherwise qualify for areduced penalty under FAQ 52 or 53. The OffshorePenalty under OVDP will be $55,000 (i.e., 27.5% of$200,000). The taxpayer would also be required to pay thetax deficiency for each year, interest on the deficiency, andthe 20% accuracy-related penalty on the deficiency If thetaxpayer elected to opt out, the taxpayer will be subject totax, penalties, and interest on the unreported income and,if, upon examination, IRS determines that the failure tofile the FBAR was not willful, the taxpayer will be subjectto a non-willful FBAR penalty of no more than $10,000for failing to file an FBAR for 2007. If IRS determinesthat the FBAR violation was due to reasonable cause, thenno FBAR penalty will be imposed.

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Opt outand 1yearnon-

willfulFBARpenalty

Opt outand

assumethe civilfraud

penatlyapplied

IncomeTax Due(notincludinginterest

20%Accuracy-relatedpenalty

27.5%OffshorePenalty

CivilFraudPenalty

FBARPenalty

Total

$700 $700 $700

$140 $140 0

$55,000 0 0

0 0 $525

0 $10,000 $10,000

$55,840 $10,840 $11,225

Example 3 — Unreported Controlled Foreign Corporation

The taxpayer, a U.S. citizen who lives in the UnitedStates, owns a 100% interest in a foreign corporation thathas substantial operations in Country A and a foreignbank account. The foreign corporation is not required tofile an FBAR and does not file one. The taxpayer also hassignature authority over the foreign bank account. Thetaxpayer did not file an FBAR to report his financialinterest in, or signature authority over, the foreign bankaccount of the corporation that he controls. The interestincome earned on the foreign account was $5,000 for eachyear. The tax deficiency for each year was $1,750. Thebalance in the foreign bank account during the calendaryears 2003 through 2010 was a constant $1 million. Thevalue of the taxpayer’s controlling interest in the foreigncorporation is determined to be $100 million (includingthe value of the $1 million foreign bank account).

The taxpayer did not file a Form 5471 to report hisinterest in the controlled foreign corporation. Instead, hewrongly treated the foreign corporation as a disregardedentity and reported the corporation’s income on aSchedule C. The income he reported from the foreigncorporation did not include interest income earned on thecorporation’s foreign bank account. Otherwise, theindividual was fully compliant in reporting all othertaxable income, including income from the controlledforeign corporation. The statute of limitations for assessingtax and tax penalties with respect to the controlled foreigncorporation remained open under IRC § 6501(c)(8)because the Form 5471 was not filed.

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Opt outand 6

years ofthe

§6038(a)penaltyplus 6

years ofthe FBARnon-willful

penalty

Assumethe civilfraud

penaltyapplied forsix yearsand theFBARwillfulpenalty

applied for6 years


$14,000 $14,000 $14,000


$2,800 $2,800 0


$27,500,000 0 0

§6038(a)Penalty

0 $60,000 $60,000

Civil FraudPenalty

0 0 $10,500

FBAR 0 $60,000 $60,000

Penalty

Total $27,516,800 $136,800 $3,084,500

Example 4 — The taxpayer is a dual citizen of the UnitedStates and Country A. Taxpayer lived and worked inCountry A during 2000 through 2010.

He had checking and savings accounts in country A withan aggregate balance of approximately $50,000 in eachyear. He had no income from U.S. sources during theperiod. The taxpayer complied with Country A’s tax lawsand fully reported his salary and the interest on his bankaccounts. Although Taxpayer earned income in excess ofthe applicable exemption amount and standard deduction,he did not timely file U.S. income returns or FBARs forany of the years he lived in Country A. After learning ofhis U.S. filing obligations, taxpayer consulted withcounsel, who concluded that he did not qualify for FAQ 17relief because of his tax non-compliance. Taxpayer madea voluntary disclosure, filing income tax returns reportingtax of approximately $400 each year. He also fileddelinquent FBARs.

The taxpayer qualifies for a reduced penalty of 5 percentunder FAQ 52, part 3, below. The Offshore Penalty underOVDP will therefore be $2,500 (i.e., 5% of $50,000). Thetaxpayer would also be required to pay the tax deficiencyfor each year, interest on the deficiency, and the 20%accuracy-related penalty on the deficiency. If the taxpayerelects to opt out, the taxpayer will still be subject to tax andinterest on the unreported income but, upon examination,IRS is not likely to assert accuracy related or FBARpenalties.

See Fact Sheet 2011-13 (December 2011). Non-residenttaxpayers should also review the New Filing ComplianceProcedures for Non-Resident U.S. Taxpayers to determine

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if they qualify for the new compliance procedures.Example 5 - The facts are the same as in Example 4,except that, the taxpayer also has interests in offshoreentities for which Forms 5471 or 3520 should have beenfiled. The value of the taxpayer’s interest in the entities isapproximately $200,000 in each year. The taxpayeracquired his interest in the entities with tax compliantfunds, and the entities’ assets produce no income. Thetaxpayer does not qualify for FAQ 18 relief because of thetax noncompliance discussed in Example 4, and decides tomake a voluntary disclosure including, in addition to theitems in Example 4, delinquent Forms 5471 and 3520.

The Offshore Penalty under OVDP will be $2,500 (i.e.,5% of $50,000). The taxpayer would also be required topay the tax deficiency for each year, interest on thedeficiency, and the 20% accuracy-related penalty on thedeficiency. If the taxpayer elects to opt out, the taxpayerwill still be subject to tax and interest on the unreportedincome but upon examination, IRS is not likely to assertaccuracy related, FBAR, or information return penalties.

See Fact Sheet 2011-13 (December 2011). Non-residenttaxpayers should also review the New Filing ComplianceProcedures for Non-Resident U.S. Taxpayers to determineif they qualify for the new compliance procedures.

51.2 Deleted 2 Under whatcircumstancesmight optingout of the civilsettlementstructure of the2011 OVDI bea disadvantagefor thetaxpayer?

The following scenarios are provided to illustrate the effectof a taxpayer opting out of the civil settlement structure.Opting out of the civil settlement structure does not affectthe status of a taxpayer’s voluntary disclosure underCriminal Investigation’s Voluntary Disclosure Practice, solong as the taxpayer is fully cooperative in the examinationprocess, by providing all requested foreign records andsubmitting to interviews, as requested, and as long as nonew issues are uncovered that were previously notdisclosed. The facts of each example were chosen toillustrate particular issues and do not represent a fullanalysis of a taxpayer’s particular situation.Consequently, they may not be relied upon in dealing withany taxpayer’s actual case. For all of the followingexamples, assume a 35% tax rate on all unreported incomeand assume a voluntary disclosure started in January2012 for a voluntary disclosure period of 2003 through2010.

Example 6 — Large Unreported Gain

The taxpayer, a U.S. citizen, opened a checking account inCountry A in 2008 with funds upon which U.S. taxeswere previously paid. The taxpayer discloses that he hadfailed to report the sale, in 2008, of an apartment buildingin Country A that he owned. The apartment building wasvalued at $10 million and the taxpayer’s unreported gainon the sale was $6 million. The related tax deficiency was$2,100,000. The taxpayer deposited the entire $10 million,from the sale, in the checking account with the foreignbank. $10 million represented the highest balance in theforeign checking account during the year and was thebalance in the account as of June 30 of the following year,the date that an FBAR was due.

The apartment building that was sold was held in aforeign trust that was a grantor trust (with the taxpayer asthe grantor). The taxpayer established the trust in 2008,just prior to the sale of the apartment building, andtransferred the building to the trust. The taxpayer did not

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file a Form 3520 to report the creation of the trust and thetransfer of property into the trust.

The Offshore Penalty under OVDP will be $2,750,000(i.e., 27.5% of $10 million). The taxpayer would also berequired to pay the $2,100,000 tax deficiency, interest, anda 20% accuracy-related penalty. A 20% penalty on a$2,100,000 deficiency is $420,000.

If the taxpayer elected to opt out, he could face an FBARpenalty with respect to the 2008 calendar year of$5,000,000 (i.e., a 50% willful FBAR penalty on thebalance in the checking account as of June 30, the datethat the FBAR was due). Taxpayer will also owe tax,penalties, and interest with respect to the $2,100,000deficiency. The taxpayer would also be subject to FBARpenalties for all other open years, if the aggregate balancein the checking account exceeded $10,000 during eachyear.

Upon examination, the revenue agent may determine thatthe nonreporting was due to fraud. In that case, the civilfraud penalty on the $2.1 million tax deficiencyattributable to fraud would be $1,575,000 (i.e., 75% of$2,100,000).


Opt outand 1 year

willfulFBARpenalty

Opt outand

assumethe civilfraud

penaltyapplied


$2,100,000 $2,100,000 $2,100,000


$420,000 $420,000 0


$2,750,000 0 0

Civil FraudPenalty

0 0 $1,575,000

§6677Penalty

0 $3,500,000 $3,500,000

Total $5,270,000 $11,020,000 $12,175,000

The IRC § 6677 penalty for failing to file the Form 3520information return would be an additional $3.5 million(i.e., 35% of $10 million).

Example 7 — Civil Fraud Penalty Warranted

In 2002, Taxpayer sold a building located in Country Xfor $400,000 short term capital gain, which heintentionally failed to report on his 2002 Form 1040.Assume the taxpayer’s basis in the building was zero. Hedeposited the sales proceeds in an offshore account with abank located in Country Y. The account with the bank in

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Country Y is in the name of a trust the taxpayerestablished in Country Z in 2000. The account earned$12,000 in interest each year from 2003 through 2010.The taxpayer closed the account with the bank in CountryY in 2010 and brought the funds back into the UnitedStates, disguising the funds as a loan from an allegedlyunrelated entity.

The highest balance in the foreign account was $496,000.The Offshore Penalty under OVDP is $136,400 (i.e.,27.5% of $496,000). The total of the tax deficiencies forthe years 2002 through 2010 was $173,600. This consistedof a tax deficiency of $140,000 for the 2002 year (for theunreported gain of $400,000) and a total of $33,600 forthe tax years 2003 through 2010 (for the unreportedinterest income). The 75% civil fraud penalty wouldotherwise apply with respect to the related tax deficiencies.There is no statute of limitations for assessments of taxattributable to fraud.

The total of the IRC § 6677 penalty for failing to file aForm 3520 to report the $400,000 transfer to the account(35% of $400,000) and the failure to file Forms 3520-A(5% of the $400,000 plus the interest income added eachyear) was $495,200.

The statute of limitations for assessing FBAR penalties forwillful violations in each year is open for the 2005 through2010 calendar years. The total amount of willful FBARpenalties that may be assessed is $1,398,000 (50% of thebalance in the account for each year, including the $12,000in interest income added to the account each year).


Opt out and 8years §6677

penalty and 6years FBAR

Penalty


$33,600 $173,600

75% CivilFraud Penalty

0 $130,200

20% Accuracy-relatedpenalty

$5,040 0


$136,400 0

§6677 Penalty 0 $495,200

FBAR Penalty 0 $1,398,000

Total $175,040 $2,197,000

51.3 If I opt outof the OVDPand undergoa regularexamination,is there achance mycase could bereferred back

If I opt outof the OVDPand undergoa regularexamination,is there achance mycase could bereferred back

Yes. Criminal Investigation’s Voluntary DisclosurePractice provides a recommendation that you notbe prosecuted for violations up to the date of yourdisclosure. If your disclosure is ultimatelydetermined to have not been complete, accurate,and truthful, or if you commit a crime after thedate of your voluntary disclosure, you arepotentially subject to penalties and prosecution.

Yes. Criminal Investigation’s Voluntary DisclosurePractice provides a recommendation that you notbe prosecuted for violations up to the date of yourdisclosure. If your disclosure is ultimatelydetermined to have not been complete, accurate,and truthful, or if you commit a crime after thedate of your voluntary disclosure, you arepotentially subject to penalties and prosecution.

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to CriminalInvestigationfor penaltiesorprosecution?

to CriminalInvestigationfor penaltiesorprosecution?

52. Deleted. Ifyou havecircumstancescovered byformer FAQ52, youshould notuse OVDPand shouldsee section 2of the‘‘OptionsAvailable ForU.S.TaxpayerswithUndisclosedForeignFinancialAssets.’’

Under whatcircumstanceswould ataxpayermaking avoluntarydisclosureunder thisinitiativequalify for areduced 5percent offshorepenalty?

Unless the taxpayer would owe a lesser amount underFAQ 50, taxpayers making voluntary disclosures who fallinto one of the three categories described below will qualifyfor a 5 percent offshore penalty. Examiners have noauthority to negotiate a different offshore penaltypercentage.

1. Taxpayers who meet all four of the followingconditions: (a) did not open or cause the accountto be opened (unless the bank required that a newaccount be opened, rather than allowing a changein ownership of an existing account, upon thedeath of the owner of the account); (b) haveexercised minimal, infrequent contact with theaccount, for example, to request the accountbalance, or update accountholder informationsuch as a change in address, contact person, oremail address; (c) have, except for a withdrawalclosing the account and transferring the funds toan account in the United States, not withdrawnmore than $1,000 from the account in any yearfor which the taxpayer was non-compliant; and(d) can establish that all applicable U.S. taxeshave been paid on funds deposited to the account(only account earnings have escaped U.S.taxation). For funds deposited before January 1,1991, if no information is available to establishwhether such funds were appropriately taxed, itwill be presumed that they were.

Example 1: When the taxpayer’s father died, the taxpayerinherited two offshore accounts. His father’s last deposit tothe accounts was more than 30 years ago. The taxpayerprovided his email address to the bank to receive bankstatements by email and indicated an investment approachas required by the bank to open the account in thetaxpayer’s name. Twice he has been to the foreignjurisdiction and talked to a banker— during one of thosevisits he withdrew $1,000 from one of the accounts.Otherwise, he did not withdraw any money from theaccounts until last year, when he closed the accounts andrepatriated the money to a U.S. bank. He never reportedearnings on the accounts on his U.S. tax returns and henever filed an FBAR. He is entitled to the reduced 5%offshore penalty. Example 2: The facts are the same as inexample 1, except that $40,000 of the funds were depositedto one of the accounts in 1995. The taxpayer would haveto identify the source of the deposit and, if the source wastaxable in the U.S., prove that U.S. income tax was paidon those funds. In the absence of such proof, the taxpayeris not entitled to the reduced 5% offshore penalty. Example3: The facts are the same as in example 1, except thatsubsequent to opening the account, the taxpayervoluntarily provided instructions to the bank concerningthe investment of funds. The taxpayer is not entitled to thereduced 5% offshore penalty.

2. Taxpayers who are foreign residents and whowere unaware they were U.S. citizens.

Example 1: The taxpayer was born in the U.S. to parents

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of foreign citizenship. She grew up in a foreignjurisdiction, unaware that she had been born in the U.S.She has a $60,000 account in the foreign jurisdiction. Shehas never filed U.S. returns or FBARs. She became awareshe was a U.S. citizen when she had to get a birthcertificate in order to obtain a passport from the foreignjurisdiction where she resides. Unless she decides to optout, she is entitled to the reduced 5% offshore penalty.Subsequent to learning of her U.S. citizenship, taxpayertook no action with respect to her foreign accounts thatwould disqualify a U.S. taxpayer from the 5 percentpenalty under paragraph 1, above. Also see FAQ 51.1Examples 4 and 5.

Non-resident taxpayers should also review the New FilingCompliance Procedures for Non-Resident U.S. Taxpayersto determine if they qualify for the new complianceprocedures. Example 2: The facts are the same as inexample 1, except that the taxpayer always knew she wasa U.S. citizen and never inquired about her U.S. taxobligations. The taxpayer is not entitled to the reduced 5%offshore penalty, unless she qualifies under paragraph 1 or3. Also see FAQ 51.1 Examples 4 and 5.

Non-resident taxpayers should also review the New FilingCompliance Procedures for Non-Resident U.S. Taxpayersto determine if they qualify for the new complianceprocedures.

3. Taxpayers who are foreign residents and whomeet all three of the following conditions for all ofthe years of their voluntary disclosure: (a)taxpayer resides in a foreign country; (b) taxpayerhas made a good faith showing that he or she hastimely complied with all tax reporting andpayment requirements in the country ofresidency; and (c) taxpayer has $10,000 or less ofU.S. source income each year. For these taxpayersonly, the offshore penalty will not apply tonon-financial assets, such as real property,business interests, or artworks, purchased withfunds for which the taxpayer can establish that allapplicable taxes have been paid, either in the U.S.or in the country of residence. This exception onlyapplies if the income tax returns filed with theforeign tax authority included the offshore-relatedtaxable income that was not reported on the U.S.tax return.

Example 1: The taxpayer is a U.S. citizen who has livedand worked as a corporate executive in Country X since1995. His income has included earnings in excess of$250,000 in each year, as well as bank interest andinvestment income on financial accounts that had a highaggregate balance of $1.2 million in 2009. He has paid allrequired taxes on his earnings and investment income inCountry X in every year, but has filed no U.S. income taxreturns since moving out of the United States. In additionto his financial accounts, the taxpayer has acquired apersonal residence in Country X with an equity of$900,000 and an automobile worth $85,000, bothfinanced with previously taxed savings from the U.S., aswell as his salary and investment earnings in Country X.

Because the taxpayer was fully tax compliant in CountryX, he will be eligible for a reduced offshore penalty of 5percent of the value of the financial accounts, or $60,000.

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The residence and automobile will not be included in thepenalty base because the funds used to acquire them werefully taxed in the Country X.

Non-resident taxpayers should also review the New FilingCompliance Procedures for Non-Resident U.S. Taxpayersto determine if they qualify for the new complianceprocedures. Example 2: The taxpayer is a U.S. citizen whohas lived in Country X since 1995. He is an entrepreneurwho developed his own software business, which heoperated as a wholly owned corporation, ABC Corp.,incorporated in Country X, until he took the corporationpublic in 2005. After the IPO, the taxpayer sold ABC stockat a capital gain of $5 million, and retained other ABCstock with a market value of approximately $20 million.He used $2 million of the stock proceeds to purchase apersonal residence and put the remainder in his investmentaccounts. His income has included salary exceeding$250,000 in each year, the $5 million capital gain in 2005,and bank interest and investment income on financialaccounts that had a high aggregate balance of $3.8 millionin 2009. He has paid all required taxes on his earnings,capital gain, and investment income in Country X inevery year, but has filed no U.S. income tax returns sincemoving out of the United States.

Because the taxpayer was fully tax compliant in thecountry of residence, he will be eligible for a reducedoffshore penalty of 5 percent of the value of the financialaccounts, or $190,000. The ABC stock and the personalresidence will not be included in the penalty base becausethe funds used to acquire them were fully taxed in thecountry of residence.

Non-resident taxpayers should also review the New FilingCompliance Procedures for Non-Resident U.S. Taxpayersto determine if they qualify for the new complianceprocedures.

53. Deleted. Ifyou havecircumstancescovered byformer FAQ53, youshould notuse OVDPand shouldsee section 2of the‘‘OptionsAvailable ForU.S.TaxpayerswithUndisclosedForeignFinancialAssets.’’

Under whatcircumstanceswould ataxpayermaking avoluntarydisclosureunder thisinitiativequalify for areduced 12.5percent offshorepenalty?

Unless the taxpayer qualifies for a lesser payment ascalculated under FAQ 50 or a 5 percent offshore penaltyunder FAQ 52, taxpayers whose highest aggregate accountbalance (including the fair market value of assets inundisclosed offshore entities and the fair market value ofany foreign assets that were either acquired withimproperly untaxed funds or produced improperly untaxedincome) in each of the years covered by the OVDP is lessthan $75,000 will qualify for a 12.5 percent offshorepenalty. As in other cases, examiners have no authority tonegotiate a different offshore penalty percentage.

Example 1: The taxpayer was born in a foreignjurisdiction and is now a U.S. citizen. He has alandscaping business in the U.S. He sends money to anaccount in the foreign jurisdiction that he owns jointlywith his mother (who is a resident of that jurisdiction).The account never has more than $75,000 in it. He hasnever filed an FBAR or paid U.S. tax on the earnings fromthe account. He is entitled to the reduced 12.5% offshorepenalty. The result would be the same for taxpayers whoare U.S. citizens by birth. Example 2: The facts are thesame as in example 1, except that the taxpayer made adeposit to the account in 2005 that briefly brought theaccount balance to $78,000. Because the highest accountbalance during the years covered by the OVDP was greaterthan $75,000, the taxpayer is not entitled to the reduced12.5% offshore penalty.

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54. I have aCanadianregisteredretirementsavings plan(RRSP),registeredretirementincome fund(RRIF), orother similarCanadianplan. I didnot make atimelyelectionpursuant toArticleXVIII(7) ofthe U.S.-Canadaincome taxtreaty todefer U.S.income taxon incomeearned by theRRSP orRRIF thathas not beendistributed,but I wouldnow like tomake anelection.What shouldI do?

I have aCanadianregisteredretirementsavings plan(RRSP),registeredretirementincome fund(RRIF), orother similarCanadianplan. I didnot make atimelyelectionpursuant toArticleXVIII(7) ofthe U.S.-Canadaincome taxtreaty todefer U.S.income taxon incomeearned by theRRSP orRRIF thathas not beendistributed,but I wouldnow like tomake anelection.What shouldI do?

Taxpayers should provide the followinginformation (see FAQ 7):

• A statement requesting an extension of timeto make an election to defer income tax

• Forms 8891 for each of the tax years and typeof plan covered under the voluntarydisclosure

• A dated statement signed by the taxpayerunder penalties of perjury describing:– Events that led to the failure to make the

election– Events that led to the discovery of the

failure– If the taxpayer relied on a professional

advisor, the nature of the advisor’sengagement and responsibilities

Taxpayers whose cases previously have beenresolved and closed with a Form 906 closingagreement who believe that the account balance ofthe RRSP or RRIF was included in the calculationof the miscellaneous Title 26 offshore penalty andwould now like to make an election shouldprovide a statement to this effect including allpertinent contact information (name, address, SSN,home/cell phone numbers), the name of theexaminer assigned to their case, and a copy of theclosing agreement. This information should be sentto:Internal Revenue Service3651 S. I H 35 Stop 4301 AUSCAustin, TX 78741Attn: OVDP Determination

Upon receipt of this information, the case will beassigned to an examiner. The examiner willprovide the taxpayer with further instructions onmaking the election. Making this election does notpreclude an OVDP participant from electing to optout of the civil settlement structure of theprogram.

The answer depends upon whether you are participatingin the OVDP announced by the IRS on January 9, 2012,the 2011 OVDI, or the 2009 OVDP.

Taxpayers who are participating in the OVDP announcedby the IRS on January 9, 2012, should provide thefollowing information (see FAQ 7):

• A statement requesting an extension of timeto make an election to defer income tax

• Forms 8891 for each of the tax years and typeof plan covered under the voluntarydisclosure

• A dated statement signed by the taxpayerunder penalties of perjury describing:

– Events that led to the failure to make theelection

– Events that led to the discovery of thefailure

– If the taxpayer relied on a professionaladvisor, the nature of the advisor’sengagement and responsibilities

Taxpayers who are participating in the 2011 OVDIshould wait until they are contacted by an examiner abouttheir case. Once they are contacted, they should inform theexaminer of their desire to make an election and providethe examiner the information listed above. Taxpayers whoparticipated in the 2009 OVDP whose cases have not beenresolved and closed with a Form 906 closing agreementshould inform the examiner working their case of theirdesire to make an election and provide the examiner theinformation listed above. Taxpayers who participated inthe 2009 OVDP whose cases have been resolved andclosed with a Form 906 closing agreement whobelieve that the account balance of the RRSP orRRIF was included in the calculation of themiscellaneous Title 26 offshore penalty and wouldnow like to make an election should provide astatement to this effect including all pertinentcontact information (name, address, SSN, home/cell phone numbers), the name of the examinerassigned to their case, and a copy of the closingagreement. This information should be sent to:Internal Revenue Service3651 S. I Hi 35 Stop 4301 AUSCAustin, TX 78741Attn: 2009 OVDP Determination

Upon receipt of this information, the case will beassigned to an examiner. The examiner willprovide the taxpayer with further instructions onmaking the election.

Making this election does not preclude an OVDPparticipant from electing to opt out of the civilsettlement structure of the program.

54.1 If myelection isgranted, willthe RRSP orRRIF balancebe includedin theoffshorepenalty base?

If myelection isgranted, willthe RRSP orRRIF balancebe includedin theoffshorepenalty base?

No. No.

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55. I have aretirement orpension planin a foreigncountry(other than aplandescribed inFAQ 54) thatI do notbelieveshould beincluded inthe offshorepenalty base.What shouldI do?

I have aretirement orpension planin a foreigncountry(other than aplandescribed inFAQ 54) thatI do notbelieveshould beincluded inthe offshorepenalty base.What shouldI do?

If you have a retirement or pension plan in aforeign country (other than a plan described inFAQ 54) for which you believe there is no U.S.reporting requirement and that you believe shouldnot be included in the offshore penalty base, youshould contact the OVDP hotline at1-267-941-0020.

If you have a retirement or pension plan in aforeign country (other than a plan described inFAQ 54) for which you believe there is no U.S.reporting requirement and that you believe shouldnot be included in the offshore penalty base, youshould contact the OVDI hotline at (267)941-0020.

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