The Offshore Voluntary Disclosure Program (OVDP) and the Streamlined OVDP procedures are two programs that the IRS maintains to bring taxpayers that have undisclosed foreign accounts into accordance with the tax laws. Instead of multiple compounded penalties for failure to disclose the offshore account, the taxpayer is given one penalty of 27 and a half percent of the biggest outstanding balance of the undisclosed money. Fines in the Streamlined OVDP for U.S. resident taxpayers are five percent of the highest balance. The advantages and stipulations of each program are different. Before choosing which program to apply to, the taxpayer should understand these the differences.

The OVDP Program is targeted to those taxpayers who are unable to fulfill the non-willfulness standard outlined below. On one hand, the penalty is higher. On the other hand, this program promises taxpayers that are welcomed into the program that they will not be prosecuted for any tax crime if they make full disclosure.

Persons choosing the Streamlined Program are required to certify under penalties of perjury that their failure to comply was not willful and they must also provide a detailed explanation for their non-compliance. In accordance with the Streamlined Procedures, the returns are liable to audit and if the IRS decides that the taxpayer’s actions were willful, the IRS is free to pursue criminal penalties or civil penalties in the amount of the 27 and a half percent fine under OVDP.

Determining the meaning of willfulness is crucial in understanding which program to choose. Willfulness necessitates a facts and circumstances inquiry into the taxpayer’s behavior and state of mind. This being said, only the taxpayer in question can truly determine whether or not their non-disclosure was non-willful. Customarily the meaning of willfulness in a criminal tax case meant, “[A] voluntary, intentional violation of a known legal duty,” U.S. v. Pomponio, 429 U.S. 10(1976). This called for more than negligence or thoughtless disregard. U.S. v. Bishop, 412 U.S. 346 (1973). Willfulness was meant that the taxpayer expressly intended to violate the law. Cheek v. U.S., 498 U.S. 192 (1991).

Additionally, as stated in the Internal Revenue Manual (IRM), the meaning of willfulness in the context of offshore compliance is a “voluntary, intentional violation of a known legal duty.” IRM 4.26.16.4.5.3. The IRM stipulates that the person’s knowledge of the reporting requirement and conscious decision not to comply with the requirement demonstrates willfulness without reasonable cause. The taxpayer can show a lack of willfulness by confirming that the failure to report was due to neglect, oversight, mistake, or behavior that is a result of a good faith misunderstanding of the law. The taxpayer may also show a lack of willfulness by demonstrating reasonable cause for the non-compliance. Reasonable cause may be found in situations where the taxpayer had entrusted their affairs with tax professionals or was not able to comply because of personal illness or illnesses in the taxpayer’s family, casualties, natural disasters, or the inability to acquire records. Read more…

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