Considerations in Relying on CLN as an Alternative to the OVDP and SFOP
For most U.S. citizens residing outside the United States who have not been totally tax compliant, the Offshore Voluntary Disclosure Program (OVDP) and Streamlined Filing Offshore Procedure (SFOP) offer opportunities to address a broad range of past noncompliance. The OVDP and SFOP were initiated by the Internal Revenue Service to process large numbers of somewhat similarly situated taxpayers. The stated objective of these programs is to ‘‘bring taxpayers that have used undisclosed foreign accounts and assets, including those held through undisclosed foreign entities, to avoid or evade tax into compliance with United States tax and related laws.’’ Even taxpayers who have failed to file U.S. income tax returns are eligible to participate in either program.
Taxpayers who are reasonably confident that their non-compliance was non-willful will in most cases take advantage of the SFOP by filing U.S. income tax and information returns for the three most recent years and foreign bank account reporting forms (FBARs) for the six most recent years under Form 14653, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures. Nonresident taxpayers who successfully take advantage of the SFOP escape penalties and are solely liable for taxes and interest on the unreported income. In contrast, taxpayers participating in the OVDP are required to file U.S. income tax returns, information returns, and foreign bank account reports for the eight most recent years and pay taxes, interest, a variety of tax-based penalties, and, most significantly, an offshore penalty of 27.5% or 50% of the high value of foreign assets and accounts during the eight-year OVDP period.
Not all U.S. persons residing outside the United States find the OVDP or SFOP desirable options to address past non-compliance. The offshore penalty regime under the OVDP is often severe.