Offshore Voluntary Disclosure Program to aid NRIs with undisclosed assets

The United States government has actively been pursuing NRIs who have undisclosed offshore assets and income. The United States law requires citizens and residents (i.e., green card holders, H1-B visa holders, and other tax residents) to report their worldwide income and complete a Report of Foreign Bank and Financial Accounts (FBAR) reporting foreign financial accounts. The failure to report such income or accounts can be subject to high civil penalties and criminal prosecution.

Some noncompliant NRIs have begun amending past income tax returns to report previously unreported income and filing delinquent FBARs reporting foreign accounts. However, the US Internal Revenue Service (IRS) has publicly discouraged the practice of quietly filing such documents and warned that such practice, if discovered, could be subject to numerous penalties. Also, some tax professionals do not recommend the quiet filing approach because of the heightened risk of audit by the IRS when filing amended or delinquent reporting obligations. Other tax professionals sometimes recommend the quiet filing approach in certain low risk situations.

However, another possible solution to come into compliance is the IRS’ Offshore Voluntary Disclosure Program that began in 2012. Following the success of the 2009 Offshore Voluntary Disclosure Program (OVDP) and the 2011 Offshore Voluntary Disclosure Initiative (OVDI), the IRS reinstated the OVDP in order to help those with undisclosed offshore funds to become compliant with US tax laws.

The OVDP’s main goal is to bring taxpayers that have undisclosed foreign assets and income into compliance with current US tax laws. The OVDP makes it possible for taxpayers who have previously failed to report foreign assets and income, to pay a one-time penalty and avoid risk detection from the IRS, including avoiding possible prosecution. When entering OVDP, the taxpayer agrees to open the last eight years to be examined by the IRS in order to fully disclose. After the eight years have been disclosed, a 27.5 per cent penalty is then assessed on the highest aggregate balance year. Although the penalty may be high, it can outweigh the risk for many taxpayers.

Under the US Foreign Account Tax Compliance Act (FATCA) it is expected that Indian banks will soon begin disclosing the names of American clients to the US government. The US Department of Treasury website indicates that India has reached an intergovernmental agreement with the US in substance beginning from April 11, 2014. It is anticipated that a USA-India FATCA agreement will be formally signed soon. As a result, many NRIs may be involuntarily discovered.

To incentivize people to participate in OVDP, once a name has been disclosed to the IRS the person may no longer enter the OVDP program and is at risk of prosecution. Therefore, NRIs who become involuntarily disclosed are no longer eligible for the program and are at a much higher risk than those who have chosen to disclose their accounts.

In many instances, it is beneficial to participate in the OVDP. For instance, taxpayers who have knowingly failed to report any offshore bank accounts or those who hold accounts in banks that the IRS has been actively pursuing should strongly consider participating in the program.

However, there are cases where OVDP is not the best course of action. If a taxpayer’s funds are so low and/or offset by losses that the IRS did not lose any money, if the taxpayer owned a property but no rental income was collected, or if the taxpayer had power of attorney on an account but did not own the account, then participating in OVDP may not be the best compliance solution. Each case is different and taxpayers should consult a tax attorney before deciding to enter the program.