Six Major Defects of the IRS Streamlined OVDI Program

Here is the continuation of the discussion about the major issues with IRS streamlined OVDI.

The Internal Revenue Service claims, its answer, it came up with the streamlined OVDI program. At first, I was optimistic. This might reduce the compliance cost as well as penalties for numerous people who did nothing all that wrong. My optimism was crushed, once I started out analyzing the nitty gritty of the streamlined program. And I observed six major deficiencies.

First, this streamlined program is only open to whoever has not filed a US tax return within the last six years. Again, if you filed a US tax return you cannot participate in the streamlined program regardless of how little your unreported taxes was. It is a perverse standard, as someone who made a partial attempt at compliance is at a disadvantage to a person who made no attempt.

Second, the streamlined agreement only holds true for expats or American people living abroad. So for the vast amount of Visa holders as well as green card holders and also dual citizens residing in the US, this plan is completely useless. This is particularly unfair as a non-citizen US individual is in the worse position to learn about the United States tax system, and definitely benefited less from this, than someone who is an actual citizen.

Third, the streamlined program is only available in case your unreported taxes were $1500 or less in a year. This can be unfair likewise. Imagine a person had $0 in unreported taxes for 5 years and $1501 for just one year. Well as stated by the program requirements, they'd be disqualified out of the streamlined program. That is, a person who has significantly less unreported income will be treated more harshly when compared with somebody who has larger unreported income.

Fourth, the vagueness. The program is only open to those who're something the IRS calls low compliance risks. However the IRS doesn’t provide any kind of concrete specifics of the huge gray area between low and high. I've got a good idea about how the lowest risk will be. But because we move up the continuum - what about medium risk? And what might someone with medium risk do? At the very least the standard OVDI will provide relief from legal prosecution - which makes all the compliance work worthwhile. However the IRS provides absolutely no such sufficient protection for someone coming up with a streamlined disclosure.

Fifth, this 'low risk' 'high risk' analysis will give several tax experts cover to suggest a ‘soft’ disclosure. Let me get to my point. The OVDI program is REALLY complicated. Not to mention this streamlined process simply just made it more complicated. And based upon exactly how many tax experts are advising soft disclosure, I assure you a lot more of them, falsely quoting the streamlined OVDI program as an authority to claim somebody in a low compliance risk thereby, can just blindly sent in amended returns and FBARs outside of the OVDI program. The IRS has cautioned relating to this. So let me make this clear: Low compliance risk is applicable only in case you qualify for the streamlined OVDI. Don't even think about risk analysis if you live in the America or already have filed tax returns - this line of questioning of what your ‘risk’ profile is will not applicable to you.

Sixth, with this initiative, there could be a perceived implication that the IRS can come out with one more streamlined program that addresses many of the concerns I brought up above. The shifting standards can convince someone to delay a decision to make use of the standard OVDI program, because after all, they wish-cast for more and more understanding the IRS.

Look the streamlined OVDI is fine. But it only works if you reside outside of the US, you never filed a return, and your outstanding taxes are less than $1500 per year or you’re a low-compliance risk - whatever that is. But for others, exactly who misses one of those qualifications, if you'd like avoid criminal charges and staggering penalties, you need to use the standard 2012 OVDI program.

Concluding remarks. Look, I understand the IRS is handling a lot of overseas account holders are a raw deal. I know it is unfair. But simply because it is really unfair does not mean it isn't true. Right now, my firm is taking on new clients who are now under audit and have unreported overseas accounts. Sure, we will be able to help them. But these individuals wished that they accepted the painful reality and got into the standard program whenever they had a chance.