Understanding Compliance and Disclosure of Overseas Bank Accounts

Without a firm deadline in place from the IRS, U.S. citizens and resident aliens need to comply as soon as possible with the Offshore Voluntary Disclosure Program to avoid significant penalties and criminal prosecution.

Modeled after the Offshore Disclosure Initiative, OVDP was passed in 2012 and increases the maximum Foreign Bank Account Reports-related penalty from 25 to 27.5 percent. Using foreign accounts or living abroad does not absolve citizens or alien residents of filing obligations or penalties related with failing to report income or filing a tax return.

The OVDP requires submission of income tax returns and FBARs for eight tax years to avoid prosecution and penalties. Although there is no set deadline for people to apply, the terms of the program could change at any time, which is why immediate compliance is necessary.

This program is just a facet of a wider effort by the IRS to stop offshore tax evasion and ensure tax compliance. It also includes criminal prosecution and third-party reporting under the Foreign Account Tax Compliance Act, enacted in 2010. Under FATCA, a Foreign Financial Institution may agree to report information on U.S. accounts. FFIs that choose not to enter into this agreement are subject to a 30 percent withholding tax on all U.S. sourced payments.

The clock on compliance is ticking as foreign banks work hard to identify their account holders who are U.S. citizens. Banks that do not wish to comply with the reporting requirement will identify U.S. customers, notify them of their tax obligations, and finally follow-up by closing the account.

Some U.S. citizens living abroad and dual citizens who have complied with tax rules where they reside raised concern that they should not be subject to this level of scrutiny. Those citizens claim they were simply unaware they were still required to file U.S. tax returns or disclose their foreign accounts. In response, the IRS created a Streamlined Filing Procedure for non-resident U.S. taxpayers, intended to encourage current non-residents and dual citizens to comply by filing delinquent returns.

The streamlined procedure is designed for taxpayers who present a low compliance risk with a history of following proper tax procedures up until the point of current overseas banking issues. The new procedures are for non-residents including, but not limited to, dual citizens who have not filed U.S. income tax or FBARs. Taxpayers who believe they are low-risk account holders should consult a tax professional to determine if they are an appropriate candidate for the program.

The IRS will analyze submitted questionnaires and filed tax returns to determine the level of compliance risk. The reviews will be expedited and it is expected that those classified as low compliance risk will not have penalties or other follow-up actions. Submissions that present higher compliance risks are not eligible for the streamlined procedure and will be subject to a more thorough review and possibly full examination.

Low-risk taxpayers will be required to file delinquent tax returns (with appropriate related information returns) for the past three years and delinquent FBARs for the past six years, with payment for tax and interest, if necessary. Additionally, taxpayers must complete a questionnaire identifying the taxpayer's financial interests in foreign financial accounts, including financial accounts outside their country of residence and other questions relating to their foreign interests and compliance.


Tony Torchia, CPA, is a partner at RotenbergMeril where he primarily engages in tax planning and multi-state compliance issues for closely-held entities, international companies and their owners. Torchia is the director of the firm’s trust and estate taxation practice and retirement plan audit services. RotenbergMeril is dedicated to helping clients resolve complicated international tax issues, navigate FATCA and other tax-related regulations, and gain tax compliance. For more information please visit http://www.rmsbg.com.