The OVDP/OVDI “scam” and how a rational country might have handled the program

To bring people back into compliance, the IRS instituted the Overseas Voluntary Disclosure Program (OVDP) in 2009, a program that the American Citizens Abroad (ACA) has termed a “scam.”

According to the ACA, those who participated in OVDP did so with the understanding that non-willing violators (those who were simply not aware of filing obligations) would not be subject to penalty application if they owed no taxes, and a maximum of taxes owed plus $10,000 if they did.

In March 2011, 18 months after the end if the period for entering the OVDP, the IRS retroactively changed the rules of the OVDP and stated that all cases would be treated as wilful violators. […] Under these rules, the OVDP systematically imposed a penalty amounting to 20% of the highest balance in the foreign accounts for each of the six years from 2003 to 2009.

While merely confiscatory for US residents keeping offshore bank accounts for tax evasion purposes, the penalty rate is ruinous for a legitimate expat keeping all their assets in their country of residence. The quiet change in penalties, a “bait and switch,” entrapped those who had participated in good faith.

The penalty amount was increased to 25% for those participating in the 2011 Overseas Voluntary Disclosure Initiative (OVDI). It also threatened criminal prosecution and jail sentences for those who begin filing quietly rather than participating in OVDI.

How Canada does it

Canada has a similar program called the Voluntary Disclosure Program (VDP). Unlike OVDP/OVDI, filers taking advantage of VDP need not fear prosecution. According to

The purpose of the Canada tax amnesty program is to encourage Canadian taxpayers to voluntarily comply with their income tax obligations. Prosecution would be contrary to the goals of the VD program and contrary to the published guidelines (binding on CRA) that make it clear there will be no prosecution.

And it seems that honey is far more effective than vinegar. The above website reports that in 2008-2009, there were 11,000 voluntary disclosures submitted – only a thousand fewer than came forward to the IRS since 2009, and from a much smaller population pool.

You can read the complete ACA report here. It’s long, but well worth reading as it provides a lot of background on FBAR and its discriminating nature.

This entry was posted in FBAR, OVDI / OVDP, US Taxes and tagged , , , , . Bookmark the permalink.

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