Coming (Fully) Clean: Does the OVDP Cover Unreported Domestic Income?
In terms of sheer revenue generated, limited-amnesty programs for noncompliance with offshore reporting requirements has been tremendously successful for the IRS. Since the IRS started these initiatives in 2009, the amount of revenue generated in fines, penalties and back taxes is upwards of $10 billion.
Many questions remain, however, about the main limited-amnesty program, the Offshore Voluntary Disclosure Program (OVDP). In this post, we’ll tackle this one: If you have unreported income from domestic sources, should cleaning up your tax returns for that income be included in OVDP participation?
The answer is two-fold. Technically the OVDP only applies to offshore compliance, not to income that went unreported from domestic sources. But in practice, it often makes sense, when entering the OVDP, to also seek to resolve other corrections that may be needed in your previous returns.
The IRS addresses this in FAQ 7.1 for the OVDP, as well as in FAQ 24. What if a taxpayer is making a domestic voluntary disclosure and an OVDP disclosure? In this situation, according to IRS, the taxpayer is supposed to indicate on the OVDP letter that there is also a domestic disclosure.
In other words, generally the OVDP only applies to those accounts – not to domestic tax compliance.
In practice, however, there may be the possibility for the IRS to accommodate a taxpayer’s efforts to resolve both domestic and offshore matters as part of the same deal. The question may come down to a matter of degree: if the amount of unreported income is not overly substantial, it may make sense to take care of it in connection with OVDP.
