Completing the work for a submission through the Offshore Voluntary Disclosure Program (OVDP) is a daunting task at best and a darn good excuse for a beer or glass of wine with lunch. The IRS has made a great opportunity available for taxpayers participating in the formal Offshore Voluntary Disclosure Program by allowing for a special simplified and lower rate PFIC mark to market alternate resolution.
Under the regular §1296 mark to market rules and election can only be made on a timely filed return and unrealized gains are included as ordinary income each year and losses are allowed up to any gains included in prior years.
Offshore Voluntary Disclosure Program mark to market is completely different. It allows the mark to market election to be made on the earliest return in the OVDP period. Gains are taxed at 20% (not the highest tax rate) and there is an interest charge of 7% only on the first year. Subsequent years in the program see appreciation in the shares taxed at 20% (instead of being added to income) with no interest charge. Unreversed inclusions are tracked and losses are allowed as a negative 20% tax (instead of a subtraction from income) to the extent there was prior gain taxed under the alternate mark to market. At the end of the 8 year OVDP period, unreversed inclusions are reset to zero and the taxpayer begins reporting under the regular §1296 rules going forward.
If you are considering Streamlined Offshore Procedure filing and there is a large amount of PFIC gain involved, the end result may be better to file the additional 5 years of tax returns and pay the penalties under the Offshore Voluntary Disclosure Program- you will need to run the numbers, have the conversation with your client, then let them make an informed decision on which solution is the best fit for their situation.