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Foreign Account Reporting Options for Taxpayers Who Do Not Qualify for the Offshore Voluntary Disclosure Program (OVDP)

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    The Offshore Voluntary Disclosure Program (OVDP), known in previous years as the Offshore Voluntary Disclosure Initiative (OVDI), was established by the Internal Revenue Service (IRS) to provide a path by which at-risk taxpayers could willingly disclose previously concealed foreign financial accounts and unreported foreign income, as is required of both individuals and entities such as corporations. However, there are two major hurdles to successful participation in the program: the OVDP is ending in 2018, and even if a taxpayer moves swiftly, there is still a possibility that he or she will not qualify and will thus be denied access to the program. There are also cases in which taxpayers choose to leave the program following acceptance and enrollment via a process called an “opt out”. However, regardless of whether a taxpayer leaves the OVDP or is denied access from the outset, he or she must find a way to resolve the outstanding matter of the noncompliant foreign account and unreported foreign income. If you need to disclose offshore income, but have left or been barred from the OVDP, you may be able to pursue one of the alternative options presented for consideration in this article.

    What Are My Options if I Don’t Qualify for the OVDP?

    In 2017, the Large Business and International (LB&I) Division of the IRS, which deals with corporations and business partnerships whose assets exceed a threshold of $10 million, announced the launch of more than a dozen tax campaigns, including the IRC 48C Energy Credit Campaign, the Micro-Captive Insurance Campaign, the Form 1120-F Non-Filer Campaign, and, as this article will focus on, the OVDP Declines-Withdrawals Campaign. To quote a portion of the brief announcement, the OVDP Declines-Withdrawals Campaign “addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to [the] OVDP or withdrew from the program of their own accord”: in other words, taxpayers with unresolved noncompliance issues related to hidden foreign accounts.

    To help such taxpayers reenter compliance, the IRS, as part of the campaign, issued taxpayers written notices titled Letter 5935. You may have received this letter if you either requested pre-clearance to enter the OVDP, or sent a voluntary disclosure letter to the IRS’ Criminal Investigation Division (IRS-CI) in accordance with OVDP provisions, but:

    • Were told you were ineligible.
    • Later withdrew your letter or pre-clearance request.
    • Failed to complete the next steps properly, resulting in rejection from the program.

    The reason you received the letter should be indicated on the notice’s first page. The second (and arguably more important) portion of the letter summarizes several disclosure options. However, you should consult with an OVDP tax attorney before pursuing these options and engaging with the IRS, as there may be unforeseen tax consequences – or legal consequences – of which you are presently unaware. In addition to protecting you from making an uninformed and potentially dangerous decision, your tax lawyer can also handle corresponding with the IRS, protecting your legal rights throughout the disclosure process, and educating you on the requirements that are necessary to successfully fulfill whichever option you ultimately choose.

    Circling back to the notice itself, Letter 5935 highlights three potential options (“Option #1,” “Option #2,” “Option #3”) for reentering compliance. These options are briefly summarized below.

    1. Option #1 – This option entails participating in a modified version of the OVDP known as “streamlined disclosure” (or, where U.S. residents are concerned, such as recent immigrants to the U.S. or frequent business travelers, domestic streamlined disclosure). If you are qualified to use this option, use red ink to write the phrase “RESPONSE TO LETTER 5935” across the top of whichever is appropriate:
      • Form 14653 (Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures)
      • Form 14654 (Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures)
    1. Option #2 – This option entails submitting various forms to the IRS, including:
      1. Pertinent tax returns (e.g. Form 1040 (U.S. Individual Income Tax Return)).
      2. Pertinent information returns, which the IRS lists here.
      3. Related filings, such as FBAR. Note that you must file your FBAR

    Though Option #2 may be the optimal approach for certain taxpayers, it is crucial to note two caveats at this juncture:

    1. As the notice states, “Submissions under [Option #2] are subject to all applicable penalties unless you establish that your noncompliance was due to reasonable cause.” To prove the existence of “reasonable cause,” be prepared to submit a detailed written statement.
    2. You may be selected to undergo an IRS tax audit if you follow Option #2.
    3. Option #3 – This option pertains only to taxpayers who believe they are compliant and feel that the IRS made an error. If this describes your situation, you will be required to (1) “provide a complete history of previous unreported foreign income, foreign entities, and foreign financial accounts,” and (2) “explain the actions you took to become compliant with U.S. reporting requirements.”

    OVDP Tax Attorneys Offering Reduced-Rate Consultations on Foreign Account Disclosures

    If you recently received Letter 5935 from the IRS, it is imperative that you take the notice seriously and discuss your foreign account disclosure options with an experienced tax attorney who is appropriately qualified to assist taxpayers with OVDP-related matters, which sit at the nexus of international tax law, taxes for expats, business tax law, streamlined disclosure/domestic streamlined disclosure regulations, and in some instances, criminal tax defense.

    To set up a reduced-rate consultation with a tax attorney or attorney-CPA from the Tax Law Office of David W. Klasing, an award-winning, nationally recognized law firm with an extensive track record of representing entities and individuals in OVDP proceedings, contact our tax law offices online, or call (800) 681-1295 today to get started. Though located in California, we represent clients around the world.

    Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San BernardinoSanta BarbaraPanorama City, and Oxnard! You can find information on all of our offices here.

    Foreign income and information non-compliance

    If you’re under audit and have undisclosed foreign bank accounts and unreported foreign income see:

    And the following links…

    Here is a link to our practice video on warning signs than an audit has gone criminal.

    What is an eggshell tax audit?

    What is an effective tax defense in an IRS eggshell tax audit?

    So, you cheated on your taxes and you are under a tax audit…

    Why should I hire a tax attorney to represent me in a tax audit?

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