Offshore Voluntary Disclosure Programs - OVDP
How Does OVDP Provide Foreign Account Reporting ReliefMany do not realize it, but the IRS imposes some of the most profoundly complicated, far-reaching, and difficult to comprehend regulations surrounding the possession, information reporting, and taxation of foreign assets, accounts, business entities/transactions, estates and trusts in the world. There is significant complexity involved in the regular reporting of foreign accounts to satisfy obligations like FBAR. Furthermore, if a mistake is made regarding foreign accounts, relief is available. However, filing for Offshore Voluntary Disclosure Program is complex and further error can further exacerbate the situation. Additionally, the IRS frequently makes changes to the program. Therefore, it is prudent to work with an experience international tax attorney for all of your offshore tax and information reporting concerns. Aside from the complexity discussed above, taxpayers must also contend with the disinformation promulgated by unethical foreign bankers that often helped create the problems faced by many of our clients in the past. Some of these individuals and companies will work under the auspices of providing “offshore asset protection services.” Others might advise clients to keep foreign accounts secret no matter what. Unfortunately, this type of advice is often a fast-track to facing a tax enforcement action and potentially criminal tax penalties.
Disclosing Foreign Accounts, Assets, Inheritances or Business ActivityIf you hold foreign accounts or foreign assets in excess of $10,000 there is a significant likelihood that you are required to file an FBAR. An FBAR is required to be filed for every year where you hold assets in excess of the reporting threshold. U.S. citizens and residents must annually report their direct or indirect financial interest in a financial account (or signature authority over) located in another country if the value in that account (or the aggregate value of all foreign accounts) exceeded, at some point, $10,0000 during the year. Some taxpayers may also have an obligation to disclose under FATCA and other disclosure laws even if the accounts are already disclosed to satisfy FBAR. The failure to make any foreign disclosure is a potentially serious error and all steps should be taken to avoid even accidental non-compliance. The intentional non reporting of an FBAR is a criminal act that is highly likely to be criminally prosecuted where accompanied with significant unreported taxable income.
New FBAR Filing Deadlines for 2017New FBAR filing deadlines that significantly speeds up the filing timeline for 2016 tax year filings, is likely to result in additional confusion and accidental noncompliance with the law. FBARs were traditionally filed by June 30th for the previous year’s taxes. Thus, one’s FBAR concerning the 2015 tax year would have been due by June 30, 2016. For the upcoming FBAR obligation, the filing deadline has been expedited to align with the tax filing deadline. That means, per FinCEN Notice 2015-1, FBARs are due by April 15, 2017 – more than 2.5 months prior to the old deadline. While certain relief provisions are available to smooth the transition to the new deadline, there is a high likelihood for U.S. taxpayers to be surprised by the expedited deadline and to fall out of compliance.
IRS Penalties for Failing to Disclose Foreign Accounts
- Failure to file FBAR Form (FinCEN Form 114) - The civil penalty, if the individual acted willfully in failing to file an FBAR, can be 50% of the total amount in the foreign account or $100,000, whichever is greater. See IRC § 5321(a)(5). However, if the taxpayer acted non-willfully, the penalty can be reduced to $10,000.
- Failure to file Form 8938. IRC §6038D – To satisfy FATCA, taxpayers are required to file an informational report they have an interest in a foreign financial asset, account, certain security, or entity. A $10,000 penalty is imposed for each Form not filed. In addition, 90 days after a taxpayer is notified of his tax liability there is a $50,000 (max) penalty per return.
- Failure to file Form 3520 - IRC §6048 requires that taxpayers report transactions with foreign trusts, the creation of them, property transfers to them, and receipt of distributions from them. The penalty is $10,000 or from 25% to 35% of the gross reportable amount, whichever is greater.
- Failure to file Form 3520-A -- Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns is the greater of: $10,000 or 5% of the gross value of trust assets determined to be owned by the U.S. citizen or resident.
- Failure to file Form 5471 -- When a U.S. individual is an officer, director or shareholder in certain foreign corporations he or she is required, under IRC §§ 6035, 6038 and 6046, to report information. The penalty is $10,000, with an additional $10,000 added for each month the failure continues (provided 90 days has passed after the taxpayer is notified of the delinquency), but the max penalty is $50,000 per return.
- Failure to file Form 5472--This informational return relates to U.S. corporations that are partly owned by foreign individuals or entities. IRC §§ 6038A and 6038C require that certain taxpayers report transactions between 25% foreign-owned corporations (i.e. U.S. corporations that are partly foreign owned) that do business in the United States. The penalty is $10,000, with an additional $10,000 added for each month the failure continues (provided 90 days has passed after the taxpayer is notified of the delinquency).
- Failure to file Form 926 -- Under IRC §6038B, taxpayers must report transfers of property to foreign corporations and other information. The penalty for failing to file each one of these information returns is 10% of the value of the property transferred (with a max of $100,000 per return). However, there is no upper limit if the taxpayer intentionally failed to file this Form.
- Failure to file Form 8865 -- This informational return relates to a taxpayer’s interest in, or transactions with, foreign partnerships. The relevant tax rules on this are found in IRC §§ 6038, 6038B, and 6046A. The penalties include $10,000 for each return not filed, with an additional $10,000 added for each month the failure continues (provided 90 days has passed after the taxpayer is notified of the delinquency), but there is a max of $50,000 per return; in addition, there is a penalty of up to 10% of the value of the property transferred that is not reported (subject to a $100,000 limit).
- Fraud penalties under IRC §§ 6651(f) and 6663 -- If a taxpayer underpaid his taxes, failed to file his taxes, and that was because there was fraud involved, then he or she may be liable for certain penalties, which could include a 75% penalty on the unpaid tax.
- Failure to file a tax return -- Under IRC § 6651(a)(1), taxpayers are generally required to file income tax returns. Thus, if a taxpayer fails to do so, a penalty of 5% of the balance due may be imposed. In addition, 5% more may be added for each month the return is not filed, with the max penalty reaching 25%.
- Failure to pay tax -- Under IRC § 6651(a)(2), if a taxpayer fails to his or her tax liability, the taxpayer may be liable for a penalty of 0.5% of the amount of tax due. In addition, 0.5% more may be added for each month the return is not filed, with the max penalty reaching 25%.
- An accuracy-related penalty -- Under IRC § 6662, a taxpayer may be subject to a 20% or a 40% accuracy-related penalty. An example of an accuracy-related penalty is the “substantial understatement” penalty or the “negligence or disregard of the rules or regulations” penalty.
How Can I Fix Offshore Disclosure Mistakes?In 2014, the IRS updated its OVDP/OVDI initiative to the 2014 OVDP. OVDP is a program that allows taxpayers with undisclosed offshore accounts, inheritances, and assets and related non reported taxable foreign income to “come clean”—with the hope of putting the past behind them. Until the IRS indicates otherwise, 2014 OVDP still applies for 2016 filings and beyond. This program is similar to the previous programs, but there are some significant differences. We explain these differences below. The 2014 OVPD is similar to the one the IRS introduced in 2012. In fact, the IRS’s own Publication states unequivocally that this new program is simply a “continuation of the program introduced in 2012” but with “modified terms.” These modifications become effective on July 1, 2014. The objective of the 2014 OVDP is the same as the prior programs: “To bring taxpayers that have used undisclosed foreign accounts and assets . . . to avoid or evade tax [back] into compliance” with the tax laws.
The OVDP Program May Be Problematic for the UnwaryThe 2014 changes introduced important considerations for taxpayers. The main import of the changes to the 2012 OVDI program is that “one size fits all” approach of the prior programs, where everyone is deemed guilty of fraud by the mere act of entering the program, has been replaced with what I call “be careful what you wish for”. To navigate the 2014 OVDP you will now be required to consult with a competent criminal tax defense attorney and make a determination if you committed fraud when you fell out of compliance. Depending on this determination, the new program essentially creates two doors to go through to resolve your foreign noncompliance.
- Door number 1: Is the standard OVDP program that provides for non-prosecution of tax crimes if the program’s terms are strictly complied with. One important step of voluntary disclosure is the preparation of 8 years of FBARS. The other basic terms of the 2014 OVDP program are 8 years of amended returns, a 20% negligence penalty on any additional tax shown on the amended returns, and interest calculated back to the original filing dates of the amended tax returns.
- Door number 2: is an expansion of the prior streamlined filing compliance procedures that is accessible here: Streamlined Filing Compliance Procedures. Streamlined compliance is typically less burdensome to file for but does not provide the same protection from criminal prosecution as with the OVDP program. This programs basic terms are 3 years of amended returns and 6 years of FBARS along with a 5% FBAR penalty (U.S. tax resident’s only – Expats potentially escape an FBAR penalty altogether) for the high water value mark of the offshore accounts and tainted assets that existed during the 6 year FBAR period.
Is this a Tax Amnesty Program?Please note that there is no guarantee of non-prosecution for subsequently discovered tax crimes that exist, and thus, a substantial risk is involved in choosing this option. If it is determined with your counsel that you committed fraud because you were, what the government considers, “willful” in falling out of compliance, you will need to make an Offshore Voluntary Disclosure. The OVDP has similar terms as contained in the 2012 OVDI program, except that the 12.5% penalty for accounts and foreign assets that never exceeded $75,000 in value during the 8-year disclosure period is no longer available after 6/30/14. Additionally, the standard offshore FBAR penalty will be 27.5% unless your bank or the person that facilitated your offshore activity is under criminal investigation and on the following list: List of foreign financial institutions or facilitators. If your bank does appear, the 27.5% FBAR penalty ratchets up to 50% unless you entered the 2014 OVDP program by 8/4/14. You are not considered to have entered the 2014 OVDP program and thus entitled to amnesty, until you have sent in the 2014 OVDP voluntary disclosure (Intake) letter and attachments which should never be done without the assistance of an experienced international tax attorney.
Role Experience Plays in the Offshore Voluntary Disclosure ProgramIf the IRS finds out that you have been hiding the existence of offshore accounts to facilitate the evasion of US income taxes on your foreign income generating assets, you will face significant consequences which potentially including a federal prison sentence. It is imperative that the negligence versus willfulness discussion be had with a qualified criminal tax defense attorney so that attorney-client privilege will apply and you get the required tax expertise necessary to reach the correct conclusion. Stated differently, where it exists, the accountant-client privilege is not robust enough to protect potentially criminal disclosures from discovery. If you have this discussion with any other tax professional (especially CPAs and E.A.’s) the conversation can be used against you in a court of law. Do not make the mistake of turning the professional you turn to for help into the government’s most powerful witness against you and the reason you are sitting in jail! There is also danger in selecting “door number 2,” Streamlined Disclosure without careful legal guidance. The government’s view of what constitutes willfulness is most likely, not your idea of what counts for willful behavior. At a recent seminar I attended by the ABA Tax Section, a representative for the government mentioned the following list of ways the government can and possibly will establish willfulness.
- The government is receiving information from lots of sources including banks, whistleblowers, cooperating witnesses, information from previously received OVDI submissions.
- Because of recent pro-government case law, the willfulness standard for filing FBARs is a very low hurdle for the government to clear in criminally prosecuting those that they believe did not file the FBARs willfully rather than negligently. To understand what I mean by a low hurdle see this link: https://klasing-associates.com/2014/03/27/willfulness-standard-failing-file-fbars/
- The act of purposefully not reporting taxable income from a foreign account or foreign income producing asset or entity is a felony if you willfully left it off your return – it’s called income tax evasion.
- The IRS and the DOJ have invested significant resources in programs like the Swiss Bank Program and FATCA IGAs meaning that no foreign account can be trusted to remain secret over the long-term.