In accordance with the intergovernmental agreement that Australia entered into with the United States, the Australian Taxation Office has represented that it has provided the Internal Revenue Service with more than 30,000 financial accounts that are estimated to be worth upwards of $3.5 billion (USD).Golding & Golding – International Business Tax Lawyers
- 1 Why Report under FATCA?
- 2 What Taxpayers did Australia Report?
- 3 What if you are Caught with Undisclosed Foreign Accounts ?
- 4 What to do?
- 5 OVDP or Streamlined Program
- 6 Why Enter either OVDP or the Modified Streamlined Program?
- 7 What is the Difference between OVDP and the Streamlined Program?
- 8 OVDP (Offshore Voluntary Disclosure Program)
- 9 OVDP is Unfair for Non-Willful Taxpayers
- 10 What is the Modified Streamlined Program?
- 11 What if you are caught trying to sneak into the Streamlined Program?
- 12 Why is the Modified Streamlined Program in Jeopardy?
- 13 There is No Reason to be Scared of the OVDP or the Streamlined Programs
- 14 If You are going to enter a Foreign Disclosure Program, use an Attorney
Why Report under FATCA?
Many individuals who are in denial do not understand that in accordance with FATCA, reporting is a two-way road. In other words, it is not just that Australia is going to disclose account information for individuals who are W-9 (as opposed to W-8 BEN) with the IRS, but it is also going to facilitate the disclosure by the Internal Revenue Service of Australian individuals required to disclose their Australian offshore income and accounts to Australia on their tax returns to the ATO.
With the globalization of the world economy, a majority of foreign countries are trying to combat against undisclosed offshore and foreign accounts. This is really nothing new, as can be seen by many foreign jurisdictions tax laws, which already account for Controlled Foreign Corporations (CFC), Transfer Pricing, and Passive Foreign Investment Companies.
The days of hiding money offshore are quickly fading away.
What Taxpayers did Australia Report?
The information that was provided by the Australian Tax Office includes US citizens and tax residence with Australian bank accounts. As provided by the ATO, Australia has every intent on providing full transparency in order to both disclose accounts of foreigners who are attempting to hide assets in Australia as well as looking forward to receiving the names and information of Australian citizens and residents who have transferred money offshore in an attempt to avoid Australian tax.
What if you are Caught with Undisclosed Foreign Accounts ?
If a person is found to have had offshore accounts that went undisclosed, it is going to be a long uphill battle with the Internal Revenue Service. Unlike voluntary disclosure, in which a person has the opportunity to come forward and disclose the information to the Internal Revenue Service in order to both pay a small fine (or larger fine depending on the facts and circumstances of the matter) and avoid criminal prosecution, if a person is under audit by the IRS OVDP and the IRS Streamlined Programs are no longer available.
Rather, the Internal Revenue Service is going to audit and/or investigate you involving your failure to disclose, tax fraud, tax evasion as well as a whole host of other potential civil criminal tax liability. In addition, it should be noted that the penalties associated with tax fraud or ordinarily high but when coupled with the fact that the violation includes international tax reporting, the penalties are literally staggering and can equate to 100% of the value of the accounts (although recently the IRS did away with penalizing individuals on amounts that exceed the total value of the account).
What to do?
As we have stated numerous times on our website in various different articles over the past two years it is imperative that if you have offshore accounts and you did not reside overseas for at least 330 days in one year during one of the last three years (and were non-willful) that you prepare to enter into one of these programs, pay any outstanding taxes, interest, and penalties and avoid criminal prosecution and even larger fines and penalties.
*If you resided overseas for at least 330 days in any of the last 3-years and were non-willful there is a modified streamlined program which eliminates the penalty – but not the outstanding tax liability – for qualified applicants.
If you are audited by the Internal Revenue Service for any reason – even if it literally has nothing to do with international tax – you are disqualified from entering the offshore programs. That is because of you are audited than technically you’re no longer operating voluntarily and thus the IRS is not going to provide you the benefits of voluntary disclosure.
OVDP or Streamlined Program
This will all depend on the specific facts and circumstances of your case, but the following is a brief summary of the difference between the two programs:
If you or your business has unreported or undisclosed foreign accounts, offshore assets, or foreign income then you may be considering whether you should enter the Offshore Voluntary Disclosure Program (OVDP) or the modified streamlined program.
Both programs provide peace of mind to the taxpayer – but it will depend on the facts and circumstances of each taxpayer’s situation, to determine which program(s) they qualify for. It is important to note that the failure to properly submit to the correct program can have serious consequences to the taxpayer.
Why Enter either OVDP or the Modified Streamlined Program?
Individuals and businesses who are looking for a way to avoid the very steep penalties may seek to voluntary disclose, pay a penalty (unless abated), and avoid criminal prosecution.
There are the only two approved programs by the Internal Revenue Service that can bring a taxpayer into compliance. Instead of entering the programs, a taxpayer may qualify to directly report under the reasonable cause exception, in which the taxpayer directly submits the forms with a statement explaining why they were not properly filed. Please note, the IRS is not known to be sympathetic and if the IRS does not believe you and audits you anyway then you are disqualified from entering either the OVDP or streamlined program.
Moreover, if the taxpayer improperly submits the forms to the IRS it can be considered “silent disclosure” or “quiet disclosure,” in which if detected by the IRS, the IRS will penalize you heavily as well as probably initiate criminal proceedings against you. In this scenario, not only with the IRS seek to take all of your money and assets through the implementation of penalties and levies, but chances are you will also be spending the next 2 to 20 years in prison for tax evasion or tax fraud.
What is the Difference between OVDP and the Streamlined Program?
Before making a decision regarding voluntary disclosure, it is important to understand the difference between the two main programs.
OVDP (Offshore Voluntary Disclosure Program)
OVDP stands for the Offshore Voluntary Disclosure Program, which came into effect in 2009 and was modified again in 2011, 2012 and 2014.
Before the implementation of the modified streamlined program (which is strictly for individuals who were non-willful in their failure to report their overseas assets and income) the penalty structure was generally (and continues to be for willful participants) 27.5% of the highest years annual aggregate total and 50% if any of your money was held in one of the identified “bad banks.”
In other words, if you have foreign accounts that were unreported to the IRS and Department of Treasury, to determine your penalty structure you would need to total up all of your unreported overseas and accounts for each year, for the last eight years, and then take the highest year’s total balance and multiply it by 27.5% to arrive at the penalty amount due. (A complete breakdown of OVDP requirements can be found on our OVDP Page, by Clicking Here)
OVDP is Unfair for Non-Willful Taxpayers
Before the implementation of the modified streamlined program, it was difficult for individuals who were non-willful (no specific definition, but generally without intent to deceive or defraud) to become compliant. Why? Because if you are not willful you still had to go through the filing procedures as if you were willful, and then opt out of the penalty structure and open yourself up for audit.
Not such a big deal, except for the fact that you also had to pay 20% penalty on the outstanding taxes that you owed along with a 27.5% penalty on the highest year’s annual aggregate (unless you successfully “opted out” from the penalty structure – which came with a whole other set of headaches). As you can imagine, for individuals who simply inherited some money overseas, had no international dealings, and had no idea that they were required to report this information to the IRS, it is a huge burden.
What is the Modified Streamlined Program?
In order to avoid “non-willful” applicants from having to go through the entire OVDP process before opting out, the IRS and Department of the Treasury modified a small program in existence, called the streamlined program, which was very limited. The IRS expanded the program to basically allow anyone who was non-willful to enter the program.
The program reduced the amount of documentation that applicants were required to file to only three years of amended tax returns and six years of FBAR (Foreign Account Reporting Statements). In addition, there was no penalty on the tax amount that was due, no penalty on the value of foreign real estate that was not previously disclosed, and the 27.5% penalty was reduced all the way down to 5%, or completely waived if the foreign residence requirements were met.
Penalty Waiver: there is a small facet of the modified streamlined program called the Modified Foreign Offshore Program. If a person qualifies for the modified stream of program ( which means they acted non willfully) and they can prove they lived overseas in any number of different countries for a total of 330 days out of the tax year in any year within the last three years, then they may qualify to have the penalty waived.
The Streamlined Programs sounds great, right? Well it is, unless you are attempting to wrongfully evade the 27.5% penalty by entering the program when you knew you were willful.
What if you are caught trying to sneak into the Streamlined Program?
I cannot stress to you enough to not enter the streamlined program if you do not qualify; in other words, suck it up and pay the penalty. Why? Because if you knowingly enter the streamlined program and it is found that you acted willfully in your failure to disclose and report your overseas and foreign assets and income you will most likely be prosecuted by the IRS.
The IRS made this fact known in a recent public relations statement in March 2015. Essentially, from the IRS’ perspective if you wrongfully enter this program in order to avoid paying the full penalty amount what you have done is stolen 27.5% or 50% of the penalty amount due to the IRS – and this does not make the IRS very happy.
Even worse is that not only are you subject to criminal prosecution – but now you’ve already disclosed all the foreign financial information and thus you’re in a pretty difficult position to defend yourself. The IRS has let it be known that they will enforce criminal tax prosecution laws in these types of situations.
Why is the Modified Streamlined Program in Jeopardy?
Just like in everything in life, a few bad apples spoil the whole bunch. The IRS has gotten wind that several individuals who were willful in their failure to report undisclosed foreign tax and bank information are trying to sneak into the modified streamlined program and thus reduce their penalty to 5%. As you can imagine, this upset the IRS who created this modified program for the sole purpose of assisting taxpayers who otherwise would be overburdened and having to enter the OVDP and opt out of the penalty structure.
There is No Reason to be Scared of the OVDP or the Streamlined Programs
The goal of this article is not to scare you. Rather, it is to warn you to just be cautious if you are entering into these programs. Way too many inexperienced and unscrupulous attorneys, CPAs and enrolled agents see these programs as a way to scare individuals.
If You are going to enter a Foreign Disclosure Program, use an Attorney
While CPAs and enrolled agents (who are not also attorneys) may charge less than an attorney is important to note that you do not have an attorney client privilege with CPAs and enrolled agents. What that means, is that if it turns out you wrongfully entered the streamlined program and the IRS wants to speak with your representative, unless your representative is an attorney, there is no privilege is CPA for mold agent not to speak with the IRS when the matter may involve criminal prosecution.