Golding & Golding - Offshore Disclosure & FATCA Compliance

Golding & Golding – Offshore Disclosure & FATCA Compliance

Despite what you may have read online, not everybody with unreported foreign accounts, foreign income, foreign assets, foreign gifts, or foreign business ownership will be audited by the IRS. But for those who are audited before proactively making a disclosure, the penalties can be severe.

Unfortunately, due to the inherent “fear factor” of being audited by the IRS, coupled by the extremely high fines and penalties that a person may be subject to if they are caught with undisclosed foreign money – many Attorneys, CPAs and Accountants are using this information to scare unsuspecting taxpayers.

While not every body will be subject to an IRS audit, it is much better to be in compliance with the IRS by making a voluntary disclosure (through one of the approved methods) than to get caught in an audit situation.

We never recommend making a Quiet Disclosure. Why? Because making an intentional Quiet Disclosure can put you on ta short path to Prison.

                                           

Voluntary Disclosure Before Audit – Penalty Reduction

When a person makes a voluntary disclosure, they are taking the proactive step to update the Internal Revenue Service and US government as to foreign money, gifts, accounts, assets, and business ownership that should have been reported previously. At Golding & Golding, we limit our entire practice to voluntary disclosure; we have pretty much seen and heard every excuse in the book.

Some excuses are good… and some excuses are not certain (read: my dog ate my FBAR). Nevertheless, the Internal Revenue Service has a program designed for both individuals and estates who had no idea they were supposed to report foreign money. Moreover, the IRS has a program in place for individuals, estates and businesses that knew they were supposed to report foreign money, but for one reason or another, never reported it.

Non-Willful Voluntary Disclosure

If a person was non-willful, they may be able to skate by with a relatively small penalty, if not a penalty waiver altogether. If you want to read a comprehensive article regarding the Streamlined Program or Reasonable Cause Statement submissions, please click the prior links.

Briefly, if a person was non-willful (and have unreported income) they typically have three (3) options to choose

Streamlined Domestic Offshore Disclosure

This program is designed for non-willful individuals who are based in the United States; in other words, they do not qualify as a foreign resident under the strict requirements of the streamlined program (the term “domestic” refers to the residence of the applicant and not the location of the accounts).

With a Streamlined Domestic application, a person will generally look back six (6) years, calculate the total amount of unreported funds for each of those years as valued on 12.31 of each year in the compliance period (Accounts closed prior to 12.31 are not included, in order to avoid double-counting or artificially inflated balances), select the year that has the highest balance and multiply it by 5%. The applicant will pay the 5% penalty in addition to any taxes and interest that should have been paid during each of the three prior years – and for the most part the applicant will be in compliance.

Streamlined Foreign Offshore Disclosure

If you qualify as a Foreign Resident under the streamlined program, you may qualify the Streamlined Foreign Offshore Disclosure Program. The requirements are much the same as the domestic program, except that the 5% penalty is waived. The applicant will still have to pay any outstanding taxes and interest for the three (3) prior years, but there is no penalty for unreported money. In addition, even if the applicant has not filed timely tax returns in the three prior years, he or she may still submit to the program.

Reasonable Cause Statement (In Lieu of Penalty)

This is not limited to international tax, but is applicable just the same. If a person believes that the penalty under the streamlined domestic program is simply too high or they do not qualify for the Streamlined Domestic Offshore Disclosure Program (a Domestic Resident who did not file tax returns in the prior three years) they can submit a Reasonable Cause Statement and request a penalty waiver submitting under reasonable cause instead of the Streamlined Domestic (there would be no reason to use reasonable cause in lieu of the Streamlined Foreign, because streamlined foreign has no penalty and you can submit even if you did not file ta returns in the three (3) prior years).

Unlike the Streamlined Program, with a Reasonable Cause Statement the applicant submits a statement explaining the facts and circumstances surrounding the failure to report the money – but then requests a penalty waiver. The risk is that the IRS may accept the statement and waive penalties, or the IRS may not accept the statement and issue penalties that are far greater than the penalties that would have been issued under the Streamlined Program; in other words, there is a risk.

Willful Voluntary Disclosure

If you are willful, then you do not qualify for any of the three (3) options listed above. Rather, you would have to submit under the traditional Offshore Voluntary Disclosure Program (OVDP). In all reality, while the penalty is much higher for OVDP than it would be under the Streamlined Program, you receive more benefits than you do under the Streamlined Program. First, you get criminal “protection” (which you do not get with the streamlined program, but which you would not need in the streamlined program since you were non-willful).

Although the IRS does not guarantee immunity from prosecution, even the IRS has stated that as long as you provide a full disclosure, the IRS will have no intention of prosecuting. Second, you also get audit protection. That is great, because once you sign the closing letter you can breathe easy knowing the IRS will not come back to audit you on these issues. Third, you get closure. You don’t necessarily receive a closing letter under the streamlined program and even when you do, it is just a letter summarizing the payment you made, and the payment they received – but it is not the same as a closing letter.

What does OVDP Closure Cost?

It can cost a lot. Assuming you do not opt-out (in which you decline the penalty and open yourself up for an audit), there are two penalty structures as of 2016. You will either be penalized 27.5% on the year within the last eight (8) years (compliance period) that has the highest maximum balance during the year (not just the 12.31 date) of unreported funds. Moreover, if any of that money is located in what the IRS has deemed a Bad Bank, the penalty for all of the money is increased to 50%.

In addition, you have to pay any outstanding tax liability for the last eight (8) years, along with a 20% penalty on the unpaid tax – in addition to any interest that is due. There are also some potential other penalties, but it is important to keep in mind that if you were willful, these penalties are significantly lower than the penalties you would get hit with an audit, in which the IRS determined that you were willful.

Being Proactive vs. Defensive

It is always better to put a fire out when it is small, as opposed to burying your head in the sand and letting it turn into a blazing inferno. In other words, you’ll be in a much better position if you simply make a voluntary disclosure to the Internal Revenue Service as opposed to letting them find you, being on the defensive, and having the IRS, DOT or DOJ make their own assumptions about the facts and circumstances of your case.

If you are non-willful, then by making the voluntary disclosure, you are taking charge of your situation and letting the IRS know what the facts are surrounding your noncompliance. Whenever a person, estate, or business makes a Voluntary Disclosure, we recommend that you use an attorney. Why? So that you do not have to answer any specific questions directly to the Internal Revenue Service, as well as maintaining a level of confidentiality with your tax representative that you do not receive with non-attorney.

Conversely, if you were willful, than by submitting to the Offshore Voluntary Disclosure Program you are limiting fines and penalties that the IRS can issue against you. Moreover, you are highly reducing any chance of being criminally investigated and placed in prison.

What are the Penalties for Unreported Foreign Money

The following is not exhaustive; it is a list of some of the more common penalties that are issued against individuals, estates, and businesses for failing to report foreign money.

As provided by the IRS:

Depending on a taxpayer’s particular facts and circumstances, the following penalties could apply:

– A Penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

– FATCA Form 8938. Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

– A Penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

– A Penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. 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 or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

– A Penalty for failing to file Form 5471. Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

– A Penalty for failing to file Form 5472. Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

– A Penalty for failing to file Form 926. Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

– A Penalty for failing to file Form 8865. Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

– Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

– A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

– A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

– An Accuracy-Related Penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

– Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

– A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

                 

Want to Learn More about Offshore Disclosure?

There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.

It is very important to ensure that if you are required to file a U.S. tax return, that you do so timely, and on an annual basis. The failure to file a tax return or pay outstanding tax liabilities may result in devastatingly high penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations.