Cryptocurrency Tax Lawyer (2018) – International Bitcoin Tax Attorney

Cryptocurrency enforcement by the IRS is on the rise and our International Cryptocurrency Tax Lawyers are here to help. Specifically, cryptocurrency reporting and tax compliance have become key IRS enforcement priorities, which can be reflected in the following recent chain of events:

  • Introduction of various new Tax Enforcement Groups,
  • U.S. joining the global enforcement team of J-5 to enforce Offshore Tax and Cryptocurrency in particular, 
  • Soon-to-be extinct OVDP (Offshore Voluntary Disclosure Program), and
  • Coinbase Subpoena being approved by the Courts  

Cryptocurrency Tax Lawyer

,At Golding & Golding we focus exclusively on International Tax, Offshore Disclosure and Foreign Asset, Investment, Account and Income Reporting. We represent clients worldwide with cryptocurrency related tax issues including:

  • Reporting Cryptocurrency on an FBAR
  • Disclosing Offshore Cryptocurrency on International Informational Returns
  • Cryptocurrency PFIC Reporting
  • Cryptocurrency Income Tax
  • Cryptocurrency Capital Gain Tax
Offshore Disclosure Attorney – International Tax Lawyer, Sean M. Golding (Board Certified Tax Law Specialist) Offshore Cryptocurrency Tax Lawyer & Bitcoin Tax Attorney (2018) (Golding & Golding)

Cryptocurrency Tax 101

The foundation for the rules and regulations involving cryptocurrency are still being laid, but the following is a summary of the basics involving how cryptocurrency should be taxed and may be recorded.

Here are some of the basics:

Do I Pay Tax When I Purchase Cryptocurrency?

No. cryptocurrency is considered property. When a person purchases property they do not pay tax because the purchase price of property is not a taxable event.

For example, last week you purchased a home for $300,000. You are not taxed on the purchase of the home, because it is not a taxable event.

The Purchase Date and Value of Cryptocurrency is Important

The date you purchased cryptocurrency (and fees you paid), will typically form the basis of your “property” and is a very important value. This is called your “basis.”

That is because at a later date, when you sell or exchange the cryptocurrency, the basis will serve as the purchase/acquisition price — and will help determine what taxes you a may owe to the IRS

What Happens When You Sell Cryptocurrency?

When you sell cryptocurrency, you have engaged in a taxable event. At the most basic level, you purchased something previously, and now you want to sell the property – hopefully for profit, which is considered Capital Gain (excluding inventory).

Example of a Cryptocurrency Sale and Tax

David purchased $25,000 of Bitcoin on January 1, 2017, and sold it on December 15, 2017 for $30,000. In other words, David purchased something for $25,000, and then sold it for $30,000 – he made $5000, and the IRS wants to tax David on his $5,000 profit. 

Here’s how it works:

Short-Term Capital Gain

Since David purchased and sold Bitcoin in the same year, he held the cryptocurrency for less than a 12-months and it is considered a short-term capital gain.

A short-term capital gain is taxed at the same tax rate as regular income. Therefore, there is no special tax credit or treatment for short-term sales of a property (exclusions, exemptions, and limitations permitting)

Long-Term Capital Gain

Referring to the same example from above, instead of selling the Bitcoin on December 15, 2017, he sold it on February 8, 2018. This changes the nature of the cryptocurrency sale. That is because more than 12-months has passed since David purchased the Bitcoin.

Therefore, David’s sale will be considered a long-term capital gain. The reason why this is important, is because long-term capital gain receives beneficial tax treatment.

Long-term capital gains has a preferred tax rate. The tax rate for long-term capital gains is 15% unless a person falls into the top tax bracket, in which the tax rate jumps to 20%.

**Long-term capital gains rules change constantly, so it’s important to keep up with the rules in the year you sold it.

Short-Term vs. Long-Term Capital Gains example

Michelle and David each earn $800,000 a year and are both in the top tax bracket. If David and Michelle each purchased cryptocurrency for $30,000 and each sold it for $100,000, here is how the different situations tax situations will play out:

David’s Short Term Gain

David would have a $70,000 dollars again, that will be taxed as ordinary income tax rate, and his net effective tax rate would be somewhere between 35 to 40%. (about $25,000)

Michelle’s Long Term Gain

Michelle has a $70,000 that will be taxed at 20%.($14,000). If Michelle was not in the top tax bracket, it would only be taxed at 15% ($10,500).

Income Tax

If a person receives cryptocurrency as a result of employment, then the cryptocurrency value is determined on the day it is received and Income taxes must be paid.

In other words, if your employer paid you $400,000, but paid you in cryptocurrency instead of a check or cash, you still owe income tax that you would have otherwise had to pay if you had receive the money via regular currency – and you would have to pay any potential social security tax, NIIT, etc.

The idea is this: The IRS is not going to let you or your employer circumvent the tax rules to avoid paying tax, just because you received cash equivalent instead of actual cash.

From a baseline perspective — you work, and as a result of your work you were paid, and now the IRS wants its cut.

Your basis in the future sale of the cryptocurrency at a future time would be $400,000.

Exchanging Cryptocurrency 

Exchanges in general can be confusing when it comes to the taxation portion of the exchange, so we are going to do our best to keep it very simple, using this example:

  • Jennifer purchased Bitcoin for $10,000 and is now worth $20,000.
  • Peter purchased Litecoin for $5,000 and is now worth $17,000.

For one reason or another Jennifer wants to Exchange her bitcoin for Peters Litecoin.

Jennifer: Jennifer has a basis $10,000. She is receiving Peter’s cryptocurrency for $17,000, which is the current market value. Jennifer has a gain of $7,000 of which she will pay tax on.

In the future, when Jennifer wants to sell her cryptocurrency, her new basis would be $17,000 instead of $10,000 because she paid tax on the full value.

Peter: Peter has a basis of $5,000 in the Litecoin. He is receiving cryptocurrency worth $20,000. Therefore, Peter has a gain of $15,000, which he will also pay tax on.

In the future, if he wants to sell cryptocurrency, his new basis will be $20,000.

In other words, when you exchange one piece of property for another, you receive the property at the current market value. So, if you received a piece of property which is more valuable than the property you have, you pay capital gain tax (usually) on the gain.

You determine the tax by subtracting the cost of the purchase of the property  from the market value of the property you received, to determine your gain amount – and you pay tax on the gain amount.

You Received Cryptocurrency as a Gift

If you receive cryptocurrency as a gift, the typical tax rule is that you receive the carryover basis, which will serve as the basis for your crypto currency.

For example, your grandma purchased cryptocurrency a few years back for $20,000. Since your grandma spends her days researching cryptocurrency (and playing mahjong) she believes her investment is going to increase in value.

Your grandma was correct, because now it’s worth $400,000.  She gives you the cryptocurrency and tells you to go enjoy yourself.

You decide you want to buy a house, but they do not accept Cryptocurrency as legal tender, so you sell the crypto first.  Do you receive $400,000 tax-free, since that is the Fair Market Value on the date you received it?

…. Unfortunately, no. When you receive the gift from your grandma, you have to take it at that value she purchased it for, which is $20,000 – which also means you have a $380,000 gain on the exchange. (aka Carry-Over Basis)

You Received Cryptocurrency as an Inheritance (Step-up)

Unfortunately, your sweet grandma passed away before she had a chance to give you the gift.  But, she was smart, she had a will, and she left you her cryptocurrency in the will.

Under estate tax rules, you receive the market value of the property on the date your grandma passed aka (Stepped-Up Basis).

Therefore, the value of the cryptocurrency you receive is now $400,000, so when you sell the Crypto for $400,000, you do not pay any tax.

1031 and Cryptocurrency

A 1031 exchange is a way to defer tax. For example, you have a rental property that you purchased for $100,000 that is now worth $1,000,000.

You don’t want to sell the property and pay tax, so you would rather shift the investment into a new rental property or something similar (since you are relocating)

You execute a 1031 exchange (which has very specific timing rules and holding requirements) and absent any boot (usually cash or mortgage payoff in addition to the property) you receive a new property, while maintaining the same basis ($100,000) and it is not considered a sale, so that you do not have to pay Capital gains tax at the time.

**Unfortunately, at this time1031 rules do not apply to cryptocurrency for exchanges for coins in 2018 and subsequent (e.g., when filing your 2017 tax return in 2018 regarding prior exchanges, there may be room for debate, but most likely not for exchanges made in 2018 going forward)


Selling Cryptocurrency as inventory is complex and beyond the scope of this article (LIFO, FIFO, COGS, etc.)

Avoiding Tax

If you knowingly traded or sold crypt currency, and intentionally avoid paying tax, or reporting the sales or exchanges on a Schedule D/Form 8949, you may find yourself in hot water.

Most, if not all crypto-exchanges track and report the information, and will provide it to the IRS – whether they want to or not.

Coinbase Subpoena

In fact, even Coinbase one of the largest (if not the largest) exchange lost its fight against the IRS, and has to disclose the names of many of it clients.

Since cryptocurrency has been dubbed “the new Swiss bank account,” and the IRS refuses to knowledge cryptocurrency as currency, there is a high likelihood that the IRS will take a heavy hand against anybody believe isn’t only evading tax and reporting.

Reporting Foreign Bitcoin/Cryptocurrency

This is where it can get infinitely more complicated, primarily because of the lack of direction by the U.S. Government, coupled by the penalties associated with noncompliance of required foreign disclosure activities.

Here are the basics:

FBAR /FinCEN 114

FBAR  (Report of Foreign Bank and Financial Account form) was created by FinCEN, is now enforced by the IRS. If a person has more than $10,000 on any day of the year in foreign accounts (not limited to bank accounts), then the person is required to disclose this information annually on an FBAR.  The failure to properly report may result in penalties stemming from a warning letter, all the way up to a 100% penalty in a multiyear audit.

Do You have to report foreign held cryptocurrency?

FinCEN and the IRS are not clear.  Since the IRS has determined that cryptocurrency is actually property and not currency, common sense would dictate that it would not need to be reported on the FBAR…since the FBAR it Is used to report foreign accounts.

But not so fast….

FBAR Rules are Contradictory

The FBAR rules can be confusing. For example, a safety deposit box in the bank would not be considered an account, and if you read various blogs, they would all say that a safety deposit box is not considered an account. The blog will also tell you the precious metals and stones of course do not need to be reported.

But, if you refer to the Internal Revenue Manual you will find the following clarification:

Safety Deposit Box

A reportable account may exist where the financial institution providing the safety deposit box has access to the contents and can dispose of the contents upon instruction from, or prearrangement with, the person.

Precious Metals, Precious Stones, or Jewels Held Directly by the Person

31 USC 5314 defines “foreign financial agency” as “a person acting for a person as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold.”

Therefore, a reportable account relationship may exist where a foreign agency holds precious metals on deposit or provides insurance or other services as an agent of the person owning the precious metals.

In other words, the information can be conflicting. This is primarily because even though the FBAR is being enforced by the IRS (and they have their own internal Revenue manual),  the form was created by FinCEN, which has its own enforcement standards.

In other words, be careful with reporting or non-reporting cryptocurrency,

Remember the Purpose of Foreign Reporting

From the IRS and FinCEN’s perspective, the purpose of filing the FBAR and other related international informational returns is to promote transparency. Typically, the Government and courts will err on the side of the U.S. government as opposed to splitting hairs and throwing support behind nuances argued by people seeking to avoid reporting and/or maintain anonymity.

Presumably, if you were ‘holding’ the cryptocurrency in your own personal wallet on your own personal computer, chances are it would not be reported.

But, the further away you drift from that situation, the more you have to consider whether you should report.

For example:

  • Is there virtual currency and regular currency in the same account?
  • Have you exchanged the currency for cash and left it in the trading account?
  • How much cryptocurrency do you actually have in the foreign Account

It is important to know that in recent months enforcement of Bitcoin/Cryptocurrency has been stepped up. Specifically, with the courts approving a slimmed-down version of the IRS subpoena against Coinbase, your information is nowhere near as private or anonymous these companies would like you to believe it is.

** In addition to FBAR, you may also have other reporting requirements under FATCA, Form 3520, Form 3520-A and Form 8621 (amongst others).

Are you out of Compliance?

If you are already out of compliance for not properly reporting or paying tax involving your cryptocurrency, you may consider getting into compliance before it is too late.

IRS Offshore Penalty List

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 

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.

IRS Voluntary Disclosure of Offshore Accounts

Offshore Voluntary Disclosure Tax law is very complex. 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.

When Do I Need to Use Voluntary Disclosure?

Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that for one or more years, you were required to file a U.S. tax return, FBAR or other International Informational Return and you did not do so timely, then you are out of compliance.

Common Un-filed IRS International Tax Forms

Common un-filed international tax forms, include:

If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to IRS Offshore Voluntary Disclosure.

Golding & Golding – Offshore Disclosure

At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.

In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.”

It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.

The Devil is in the Details…

If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.

It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.

Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.

What if You Never Report the Money?

If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported —  then you are in a bit of a predicament, which you will need to resolve before it is too late.

As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.

Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).

Getting into Compliance

There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.

5 IRS Methods for Offshore Compliance

  • OVDP
  • Streamlined Domestic Offshore Procedures
  • Streamlined Foreign Offshore Procedures
  • Reasonable Cause
  • Quiet Disclosure (Illegal)

We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlike the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.

After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.

If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.

Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.

1. OVDP 

OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.

The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.

The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.

Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.

An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.

What is Included in the Full OVDP Submission?

The full OVDP application includes:

  • Eight (8) years of Amended Tax Return filings;
  • Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
  • Penalty Computation Worksheet; and
  • Various OVDP specific documents in support of the application.

Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.

Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).

OVDP Penalties

The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.

Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank) on the highest year’s “annual aggregate total of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).

For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.

Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!


2. Streamlined Domestic Offshore Disclosure

The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.

What am I supposed to Report?

There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.

In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.

Reporting Specified Foreign Assets – FATCA Form 8938

Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.

The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.

The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.

Other Forms – Foreign Business

While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:

  • If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
  • If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
  • If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
  • And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.

Reporting Foreign Income

If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.

It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.

In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.


3. Streamlined Foreign Offshore Disclosure

What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?

If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.

Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)

*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.


4. Reasonable Cause

Reasonable Cause is different than the above referenced programs. Reasonable Cause is not a “program.” Rather, it is an alternative to traditional Offshore Voluntary Disclosure, which should be considered on a case by case basis, taking the specific facts and circumstances into consideration.

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International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our International Tax Lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70 different countries. Managing Partner, Sean M. Golding, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
International Tax Lawyers - Golding & Golding, A PLC