201512.31
0

FBAR Lawyers | Willful Offshore Disclosure Penalties – International Tax Lawyers

Golding & Golding - U.S. and International Tax Lawyers

Golding & Golding – U.S. and International Tax Lawyers

When it comes to international tax law compliance, one of the main missteps that an individual or business often takes is failing to file the FBAR (Report of Foreign Bank and Financial Accounts) statement with the Department of Treasury on an annual basis.

Sometimes the failure is due to negligence wherein the person was unaware that there was a requirement to file an FBAR. Other times, it is due to willfulness. When it is due to willfulness, it is very important that the account holder understand that this intentional failure to disclose foreign accounts and foreign income is a form of tax evasion and tax fraud, which the federal government is enforcing with a very heavy hand – no matter where the person resides.

Under new FATCA rules and regulations (Foreign Account Tax Compliance Act) the IRS is going full throttle in enforcing civil penalties (Money) and criminal prosecution against individuals and businesses that engage in the intentional failure to disclose foreign accounts.

                   

Foreign Investment Companies

One of the main tools that is used by US taxpayers in International Tax Evasion (U.S. Citizens, Legal Permanent Residents, or Foreign Nationals subject to U.S. Tax) is to use holding corporations such as BVI (British Virgin Islands) Holding Corps, Cayman Island Holding Corps, Malta Holding Corps, and Dubai/UAE Holding Corps to “hold” assets and accounts.

                   

Passive Investments

Although each country may have different terminology for Passive Holding Corporations, the concept is the same – a US person will open a foreign holding Corporation to “hold” various investment products with the idea that the company and not the individual will be identified on the account.

As a result, the IRS will not be aware that a US person owns the account. Often times, this is accomplished with the help of foreign investment companies, foreign managers, and financial professionals who would make misrepresentations to the foreign authorities.

Example: A US person with dual citizenship between the United States and France would have a French financial professional prepare a foreign holding Corporation in BVI with the financial professional making the representation that the person is a French citizen (and making no reference to the fact that the person is also a US Citizen).

                   

Foreign Bank Agreements with the IRS

Due to the rampant tax evasion that was discovered to have been taking place in Switzerland – as well as several other countries – there have been a number of criminal prosecutions against individuals who held their accounts overseas and banks such as UBS. These prosecutions resulted in heavy fines and imprisonment.

Moreover, as of December 29, 2015 the United States has entered into agreements with 89 foreign banks to provide full disclosure of individuals and businesses that have accounts at these banks to the IRS.

                   

OVDP and Streamlined Programs

If you or someone you know has unreported foreign accounts, it is important that they speak with an experienced international tax lawyer to assess their reporting requirements and determine whether they acted willfully or non-willfully. No action should be taken (affirmative representations to the IRS) until the person has spoken with an attorney.

                    

OVDP or the IRS Streamlined Program?

We receive this question often, and in order to assist you understand the distinction between the two different IRS foreign account disclosure programs, we are providing the following summary for your reference:

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 Comply with IRS Foreign Disclosure Laws?

Because if you fail to do so, the IRS has the authority to penalize you upwards of 100% of the value of your offshore assets and accounts as well as prosecute you for criminal tax fraud and tax evasion if it is found that you acted willfully in failing to report your assets and foreign income.

The reason why international tax law compliance has taken center stage is because under the new FATCA (Foreign Account Tax Compliance Act) laws, foreign countries are actively reporting the bank and financial accounts of US citizens and US legal permanent residents. If a foreign country is interested in working with the United States, the foreign country will enter into an “ Intergovernmental Agreement” (IGA). These agreements are reciprocity agreements, which means not only will the foreign country report the information to the IRS, but the IRS will also reciprocate by providing the same information to foreign country tax authorities.

                                       

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, 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 AND the IRS is have more of your overseas/foreign financial information you would like probably like.

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 Requirements)

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, then 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 highest 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 non-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 foreign passive income (Interest income) in a country that does not tax its own citizens on passive income earnings — providing this information to the IRS was 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 between a CPA and Taxpayer when a Criminal Matter is at issue.