IRS Amnesty (2018) – What are my IRS Amnesty Program Options?
IRS Amnesty is a broad term used to describe the process of getting into compliance for IRS related issues. Typically, IRS Amnesty involves entering into either one of the Offshore Voluntary Disclosure Programs or the Domestic Voluntary Disclosure Program – depending on the facts and circumstances of your situation.
Why is it Called IRS Amnesty?
Actually, it is not a pure amnesty program but rather a voluntary disclosure program. There is a difference, with the difference being in a pure amnesty program the person is all but guaranteed that once they disclose any information to the proper authorities — they will not be prosecuted.
A typical example is if a witness who may also have been a party to a crime agrees to turn and become a witness for the prosecution, they will be given “amnesty” against any prosecution for any issues relating to the crime. That is not a situation with Offshore Voluntary Disclosure.
What is IRS Voluntary Disclosure?
IRS Voluntary Disclosure is the process of getting into compliance with the IRS. There are various different programs but none of them absolutely guarantee that you will not be prosecuted.
The traditional program, which is called OVDP (“Offshore Voluntary Disclosure Program”) is the closest thing to Amnesty. Under traditional OVDP, as long as a person provides a full disclosure to the IRS, the IRS in almost all situations will forgo prosecution. Moreover, by entering the program a person can avoid being audited on issues involving the disclosure.
The Domestic Voluntary Disclosure Program is a bit different. It has not received nearly as much press as offshore disclosure, but it is been around for much a longer time-period, and is more encompassing. Unfortunately, it is also a bit more esoteric. In other words, with offshore disclosure there are very specific fines and penalties that are issued against the individual.
For example, with traditional OVDP there is either a straight 27.5% penalty or 50% penalty – depending on whether any of the unreported money is in a bad bank.
Conversely, with domestic voluntary disclosure, typically a person will make the submission and provide their scenario as to why they were improperly reporting or withholding income – but they are not guaranteed that their penalty will be a specific amount. Usually, the 75% fraud penalty is reduced to 25%, but not always.
Moreover, under the domestic disclosure, the IRS can still audit the person, whereas under the offshore disclosure, the person will almost always skate by without audit.
Is the IRS Doing Away with Voluntary Disclosure?
There have been rumblings for many years that the voluntary disclosure programs will be eliminated in 2018. It is because there is a reduced need for the program, ever since the introduction and enforcement of FATCA, in which more than 110 countries and 300,000 foreign financial institutions have begun voluntarily reporting to the IRS about US account holder information.
Moreover, as a result of various non-prosecution agreements with some of the bigger banks and financial institutions worldwide, the IRS does not have the same need for voluntary disclosure. Coupled with this fact, is the fact that the IRS is understaffed and under budget — and is focusing its enforcement activities in various other international tax arenas.
Therefore, while you should never feel pressured into entering one of the offshore voluntary disclosure programs or the domestic voluntary disclosure program, it is important to note that the programs can be eliminated at any time and without notice (although the IRS has provided that presumably it would provide some notice before eliminating the programs)
The reality is that not everybody who owes money or otherwise defrauded the IRS is going to get caught. But, for the individuals who do get caught with having intentionally, knowingly or with reckless regard life to the IRS, they may find themselves at the receiving end excessive monetary fines and penalties, along with criminal prosecution. This could lead to Liens, Levies, Seizures….and worse.
Willful vs. Non-Willful
The idea of making a proactive representation to the IRS to disclose income that was previously unreported is not necessarily criminal, and a key factor will be to determine willful vs. non-willful.
For example, if David works as a consultant and simply forgot report one of his 1099s when he received income for some additional U.S. consulting he forgot about, David can go back and amended returns-usually without issue. Typically, since David is making a proactive representation to the IRS, he should use an experienced tax lawyer – but as long as David includes a properly prepared reasonable cause statement, David should be fine.
Unlike non-willful, if the person making the representation to the IRS does so in case he or she knows that they knowingly or otherwise intentionally omitted income or embellished deductions, the nurse seeking to avoid criminal investigation.
As such this is a very serious situation
Willful is a very generic term and it has a very broad spectrum. It typically includes multiple variations of the term intentional, such as:
- Intentional or Willful Omission – knowingly not including income
- Willful Blindness – Avoiding the fact you should have been aware
- Reckless Disregard – Essentially, you should have known you were doing something wrong
In a civil arena, the IRS gets a double-whammy. On the one hand, the IRS can take you to task and go after you for criminal-like penalties, such as FBAR penalties which could result in a 100% penalty against your assets in a multiyear audit. Compounding insult to injury, the IRS does not need to meet the burden it would otherwise need to meet in a criminal case.
Rather, courts have been holding that since the case being brought in a civil jurisdiction, the IRS is not required to meet a criminal standard. Thus, the IRS can go after you for criminal like penalties, while only meeting a civil burden (Read: Little evidence needed for major penalties).
Domestics vs. Foreign Income
The rules are incredibly different for different types of income. When it comes to offshore disclosure, there are very specific programs in place for individuals to get into compliance.
Ever since the Internal Revenue Service has made offshore disclosure agency enforcement priority, there’s been much publicity about these two main programs: OVDP (Offshore Voluntary Disclosure Program) and Streamlined Filing Compliance Procedures (SDOP & SFOP).
Foreign vs. Offshore
Oftentimes individuals get caught up on the difference between the terms offshore and foreign. For these purposes, there really is no difference. In other words, while most people consider offshore a scenario in which a person hides money in the Cayman Islands or British Virgin Islands – that is not how the IRS defines it. Rather, when it comes to these programs, any money located outside of the United States is considered to be offshore or foreign – the terms are interchangeable.
Therefore, whether you are a permanent resident of the United States but a citizen of Hong Kong who had accounts in Hong Kong before you ever dreamt of moving to the United States, or you are a U.S. citizen money hidden in Jersey – you would still evaluate the same programs to determine which compliance method works best for you.
Offshore or Foreign Penalty
One of the benefits of the offshore disclosure programs are that the penalties are set in stone (absent an opt out). In other words, when a person enters the Streamlined Domestic Offshore Disclosure program, they will have a 5% penalty on certain Foreign Assets and Foreign Accounts. Alternatively, if a person enters traditional OVDP, they will be subject to a 27.5% penalty or 50% penalty depending on the facts and circumstances of where the money is located.
These penalty structures are nonnegotiable. Therefore, if you enter these programs, you have to presume you will be paying these penalty amounts, unless you are in traditional OVDP and want to opt out.
**(330-Day Rule and/or Substantial Presence Test) Streamline Foreign Offshore Procedures waive the 5% penalty, but requires a 330 day foreign residence test which is very strict (more strict than the foreign earned income exclusion physical presence test). Alternatively, if a person is a non-Legal Permanent Resident and fails the Substantial Presence Test, they may still qualify as well.
When it comes to domestic income, the IRS is less forgiving. It should be noted that if a person was non-willful and submits to the streamlined program, they can also include their domestic income when getting into compliance. They can also do so with OVDP, but the domestic portion of the submission is treated different than the foreign portion.
Domestic Willful Non-Disclosure
The IRS has a Domestic Voluntary Disclosure Program. It has been around for many years, and it allows an individual to get into compliance by proactively reporting and amending their prior returns (or filing returns for the first time).
But, this comes at a cost and with a risk. Unlike the offshore voluntary disclosure programs, the domestic voluntary disclosure programs are not set in stone. In other words, under ordinary circumstances if a person was hit with domestic fraud charges, they could get hit with amongst other penalties, a 75% fraud penalty.
If you submit to the domestic program, chances are you can get that fraud penalty reduced to a 25% penalty or possibly even less, but there is no guarantee. With OVDP or Streamlined as long as your submission was truthful and prepared properly by an experienced offshore disclosure attorney you are almost guaranteed that the IRS will accept submission and the penalty will be as stated above.
With domestic voluntary disclosure, the IRS could feasibly come back penalize you more than you would otherwise penalize if you are caught and had an experienced attorney negotiate for you.
Experienced IRS Offshore Disclosure Representation is crucial for a successful OVDP disclosure. There are only a handful of Law Firms that focus their entire tax practice on IRS Offshore Voluntary Disclosure (We are one of them!). We have represented several hundred clients in OVDP, Streamlined and Offshore Disclosure.
You will want to make sure you use an OVDP Attorney who has:
- Litigation Experience
- IRS Audit Experience
- At Least 15-20 years of Attorney Experience
- An advanced Master’s of Tax Law Degree (LL.M.); and
- Either a CPA or Enrolled Agent (EA) license.
Why? Because you never know how the OVDP or Streamlined submission will go. Sometimes, a person is already under IRS investigation and may not know it. Then, when the person submits to OVDP they are rejected. In this type of situation, you need an Attorney with all the above required experience.
Using a CPA or Junior Attorney with no real experience, is not going to help (and you will then realize why the fees they charged were so low). We know this, because each year we receive many inquiries from clients seeking to retain our services after their initial OVDP or Streamlined junior tax attorney (without the experienced mentioned above) flubbed their submission and made numerous mistakes in the submission process.
Alternatively, once you are in OVDP, you may want to:
- Make an MTM Election
- Argue FAQ 55 Penalty Reductions
As a result, for this highly specialized area of law, you need an OVDP Attorney who is experienced specifically in OVDP, but also has the background and experience to fight on your behalf.
OVDP Attorney Fees
If you receive an OVDP Fee Quote from a CPA or Attorney that seems too Low…you should be careful.
That is not to say you should resign yourself to mortgaging your house for representation, but there are many CPAs and Attorneys who see a frightened human being as little more than a “Mark” or “Target.”
They will provide artificially low fee quotes to bait you in, only to request more money down-the-line. Most of the these Attorneys do not have real experience, and do not understand the comprehensive nature of an OVDP.
Golding & Golding, A PLC
At Golding & Golding, we have successfully handled numerous OVDP (Offshore Voluntary Disclosure Program) and IRS Streamlined Program applications for individuals and businesses around the globe with outstanding unreported foreign accounts ranging from $50,000.00 to nearly $40,000,000.00 in a single disclosure.
In order to assist you to better understand the distinction between the two different IRS offshore/foreign account disclosure programs, we are providing the following summary for your reference.
We Take OVDP Representation Very Seriously
The main takeaway from this article is that you understand the risks and pitfalls of entering either over OVDP or the Streamlined Offshore Disclosure Program unprepared.
We are passionate about representing individuals in offshore voluntary disclosure matters, and feel horrible when a client calls us after having hired an inexperienced Attorney or CPA who either did a sloppy job, charged them more money than they agreed upon, and/or is overall not providing the level of representation a person deserves.
Want to learn more about Offshore or Domestic Disclosure?
Below please find links to two separate articles we have written, which summarize each of the different programs.