IRS Offshore Disclosure – Highest vs. Year-End Balance Calculations
- 1 OVDP – Highest Balance
- 2 Streamlined Offshore Disclosure Program is More Forgiving
- 3 Highest Year’s Balance is the Penalty (Not Every Year)
- 4 OVDP vs. Streamlined
- 5 When Do I Need to Use Voluntary Disclosure?
- 6 Golding & Golding – Offshore Voluntary Disclosure
- 7 The Devil is in the Details…
- 8 What if You Never Report the Money?
- 9 Getting into Compliance
This article will summarize OVDP (Highest-Year Balance) vs. Streamlined (Highest “Year-End” Balance).
Once a person comes to the realization that they are going to submit to OVDP IRS Offshore Voluntary Disclosure Program and pay an upfront penalty in order to leverage against a possible much larger penalty in the future (or Opt-Out), they must determine which Offshore Disclosure program they are going to enter.
Aside from making the determination of whether a person is willful or non-willful, they must also be cautious to ensure they understand the different penalty structures for OVDP and the IRS Streamlined Program.
The two penalties are calculated differently, and can have a big impact on a person’s decision.
OVDP – Highest Balance
Unless certain circumstances apply, if a person was willful then they will enter OVDP – Offshore Voluntary Disclosure Program. Willful means the person had knowledge of their tax reporting obligations and responsibilities, but knowingly/intentionally/deliberately attempted to avoid, or evade tax and reporting requirements.
When an individual or business was “Willful” the IRS, DOT, and DOJ take less mercy — and thus the penalties are relatively high. In addition, not only are the penalties higher than in the Streamlined Program, but the calculation is also more intense. Namely, a person has to review each of the account/asset values to determine the highest balance at any time during the year (as opposed to the year-end balance for the Streamlined Program).
If you happen to bank or invest with an institution that only issues quarterly statements or monthly statements, you are allowed to rely on the interval of statement provided (in other words, if daily balances are unavailable then you do not have to obtain them). Unfortunately, if you utilize an institution that provides daily balances, it can be much more detrimental.
Specifically, let’s say for example your month-end balance was $400,000 – but at one time during the month your account was as high as $2 million and it is reflected on a financial statement you receive from the institution — in accordance with FBAR (Report of Foreign Bank and Financial Accounts) rules and regulations, you must use the $2 million balance as the high balance.
In addition, even though foreign real estate is not reflected on either an FBAR or 8938, if the property is used to generate income then the value of the property must be calculated into the penalty calculation.
Streamlined Offshore Disclosure Program is More Forgiving
The Streamlined Offshore Disclosure Program, or otherwise known as Streamlined Filing Compliance Procedures has a more lenient penalty structure. Why? Because individuals who submit to this program are non-willful and had no intent to defraud, evade, or avoid US tax reporting and compliance requirements.
As such, the U.S. government does not want to artificially increase the penalty to an amount that is not reflective of the account. As in the above referenced example for OVDP, the $2 million was only in the account for a very short period of time due to a transfer stemming from a sale of property (With OVDP, since the person is presumed ‘Willful,’ they are subject to the penalty on the highest balance – no matter how unfair it is – unless the applicant “Opts-Out” later in the process)
To avoid this outcome for the streamlined program, the date of calculation for the accounts is December 31 of each year. Therefore, in the above referenced scenario the taxpayer would not be penalized from the balance of $2 million, but rather the balance on December 31st value, which is the highest in the compliance period (8 years for OVDP, 3 or 6 years for Streamlined)
Highest Year’s Balance is the Penalty (Not Every Year)
There seems to be some confusion regarding the penalty; the confusion is can largely be attributed to the fact that many inexperienced Attorneys, CPAs, EAs, Accountants, etc. are trying to sell their services to unsuspecting taxpayers by getting them unnecessarily scared.
Under either one of these programs, the applicant does NOT pay a penalty for each year, but rather the taxpayer is penalized on a percentage of the highest year value. For OVDP the calculation includes the maximum account balance over the last eight years, while for the Streamlined Program the penalties based on the highest December 31st value during the last six years.
There are numerous other distinctions between these programs, and we reproduce a very popular article we authored detailing the difference between OVDP vs. Streamlined Program.
At the end of the article, and based on our many years of experience we have also provided links to much more comprehensive FAQs we have prepared for OVDP, Streamlined Program, FBARs and Expat Tax Laws.
OVDP vs. Streamlined
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 Dept. of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
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 Voluntary Disclosure.
Golding & Golding – Offshore Voluntary 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.
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. Unlikes 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.
Call now; let us help you.
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.)
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