- 1 What Does Voluntary Mean?
- 2 Not Under Audit or Examination
- 3 Under Audit or Examination
- 4 Intentional Silence
- 5 Receiving a John Doe Summons
- 6 Willful vs. Non-Willful
- 7 A Summary of Different IRS Offshore Disclosure Programs
- 8 1. OVDP
- 9 2. Streamlined Domestic Offshore Disclosure
- 10 3. Streamlined Foreign Offshore Disclosure
What Does Voluntary Mean?
When it comes to IRS Offshore Voluntary Disclosure, one of the most important and overlooked aspects of an offshore submission is whether a person is voluntary.
While voluntary may seem like a pretty simple definition…welcome to the world of the Internal Revenue Service.
Simply because a person “voluntarily” submits an application does not mean they were voluntary in the eyes of the IRS. This is why it is important to use an experienced offshore disclosure attorney before making a submission.
Why? Because if it turns out the IRS is aware of other criminal investigations about you already in process, and/or you received notice of audit or examination and you would not otherwise volunteer this information during the audit (Eggshell Audit), you have unintentionally self-incriminated yourself.
We will provide examples of what is considered voluntary versus what is not considered voluntary for purposes of an offshore voluntary disclosure program submission.
Not Under Audit or Examination
When it comes to the IRS Offshore Voluntary Disclosure Programs such as: OVDP, Streamlined Filing Compliance Procedures (a.k.a. Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures), and Reasonable Cause Submissions – they all require the submission to be voluntary.
For example, as Michelle ponders which delivery service to order dinner from, she begins opening up her mail. One of the notices is a FATCA Letter from her foreign bank require her complete either a W-8 or W-9 form.
Michelle is a Director of an Engineering program at a top engineering company in California. She has no idea what FATCA Reporting is, or what it means…and why should she? She is not a tax professional, nor does she want anything to do with taxes – that is why she has a Tax Preparer. After conducting some research, Michelle learns that she should have been disclosing her foreign accounts to the IRS (along with the income it generates).
Michelle contacts her tax preparer to explain the situation to him, only to realize that he does not understand the offshore reporting requirements. Michelle links up with an experienced offshore voluntary disclosure Lawyer and together they submit her to one of the offshore voluntary disclosure programs.
Michelle is not under audit or examination. Michelle has not received any notices from the IRS and therefore should have no problem with her submission (at least based on it being “Voluntary”)
Under Audit or Examination
In a different scenario, Peter is currently under audit. He received a document request (IDR) asking him to provide information regarding his small business, which is the purpose of the audit.
In preparing for the audit, the CPA notices that Peter has bank statements from a foreign bank. The CPA asks Peter about the foreign bank, and Peter explains that he had these accounts for many years as an inheritance from his grandma who is a citizen and resident of Portugal.
The CPA asks why Peter never brought this to his attention previously, and Peter explains that he did not think he had to report it. The money came from his grandma who is from Portugal, Peter has never touched the money or otherwise accessed it. Rather, it is been sitting in the account ever since his grandma passed away and left Peter the money. Moreover, the CPA did not specifically ask about Foreign Banks or Foreign Accounts
Even though the IDR does not specifically ask questions regarding foreign income or foreign accounts, Peter cannot voluntarily enter offshore disclosure. Why? Because Peter is under Audit/Examination and is aware that he has a reporting requirement, and the IDR asks about unreported income (Not all IDRs ask about unreported income).
Since the IDR does ask about unreported income (even though it does not specify foreign income), Peter does have interest income that is generated from the foreign account and therefore he has to report it during the audit, as opposed to making an offshore disclosure.
Peter is non-willful and should be able to negotiate reduced penalties or a waiver…but he should not submit to an IRS Offshore Voluntary Disclosure program at this time.
If Peter was to intentionally omit the information regarding the offshore foreign reporting/tax issues, Peter would be committing Tax Fraud/Tax Evasion. Specifically, Peter would be committing a willful omission by knowingly failing to disclose information regarding foreign income and/or foreign accounts that he has an understanding that he is required to report, and which was he directly asked by the IRS.
Receiving a John Doe Summons
It is important to note that the Internal Revenue Service uses the phraseology audit or examination when explaining that in that type of circumstance a person is unable to enter offshore voluntary disclosure.
Alternatively, if a person receives a John Doe summons or other less specific request for information, then that does not necessarily prevent a person from entering offshore voluntary disclosure.
For example, if the IRS issues hundreds of John Doe summonses during an investigation and Scott happens to receive one – that does not in and of itself prevent Scott from entering offshore voluntary disclosure.
Why? Because Scott personally is not under audit or examination. Now, if Scott was to appear and provide testimony, then this may change his ability to enter one of these programs. But, since Scott is not currently under audit or examination, he may still be able to enter offshore voluntary disclosure (other facts permitting).
Willful vs. Non-Willful
When it comes time to determine which program any one of these individuals may be able to enter, the key aspect will be whether the person is willful or non-willful. You can read more about willfulness versus non-willfulness in an article we previously authored on the subject. And, if you were Willful, you should never submit to the Streamlined Programs or a Reasonable Cause Application. For an interest article on the dangers and perils of going Streamlined when you know you were willful, Click Here.
A Summary of Different IRS Offshore Disclosure Programs
The following is a summary on the distinction of OVDP vs. Streamlined. For more about Reasonable Cause, please click here.
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).
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.
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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.)