Irvine Tax Lawyer – IRS Foreign Reporting, Certified Tax Specialist
Golding & Golding’s Irvine Tax Attorneys have been serving Irvine for 20 years. Our main office is in Irvine, and we represent a diverse client base in all aspect of International Tax Law.
Irvine, Orange County Tax Lawyers
We are highly experienced International Tax Lawyers representing clients worldwide on simple-to-complex international tax matters. We serve as advisors to several high-profile individuals in over 60 countries; International Tax is our passion.
IRS Voluntary Disclosure is a highly specialized area of law that combines Legal Advocacy and Tax Analysis, with Tax Return Preparation. It also required a strong background in IRS Audit and Trial/Litigation experience.
We handle a broad range of FATCA, FBAR and IRS Offshore Voluntary Disclosure matters.
Common questions we receive are:
- Why do I have to report Foreign Accounts?
- My CPA never told me I had to report
- What is FATCA?
- What is an FBAR?
- What are the penalties?
- Am I under criminal investigation?
- How do I expatriate?
Sean M. Golding, JD, LL.M., EA – Certified Tax Law Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure Matters.
In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.)
He is frequently called upon to lecture and write on issues involving IRS Offshore Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide
Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.
Common International Tax Issues We Handle
The following are very common questions/issues we routinely handle; so, no you are not alone.
U.S. Taxes on Worldwide Income
The United States follows a worldwide income tax model. In other words, if you are considered a US person, and green card holders are considered us persons for tax purposes then you are required to include your worldwide income when you file your U.S. taxes each year.
It does not matter whether the money was earned while you resided in United States or outside of United States, and it does not matter if the money has already been taxed by a foreign jurisdiction. Moreover, it does not matter if the income is tax exempt in the other jurisdiction. Rather, if you are a U.S. person then you have to report your worldwide Income.
*They may be a bilateral tax treaty in place with the U.S., and/or other specific IRS rules that may exclude, exempt, or limit the application of U.S. tax, but from a baseline perspective — it should be included on your tax return.
Foreign Tax Credits May be Available
If you earned income in a foreign country and you already paid tax in a foreign country on the income, you may be able to receive foreign tax credit by the IRS for foreign taxes already paid. With a foreign tax credit, the IRS credits you for some of the taxes you already paid overseas. It is not always a dollar-for-dollar credit, because it depends on what portion of your income was earned in the US versus abroad, along with whether or not you were in a high tax jurisdiction, but it is usually applicable at least in part and effective in reducing your U.S. tax liability.
Also, you can typically carry the credits forward into future years if you have excess credits that you cannot use in the current (and carry it back a few years as well)
An FBAR is a Report of Foreign Bank and financial Form aka FinCEN 114. Unlike FATCA (Foreign Account Tax Compliance Act), which is a relatively new law, the FBAR rules and regulations has been around since the 1970s. It was only recently, with the development (2010) and enforcement (2014) of FATCA that FBAR filing has become such a big deal. While the FBAR was initially developed and enforced through FINCEN, the IRS has the power to enforce FBAR penalties against individuals and businesses.
FBAR Penalties represent a major part of our IRS Offshore Voluntary Disclosure practice. While we have authored several articles and blog postings on issues involving FBAR penalties, FBAR Filings, and FBAR Frequently Asked Questions (FAQ), we feel that by providing you a Summary Review Guide to FBAR Penalties in general — it may assist you better answer the following questions:
- What is an FBAR?
- What is the purpose of and FBAR?
- What are FBAR penalties?
- Which FBAR penalties will I be subject to?
- Most importantly — How can I avoid, limit or reduce FBAR Penalties?
The IRS has the authority to penalize you upwards of $10,000 per violation, per account for violations that were non-willful. In other words, if you didn’t even know you were supposed to file the form and report your annual maximum balance on an FBAR statement, the IRS can still penalize you upwards of $10,000 per account, per year.
Sounds absurd, right?
Take this Example: David is a Legal Permanent Resident (Green Card recipient) who relocated to the United States for work when he was 42 years old. David was transferred by his company to the United States initially on an L-1 visa due to his proficiency in science and management. David earned several million dollars during the first 20 years of his career, which he staggered over seven different accounts. These accounts earn about $50,000 a year in passive income.
Under the current state of the law, David could be penalized upwards of $70,000 per year for the six years of unreported FBARs – that is a whopping $420,000 penalty solely because he was unaware of the rule. He will also have to pay taxes, fines and penalties on the unreported income — along with additional fines for unreported FATCA form 8938.
*The reason it is six (6) years instead of three (3) years is due to a nuance in the law statute of limitations which states that when a person has more than $5000 of unreported foreign income, the statute of limitations is expanded from three (3) years to six (6) years.
**The FBAR is only one of several forms David did not file which can lead to additional penalties, including FATCA 3520, 3520-A, 5471, 8621, and FATCA Form 8938.
If the IRS reserves the power to penalize you $10,000 per violation, per account, per year for a non-willful violation – would you like to take a guess at what the penalty would be if they think you were fraudulent?
Answer: The penalty can reach $100,000 or 50% of the account value – whichever is greater.
Therefore, in a multiyear audit, you could easily be penalized 100% value of the account balances. But, at least you can take some solace in the fact that the IRS has reduced the maximum penalty from 300% down to 100%. In other words, using the six-year statute of limitations explained above, in prior years, the IRS could penalize you 300% value (50% per year, for a total of six years). At least now, the penalty is limited to everything you have…and nothing more.
FATCA is the Foreign Account Tax Compliance Act, and it requires both individuals and foreign financial institutions worldwide to report foreign account and “Specified Asset” information to the United States.
While the law has good intentions, it is abhorred by many — and for some, rightfully so.
Why? Because there are many individuals who reside overseas and have no other relation to the United States other than being born as a U.S. Citizen (Accidental American) or relocated from the United States to a foreign country many years ago — and then had no further interaction with the United States, who are now caught in the FATCA matrix.
Worse yet, in order to enforce FATCA, many Foreign Financial Institutions are finding it easier to simply close and/or freeze U.S. Account Holder accounts, than to take the time to properly report any individuals who may be considered a U.S. person.
This is causing major disruptions for individuals residing overseas, and making it nearly impossible to exist as a foreign resident and U.S. Citizen/Legal Permanent Resident.
To that end, we will provide a brief summary of things you need to know regarding FATCA — hopefully to help relieve some of the stress, and bring you back to reality (after all those rabbit holes you dug through, and/or fear mongering websites you landed on).
A PFIC is when a majority of the earnings you receive is facilitated (whether by assets owned or income generated) by passive activities. For example, if you own a shell company in Hong Kong (either through a LTD or BVI) and the sole purpose of the company is to aggregate or ‘pool’ your investments – which generate interest, dividends, capital gains or royalties – then all the income you are earning is passive income.
Let’s take an example: Maria is an astute investor and simplified her paperwork by pooling together all of her mutual funds, equity funds, and ETF’s under one umbrella. The umbrella is a holding Corporation, such as a Hong Kong Limited. All of the investments are owned by the Corporation, which then distributes the income (or not) to Maria.
Since Maria is an owner of the company, and the company generates all of its income through receiving passive investments (as opposed to Maria receiving consulting fees for providing active work to other clients), the corporation would be a default PFIC.
Are PFICs Bad?
Yes, they are inherently harmful when it comes to IRS and tax. Since 2012, a PFIC must be reported each year on a form 8621 – despite whether any excess distributions or proper were earned from the PFIC (post-2012). In addition, if there are distributions and those distributions exceed 125% of the average of up to three years of prior-year distributions, the person will have what is called an excess distribution, unless a proper election was made (Read: If you are reading this article, you probably did not make the election)
Excess distribution calculations are at best, brutal (we have handled cases where a single person had over 35 PFICs in a single trading account., with a mix of interest and dividend income spread over 6 years), and at worst, a time-suck that can drain your pockets, time, and resources — and result in a tax liability far exceeding the Long-Term Capital Gain or Qualified Dividend you may have expected when you first invested in the fund(s).
For a more comprehensive analysis of excess distributions, you can bore yourself with this prior article we prepared on basic form 8621 excess distributions.
The most important take away from an excess distribution is that instead of being taxed at the Long-Term Capital Gain or Qualified Dividend Tax Rate, you will instead be taxed (presuming you did not make any elections), at the highest ordinary income tax rate (even if you are not in the highest tax bracket) for all years aside from the current year, in which you are taxed at your ordinary income rate for the year.
Generally, an investment that was held for a significant amount of time will see a tax upwards of 50 to 75% (or more) of the income, as opposed to a 15 or 20% long-term capital gain a qualified dividend tax rate.
Fixing Quiet Disclosures to the IRS
Quiet Disclosure vs. Offshore Voluntary Disclosure is the difference between making an illegal offshore voluntary disclosure to the IRS (Quiet) vs. following proper IRS Offshore Amnesty Procedures (Streamlined, OVDP or Reasonable Cause).
What is a Quiet Disclosure?
- Silent Disclosure
- Soft Disclosure
- Illegal Offshore Disclosure
- Criminal Tax Disclosure
Anatomy of a Typical Quiet Disclosure
- You have unreported foreign accounts, assets or income
- You learn about IRS Offshore Reporting Requirements
- You learn about FBAR & FATCA Penalties
- You get caught up reading fear mongering websites
- You take the FBAR & FATCA penalties “out-of-context”
- You get scared about going OVDP or Streamlined
- You file prior year Income Tax Returns and FBARs
- But You did not submit under OVDP, Streamlined or Reasonable Cause
- Now you are scared of Willfulness, Criminal Penalties & a Potential Jail Sentence
The Problem: Now You Are Willful
Even if you did not have a prior knowledge of the reporting requirement at the time you hadn’t disclosed, by submitting a Quiet Disclosure, when you know you were required to submit under either OVDP, Streamlined or Reasonable Cause you have now made yourself willful.
In other words. you have willfully failed to pay the penalty, you may have bootstrapped your non-willful submission into full-blown tax fraud and tax evasion.
Why? Because you have now willfully evaded reporting foreign accounts and/or paying outstanding U.S. Tax, Interest and Penalties by knowingly filing an untimely FBAR or Amended Tax Return without following proper procedures.
Foreign Rental Income
Foreign tax laws involving rental income vary depending on which country the rental income is earned in. This is because in many countries, there are minimum threshold requirements before real estate income has to be reported on a foreign tax return.
This is true in many countries such as Korea and South Africa. As such, in countries with a minimum threshold requirement, individuals can earn a certain amount of foreign rental income “tax free,” since because until they meet the foreign jurisdiction’s reporting threshold, they do not need to report the income.
IRS Tax on All Foreign Rental Income
Unfortunately, from the IRS’ Tax perspective there is no de minimis requirement regarding the reporting and taxation of foreign real estate income – all rental income must be reported.
This can get individuals who own foreign rental property into trouble with the IRS, especially when there are other assets or foreign accounts associated with the real estate income (aka FBAR or FATCA)
IRS Subpart F Income
Subpart F Income is complicated. Essentially, from a U.S. tax perspective, when you have income from a Controlled Foreign Corporation (CFC) as well as current E&P (Earnings and Profit) you may have to pay tax on the income — even before you ever receive it.
This is even more complicated if you have foreign income that has been sitting overseas in accordance with the new repatriation laws (2018) – while not technically Subpart F income, the resulting income is treated similar.
When it comes to CFC and Subpart F Income, key issues to keep in mind are the the following:
- Defining a CFC
- Defining Subpart F Income
- 5471 Reporting Requirements
- 8621 Reporting Requirements
- 8938 Reporting Requirement
- FBAR Reporting Requirements
- Current Year E&P
Millions of individuals in the U.S. have foreign income investments. The confusion often lies in the fact that most foreign corporations do not have a foreign tax or reporting requirement. Thus, the foreign corporation does not provide any documentation (1099) to the U.S. Person regarding IRS Tax Compliance.
Moreover, oftentimes, the U.S. individual is unaware (rightfully so) that even though they have a foreign investment, it is still subject to U.S. Tax.
As if that is not bad enough — and due to lack of information and clarity provided by the IRS, the person is also unaware that they also have other issues to contend with.
Fighting IRS International Tax Penalties
The IRS has the right to issue excessively high fines and penalties against any individual who violates optional reporting disclosure rules. That is not to say that the IRS issues penalties against everyone who is out of compliance, but, if you are out of compliance than you may be subject to these penalties.
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 Offshore Voluntary Disclosure
IRS Voluntary Disclosure of Foreign or Offshore Accounts is a legal method for getting into IRS Tax and Reporting compliance before the IRS finds you first. At Golding & Golding, we limit our entire tax law practice to IRS Offshore Voluntary Disclosure.
Why IRS Voluntary Disclosure?
With the introduction and enforcement of FATCA (Foreign Account Tax Compliance Act) and FATCA penalties, coupled by the renewed interest in the IRS issuing FBAR (Report of Foreign Bank and Financial Account Form aka FinCEN 114) penalties — which are both very steep – it is typically a better strategy to be proactive and get into compliance, than to play “defense.”
FBAR penalties alone can reach ~$12,500 per account, per year (adjusted inflation from $10,000). While this is the maximum penalty, the “recommended penalty” is still $12,500 per year (usually 3-6 years).
4 Types of IRS Offshore Voluntary Disclosure Programs
There are typically four types of IRS Offshore Voluntary Disclosure programs, and they include:
- Offshore Voluntary Disclosure Program (OVDP)
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
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:
- 1040 (Tax Returns)
- Schedule B (Ownership or Signature Authority over Foreign Accounts)
- FBAR (FinCEN 114)
- FATCA (Form 8938)
- Form 3520 (Gift from Foreign Person)
- Form 5471 (Foreign Corporations)
- Form 8621 (Foreign Investments, aka PFIC)
- Form 8865 (Foreign Partnership)
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
- 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 (Ends on 92/28/2018)
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.
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.
Contact us Today, Let us Help.
We Can Help You!
Offshore Disclosure: We safely bring Taxpayers from around the world into IRS Tax Compliance. We work together to evaluate and analyze your case, including assessing whether you are willful or non-willful, the pros and cons of entering OVDP, Streamlined, or Reasonable Cause, and whether you may have Form 8938, 3520, 5471, 8621, PFIC or other Requirements.
Who are Golding & Golding?
Golding & Golding limits their practice exclusively to IRS Offshore Voluntary Disclosure matters. Sean represents clients worldwide (in over 60 countries) with Offshore Disclosure (OVDP) and Streamlined Procedures, as well as FBAR & FATCA Compliance.
Throughout his nearly 20 years of practicing as an Attorney, Sean also has gained extensive litigation experience in highly complex civil and criminal matters nationwide.
He has represented individuals and businesses in a broad range of both civil litigation and audit matters and has helped thousands of individual and business clients worldwide avoid criminal charges, as well as reduce and avoid penalties. (See our Case Results for more information.)
Sean has been retained to represent clients in offshore disclosures matters with unreported accounts reaching nearly $40,000,000 in a single disclosure and has substantial experience with facilitating compliance of Foreign Corporations, CFC (Controlled Foreign Corporations), and PFIC (Passive Foreign Investment Companies), in all aspects of Offshore Disclosure.
Sean’s clients include U.S. and foreign businesses and families living throughout the states and abroad. Past and current clients reside in Afghanistan, Argentina, Australia, Austria, Bermuda, Brazil, British Virgin Islands, Bulgaria, Canada, Cayman Islands, China, Costa Rica, Germany, Hong Kong, Hungary, India, Indonesia, Iraq, Israel, Italy, Japan, Jersey Islands, Korea, Malaysia, Malta, Mexico, Morocco, Netherlands, New Zealand, Nicaragua, Pakistan, Philippines, Romania, Singapore, Sweden, Switzerland, South Africa, Thailand, Taiwan, Turkey, and more.
Sean graduated from one of the nation’s Top Master of Tax Law Programs at the University of Denver, where he also received his Bachelor’s degree. He worked his way through school and earned Dean’s List distinction at both Whittier Law School and University of Denver.
- Certified Tax Law Specialist (Less than 1% of Practicing Tax Attorneys Nationwide)
- Member, State Bar of California, 1999-Present (Inactive 2004-2005 while launching NY practice)
- Member, State Bar of New York, 2004-Present
- Enrolled Agent, Federally Licensed Tax Practitioner
- Admitted, United States Tax Court
- Real Estate Broker, California Department of Real Estate
Having achieved Enrolled Agent status, Sean is one of only a few attorneys licensed to represent individual and corporate clients nationwide before the IRS, IRS Appeals Board, Tax Courts, and Federal Courts. He has been quoted in several news publications, including Accounting Magazine and Tax Pro Today.
Sean is originally from New York City and currently resides with his family in Southern California. He is active within the community and serves on various legal panels. Sean is also a former ranked junior competitor Tennis Player in the Eastern Tennis Association (part of the USTA). In his free time, Sean enjoys traveling.
Reduced Fee Initial Consultation
We understand that many firms offer a “Free” Initial Consultation, with the word being used loosely.
Oftentimes, these firms use these free consultations to bait you in, only to try to scare you (5 Years Prison) or sell you (Better Act Now!). This is not how Golding & Golding, APLC operates.
When you are ready to contact our firm, we will schedule a reduced fee to discuss the facts of your case in more detail and provide you a firm understanding of the IRS Offshore Voluntary Disclosure Program and what your options are for compliance.