Golding & Golding - Offshore Disclosure & FATCA Compliance

Golding & Golding – Offshore Disclosure & FATCA Compliance

Voluntary Offshore Disclosure is the process of “voluntarily” coming forward to disclose unreported foreign/offshore money to the United States Government.

The disclosure will typically include:

  • Foreign Accounts
  • Foreign Income
  • Foreign Assets
  • Foreign Business Ownership
  • Trust Distributions; and
  • Other Foreign Money

Disclosing previously unreported money and proactively making statements to the IRS is a very big step to take, but for those of our clients who decided to make that decision, they are all better off in the long-run. Why? Because the IRS, DOJ and DOT have ramped up enforcement initiatives (Read: FATCA).

To date, we have not had any of our applicants subject to a criminal investigation after submitting to either Offshore Disclosure Program (either OVDP or the Streamlined Program).

Not all Money has to be “Offshore or Foreign”

While offshore disclosure programs are typically designed for offshore or foreign disclosures, they are not limited to only foreign money. If a person has both undisclosed foreign income/accounts and undisclosed U.S. income, they can make a dual disclosure submission.

In other words, if for example a person wanted to report seven (7) foreign bank accounts in Malaysia that they were unaware they were required to report they would report the accounts under the streamlined program (since they were non-willful) – unless they wanted to make a Reasonable Cause Statement instead.

In addition, if that same applicant had unreported U.S. income (as long as it was not derived from illegal sources) and/or simply needed to amend their US return to reflect changes with their U.S. Taxes (maybe they received a 1099-B after they submitted their tax return and/or over-reported or underreported domestic business income or other income) they can do so under either the Streamlined Compliance Procedures, or Traditional OVDP.

Streamlined vs. OVDP – U.S. Income

It is important to note that there are key differences between the Streamlined Program and OVDP. Namely, the starting point for the OVDP is that the person was willful and therefore does not qualify for the streamlined program. This is generally true, unless the applicant is a business, in which a business does not have the option to enter the streamlined program and therefore must enter traditional OVDP, and subsequently opt-out.

Let’s assume for purposes of this example that the applicant is an individual; it is important that he or she understands the distinction between willful versus non-willful and where they fall on that spectrum. 

Streamlined Program – Non-Willful

If a person was non-willful, then the protocol is to submit their streamlined application detailing their undisclosed foreign information, along with the additional information for their unreported U.S. income (or other U.S. changes) – with an explanation about why it was not reported, underreported, or misreported. No harm, no foul.

The same cannot be said for a “Willful Submission” under OVDP.

OVDP – Willful (Foreign Accounts)

OVDP is very different than the Streamlined Program. Why? Because under OVDP a person is making the representation that he or she was willful. In other words, that the applicant knew that he or she had a reporting requirement, but intentionally or willfully did not report the foreign income or foreign assets.

To that degree, the IRS provides very specific reporting requirements to get into compliance. In addition, the IRS has a very straight and narrow penalty. Either the applicant pays 27.5% or 50% (if any of the money was in with the IRS deems as a bad bank) in addition to other penalties for the nonpayment of tax and that is it (unless they choose to opt-out).

Under the circumstances – in which the person only has unreported foreign money – he or she will amend the tax returns, file the necessary FBARs, 8938s, 3520, 5471, 5472, 8621, etc., pay the penalties, and receive a closing letter.

OVDP – Non-Foreign/Offshore Money

A person cannot use OVDP to get into compliance unless they also have foreign accounts. In other words, a person who only had undisclosed U.S. income, would defer to the Domestic Voluntary Disclosure Program (aka IRS Domestic Voluntary Disclosure Practice).

The Internal Revenue Service has had the domestic voluntary disclosure program in place for many years. It is very different than OVDP in that there are no specific requirements for reporting and for the submission in general.

The IRS does provide certain guidelines that should be followed when making a submission to ensure the submission is complete, but does not require the applicant to do so. The only requirement for the domestic voluntary disclosure is that the funds were earned legally; in other words, illegally sourced funds cannot be “washed or laundered” through the Domestic Voluntary Disclosure Program.

Even though a person can submit undisclosed U.S. money under OVDP, it is crucial that they work with a highly experienced voluntary disclosure attorney when making the submission. The IRS does not provide the same guidelines and protections for the domestic disclosure as it does for the foreign disclosure, and it is important to understand the key nuances when making the submission.

Can I Just Disclose the Foreign Money?

If you only disclose the foreign money, even though you know you have undisclosed U.S. earnings that were not reported, congratulations…you have now proactively committed Tax Fraud and/or Tax Evasion.

Put it this way: if you are aware that you had unreported US income along with unreported foreign income and knowingly conceal the US income that was previously unreported when you file the amended tax returns, then you are knowingly failing to report income. If you knowingly fail to report income, you are committing a tax crime because:

  • You are knowingly filing a false tax return
  • You are knowingly failing to disclose unreported income
  • You are intentionally not paying the rightful amount of tax due.

If you resign yourself to the fact that you were willful, and that you have to report your undisclosed foreign money through traditional OVDP – and you also have undisclosed US income – you should ensure to report all of your undisclosed income.

By entering into OVDP and providing full disclosure, you will be in full compliance — and that will bring you peace of mind. If instead, you make an affirmative tax amendment without disclosing your unreported U.S. Income, you are only putting yourself further in danger  – and greater risk – of a potential tax fraud or tax evasion charge.

A Summary of Filing Options

We get it; the whole process is confusing and overwhelming – and further confounding by the scare mongering articles you find online.

It boils down to the fact that there are various options for individuals depending on whether they are US resident or foreign resident, and whether their unreported money was earned offshore (anywhere outside of the United States) or within the United States.

We have provided a basic summary for you below:

U.S. or Foreign Resident with Foreign Money Only

If you are a foreign resident and only have foreign accounts and/or foreign money that you did not report, then you have two options: if you are non-willful, then you would submit to the streamlined program. If you meet the requirements of a foreign resident under the strict guidelines of the streamlined program, you may qualify for a penalty waiver. If you do not meet the foreign residence requirements than you would pay the 5% penalty.

Alternatively, if you were willful, then you would submit to the traditional OVDP. When it comes time to pay the penalty, you can either pay it, or have the opportunity to opt-out, but the starting point would be submitting under OVDP.

                                               

U.S. or Foreign Resident with Foreign and U.S. Money

If you are a foreign resident with both US and foreign money, then depending on the facts and circumstances of your case, you would submit to either the streamlined program or OVDP.

If you are non-willful, then all of the unreported money and income would be reported using the streamlined program. Again, depending on whether you meet a foreign residence test under the streamlined disclosure program rules and regulations, you may qualify for a penalty waiver; if not, the penalty is generally 5%.

Alternatively, if you were willful and you want to disclose, then you would be limited to disclosing under traditional OVDP. By doing so, you must get into full tax compliance, which would require including your legally sourced, unreported U.S. money.

*If you were aware that you had US income that you did not previously report, but you did not report that income on a US tax return then you are required to disclose that information when you make your submission.

**If you knowingly file a tax return only to report your foreign income and willfully do not include the US income on your filing, then you may be subject to criminal fines and penalties.

                                               

U.S. or Foreign Resident with U.S. Money Only

If you do not have any unreported foreign offshore money and all of your unreported money stems from domestic or US earnings, then you do not qualify for offshore disclosure. That is because none of your money is “offshore.” Rather, you would make a submission under the domestic voluntary disclosure in order to report your unreported US money.

For a summary on how the domestic voluntary disclosure aka IRS domestic voluntary disclosure practice works, please click here to be taken to a comprehensive article we authored on the domestic voluntary disclosure submission process.

                                               

Reporting Foreign Income – The Basics

Golding & Golding is a flat-fee, full-service firm; we are lawyers who assist international clients in reporting their offshore accounts to the IRS. Most recently, many of our clients learned about Foreign Bank Account reporting requirements when they received a FATCA Letter from their Bank, asking them to certify their U.S. Status by submitting either a W-9 or W-8 BEN.

Who Has to Report?

We have represented numerous clients worldwide with issues similar to yours:

Expats who relocated overseas and did not know they had to report their foreign accounts.

U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.

Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.

Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.

Please do not worry. We can assist you as we have assisted hundreds of clients in over 40 countries disclose upwards of $40 million in a single disclosure.

We are available seven days a week and provide flat-fee and full-service representation to our clients around the world.

The Basics

These are the most basic rules when it comes to foreign accounts and foreign income:

Foreign Income

If you are either a US Citizen, Legal Permanent Resident (aka Green Card holder or recently gave up your Green Card) or foreign resident who meets the substantial presence test, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.

Foreign Accounts

If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.

In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.

Fines & Penalties

Unless you are criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.

Customs Holds and Passport Revocation

With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport “customs hold” to question you on the spot (usually outside the presence of your attorney).

Getting Into Compliance

Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 40 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.

To that end, there are three main methods of compliance:

(1) Streamlined Compliance

This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes.

(2) OVDP

This program is mainly for individuals and businesses who were willful, aka were aware they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.

(3) Reasonable Cause Statement

This is not a particular program; instead, it is a method for getting to compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, which must be evaluated carefully with your attorney before making a decision.