Missed your Chance for OVDP – Recent Criminal Tax Convictions
- 1 What if You do not Enter OVDP?
- 2 Using a Hong Kong Shell to Hide $2.6 Million
- 3 Using a Panamanian Bank to Hide Funds
- 4 Concealed Foreign Bank Accounts
- 5 OVDP – FAQ
- 6 Golding & Golding – About Us
- 7 FAQ – Summary
- 9 Streamlined Program FAQ
- 10 OVDP vs. Streamlined
- 11 Why Comply with IRS Foreign Disclosure Laws?
The decision to enter the IRS Offshore Voluntary Disclosure Program is a very big decision to make. That is because once a person makes a decision to enter into OVDP, they are essentially “putting themselves on the grid” involving disclosure a foreign accounts, assets, and other money.
At Golding & Golding, our tax law firm focuses exclusively on offshore voluntary disclosure, so we understand what a big decision it is. We can tell you that once a client makes the decision to move forward, they all report feeling a sense of relief after entering the program –if for no other reason, the IRS rarely ever prosecutes anybody who enters the program (none of our clients have ever been prosecuted).
To that end, there are individuals who sit on the fence a bit too long, waffling between whether they should enter the program or not — and for some people, time does run out.
It is important to keep in mind that intentionally or willfully failing to report income, assets and other foreign money is a tax crime. It can be considered tax fraud, tax evasion, and/or money laundering…and lead to a criminal investigation, indictment and prosecution.
What if You do not Enter OVDP?
Not everyone’s who decides against entering OVDP will be detected, investigated, or prosecuted by the Internal Revenue Service, or Department of Justice — but many of them will. The following is a brief summary of recent cases in which individuals were caught with money offshore before entering OVDP, which resulted in significantly high fines, penalties and prison time.
The following are summaries are provided by the Department of Justice:
Using a Hong Kong Shell to Hide $2.6 Million
A Michigan man pleaded guilty today to charges of filing a false tax return, announced Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division and U.S. Attorney Barbara L. McQuade of the Eastern District of Michigan.
– “Today’s plea is yet another example of the department’s commitment to identifying, investigating and prosecuting those individuals who seek to conceal funds in foreign jurisdictions and evade their tax obligations,” said Principal Deputy Assistant Attorney General Ciraolo. “The days when a shell company created in Hong Kong or other jurisdictions could be used successfully to hide funds in foreign financial accounts are over, and those who continue to engage in this conduct will be held accountable.”
– “For Americans who follow the rules and pay their taxes, it is important to see that those who go to great lengths to avoid paying taxes are held accountable,” said U.S. Attorney McQuade.
– “There are no safe havens for hiding money in secret bank accounts around the globe,” said Chief Richard Weber of Internal Revenue Service (IRS) Criminal Investigation (CI). “Wealthy individuals hiding assets abroad should know that IRS criminal investigators will find them. You can no longer hide behind a veil of secrecy, sham companies or offshore bank accounts.”
– S. District Court Judge Sean Cox for the Eastern District of Michigan scheduled Rumbold’s sentencing for Feb. 8, 2017. Rumbold faces a statutory maximum sentence of three years in prison as well as a period of supervised release and monetary penalties. The plea agreement requires Rumbold to pay restitution for his unpaid tax liabilities for the years 2006 through 2008.
Using a Panamanian Bank to Hide Funds
A Weston, Connecticut man, who used a Panamanian bank account to conceal over $1.5 million in income from the sale of duty-free alcohol and tobacco products pleaded guilty today to one count of conspiring to conceal assets and income from the Internal Revenue Service (IRS), announced Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division and U.S. Attorney Paul J. Fishman for the District of New Jersey.
– U.S. persons are required to report to the IRS on Schedule B of a U.S. Individual Income Tax Return any financial interest in, or signature authority over, a financial account in a foreign country by checking “Yes” or “No” in the appropriate box and identifying the country where the account was maintained. U.S. persons also must report all income earned from foreign financial accounts and, if the accounts have an aggregate value of more than $10,000 at any time during the calendar year, file with the Department of the Treasury a Report of Foreign Bank and Financial Accounts (FBAR).
– Hyatt failed to report income earned on his Panamanian account, and failed to file an FBAR for the years at issue. Hyatt admitted that this scheme resulted in a tax loss of $521,986.
– “The Department continues to vigorously pursue and prosecute those who conceal their assets and income in offshore accounts in an effort to evade paying their fair share of taxes,” said Principal Deputy Assistant Attorney General Ciraolo. “Nearly eight years after the IRS announced its first offshore voluntary disclosure program, individuals who fail to disclose their interests in foreign accounts and report income earned on these accounts should be well aware that there are significant consequences for this criminal conduct.”
– “The Panamanian banking system should not be a haven to hide profits made from United States businesses,” said U.S. Attorney Fishman. “When American taxpayers use foreign bank accounts to hide their assets, we will investigate and prosecute them to the fullest extent of the law.”
– Hyatt faces a statutory maximum sentence of five years in prison, as well as a term of supervised release and monetary penalties. Hyatt has agreed to file true and accurate tax returns and to pay the IRS all taxes and penalties owed, in addition to paying an $854,465.50 penalty for failure to disclose his foreign accounts.
Concealed Foreign Bank Accounts
A Los Angeles, California, businessman was charged today in an information, which charges one count of conspiracy to defraud the United States and one count of corruptly endeavoring to impair and impede the due administration of the internal revenue laws, announced Principal Deputy Assistant Attorney General Caroline D. Ciraolo, head of the Justice Department’s Tax Division.
– As alleged in the information, between 2006 and 2009, Sarshar diverted more than $21 million in untaxed gross business income to these undeclared bank accounts. Between 2007 and 2012, Sarshar also earned more than $2.5 million in interest income from these accounts. Sarshar omitted all of this income from his 2006 through 2011 individual and corporate tax returns and he failed to report his authority over and ownership of these bank accounts in false Reports of Foreign Bank and Financial Accounts (FBARs) that he submitted to the U.S. Department of Treasury.
– Sarshar stashed millions in secret foreign financial accounts in Israel and then sought to use these accounts to evade his U.S. tax obligations, seeking to cover his tracks along the way,” said Principal Deputy Assistant Attorney General Ciraolo. “The message of this case is clear: There are no safe havens. If you are concealing assets and income in undeclared offshore accounts – or are a banker, an asset manager or otherwise are assisting accountholders in such criminal conduct, your only viable option is to come forward and accept responsibility for your actions. Those who continue to violate U.S. tax laws will be held accountable and pay a heavy price.”
– Sarshar signed a plea agreement to the charges in the information, agreeing to plead guilty and pay more than $8.3 million in restitution to the IRS. If the court accepts the parties’ agreement, Sarshar will be sentenced to 24 months in prison. In addition, Sarshar stipulated to a civil penalty in the amount of 50 percent of the high balance of his undeclared accounts to resolve his civil liability for not disclosing the existence of his Israeli bank accounts.
– “As the filing of today’s criminal charges demonstrate, the days of bank secrecy is rapidly changing,” said Chief Richard Weber for IRS-Criminal Investigation. “There’s no safe place for taxpayers to divert and hide income anywhere in the world. IRS-CI works vigorously to stop offshore tax schemes such as this one and is proud that our forensic accounting skills helped uncover over $21 million in untaxed gross business income in this investigation.”
OVDP – FAQ
OVDP (Offshore Voluntary Disclosure Program) is a very complicated process, which requires comprehensive international tax law knowledge and experience.
Our firm has successfully represented numerous clients worldwide in OVDP applications since the program’s inception back in 2009 (when it was called OVDI – Offshore Voluntary Disclosure Initiative).
We have utilized our experiences in representing hundreds of clients around the world to put together this comprehensive OVDP FAQs from the trenches.
Golding & Golding – About Us
Golding & Golding is an International Tax Law Firm, and one of the most experienced boutique OVDP (Offshore Voluntary Disclosure Program) and International Tax Law firms around the globe.
We have represented numerous businesses and individuals around the world with international tax law and OVDP submissions, with unreported assets and/or financial accounts exceeding $35,000,000.
The reason why individuals and businesses are getting into trouble with foreign reporting and OVDP is because there are so many aspects to OVDP that an inexperienced attorney, CPA or accountant would not know to look out for, and/or even warn the client about.
Over the last few years, there has been a recent increase in OVDP applications. In addition, our firm has receives numerous referrals from clients who previously sought the help of other tax professionals who steered them in the wrong direction and nearly got them in trouble.
This is a list of the most common questions and/or mistakes made by inexperienced OVDP Attorneys that have negatively impacted our clients:
FAQ – Summary
We have put together a basic summary of key issues applicants should consider when they are considering entering the Offshore Voluntary Disclosure Program. While the IRS has its own set of FAQs, they are focused more on the technicalities of qualifying for the program. Our summary will provide you more of the “ins and outs” of the actual application for individuals who are unsure of which accounts should be reported, and how entering OVDP can impact their legal status — and freedom.
In the end, if you were willful and you have foreign accounts that are unreported (especially if you are in a FATCA Agreement Country) or bank with a FFI (Foreign Financial Institution) that is reporting (and even more so if your money is in a Bad Bank), you should consider retaining an experienced OVDP lawyer and entering the program.
Can My Immigration Status Be Impacted by OVDP?
Yes, depending on your current status and future intended U.S. legal status, an OVDP application may have an impact. Under some circumstances it may hurt your status, and under other circumstances it may actually benefit your status.
Applying for Citizenship
Your immigration status can be impacted for several reasons. As a general answer, your immigration status can be impacted due to the “willfulness” presumed by applying for OVDP. When a person enters OVDP (as opposed to the IRS Streamlined Program), they are acknowledging that they were willful and/or intended to evade tax.
Therefore, if you are a Legal Permanent Resident or other Visa holder, there is the concern that if you want to apply for Legal Permanent Residence Status (“Green Card”) or U.S. Citizenship, when you are completing your N-400 form and it asks whether you have ever committed a crime, you would have to include the tax issues as a crime. Technically, willfully and/or knowingly not reporting your foreign accounts is a form of tax fraud and tax evasion.
Deportation or Removal
If you are applying for OVDP and you are granted admission into the program, chances are you will not be criminally prosecuted and therefore you would not be deported or removed if your Foreign Bank reports you and the information makes it way to the USCIS. Moreover, once your OVDP application is complete and you are approved (and you submit the OVDP closing letter) it may facilitate obtaining citizenship if that is the endgame you are seeking.
*If you are rejected for OVDP, it could lead to Deportation or Removal, but that is a fact-based analysis depending on the specific circumstances of your case.
My Spouse Does not Want to Enter OVDP
It does not take two to tango when it involves OVDP. The IRS is more than willing to accept a one person OVDP application. Even if your prior tax returns were submitted married filing jointly MFJ, it does not change the fact that one spouse (or one former spouse) has the ability to submit to the program, even if the other spouse will not comply.
It is a much more complicated process, but if you happen to be married to a tax fraud then it is probably in your best interest to consider entering the program while making a dual application for Innocent Spouse as opposed to playing the wait-and-see game for two reasons:
- You never know when the IRS is going to strike – and that can have a major impact on your financial status; and
- You never know how sneaky your spouse, and especially a prior spouse may be – and the first person to go to the IRS usually gets the best deal (aka “first to squeal, gets the deal“)
We are Divorced, Not on Speaking terms and filed Tax Returns Jointly
Again, the IRS does not care if you are no longer married and the prior spouse will not cooperate. If you want to go into the IRS and disclose these accounts — then you have every right to do so.
If you were unaware of your spouse’s foreign assets during the marriage, and/or were unaware of the requirement to report the assets, and/or the money was not yours, then there are other options you may consider before making a full OVDP application.
**Before making any affirmative representation to the IRS you should consider speaking with an experienced OVDP Lawyer.
There is No Passive Income Tax in The Country with My Accounts
Unlike nearly every other country on the planet, the United States taxes US citizens, Legal Permanent Residents and Foreign Nationals Subject to U.S. Tax (Substantial Presence Test) on their worldwide income – despite where they are residing when the income is earned. Thus, merely because you may have your money in Singapore, Taiwan, Hong Kong or another country that does not tax interest income, it does not mean that the United States loses its chance to tax your money.
Since your worldwide income is subject to US tax, you are required to report these accounts as well as pay income tax on the earnings. Some common forms are Schedule B, 8938 and FBAR.
The Unreported Money does not belong to me?
In many countries, it is not uncommon to have children listed on the financial accounts of the parents – even though the children ”really” have no right to the money. The United States understands this concept and therefore created a different program for non-willful individuals, which is called the Streamlined Program. Moreover, since none of the money belongs to you, you should be able to waive any penalty that would otherwise have been levied against you.
My Business Never Reported Foreign Accounts
Under U.S. law, as long as the business accounts meet certain threshold requirements (more than $10,000), you are required to report these accounts on your annual FBAR (Report of Foreign Bank and Financial Account Statements). It does not matter that the accounts are being held under business account name. If you are an owner of the business and have access to the money, then technically you are supposed to report these accounts to the United States.
My Business is Held as a Foreign Holding Corporation
The IRS knows all of your tricks. Whether your money is being held in a foreign corporation, a foreign holding Corporation, a British Virgin Islands company (BVI), a Cayman Islands company, a Maltese company – it does not matter. If the foreign financial institution where you hold the bank accounts has a US address or any information regarding the US owner on the account on file, chances are that under FATCA, the financial institution is going to err on the side of caution and report the account.
The Business is not Under my Name
Depending on how sophisticated your foreign business and tax planning was, you may have foreign corporations that are not under your name, but to which you have signature or other authority over accounts at the bank – which are under the name of the business. Due to the global priority of promoting “financial transparency” in accordance with FATCA and CRS (Common Reporting Standards), there is a significanrtly increased chance that the corporate veil will be lifted and you will be exposed.
I did not report my Foreign Retirement Account
You are required to report your foreign retirement accounts (some restrictions apply, but it is better to not leave anything to chance). When it comes to foreign retirement accounts, it can get a little more tricky because if the retirement account was a US 401(k) then chances are you would receive deferred tax treatment. Thus, if you did not receive any benefits from the foreign retirement account (especially any withdrawals) then you may not have been willful by not reporting the account. This is because it is understandable to think you would not have to report a foreign retirement account until any distributions were made to you.
***You should speak with an experienced OVDP lawyer on this issue.
I received a FATCA Letter, What Should I do?
If you received a FATCA letter from your foreign bank, then you really need to take action. That is because the bank is waiting for you to reply to both confirm compliance with IRS tax law, as well as indicate whether you qualify for a W-9 or W-8 BEN.
If you are a US taxpayer then you will have to complete the W-9, which means you will be subject to IRS tax reporting, And, if the bank or foreign financial institution sends the information to the IRS and they contact you before you have a chance to enter the program, the chances of you being subject the very stiff penalties skyrockets.
Only a Small Amount of money is in a Bad Bank, is All my Money subject to a 50% Penalty
Yes. At the current time, the IRS will not distinguish between the money you have in “Safe Banks” versus the money you have in banks identified as “facilitator banks” aka “Bad Banks.” Therefore, if you have any of your money in one of these bad banks, then before entering OVDP it is important that you determine whether you were actually willful (50% penalty applies) for non-willful (50% penalty does not apply).
Stated another way, just because you have money in a bad bank does not mean your entire offshore balance is subject to the 50% penalty; you must also be willful. Why? Because a person could be non-willful and still have their money in one of these bad banks — and that should not make them subject to a 50% penalty.
I Sold Foreign Property and Transferred Money into a Foreign Bank Account
The money that resulted from the sale will be included in the penalty calculation, if after you sold the home and placed the funds into a foreign bank account — you did not report the account.
Unreported Income from a Foreign Rental Property
If you have unreported foreign rental income from a home or property and you enter OVDP vs. the Streamlined Program, the value of the home is included in the penalty structure. The same rule does not apply to streamlined program applications (e.g., the value of the unreported income generating real estate is not included in the penalty computation).
What if I have an Unreported Foreign Gift (Form 3520)?
If you failed to report a gift from a foreign person, foreign business or trust distribution, it may be subject to a penalty unless you properly disclose it in accordance with amending your tax returns under OVDP. For more information about Foreign Gifts, please Click Here.
What if I Failed to Report a Foreign Trust (Form 3520-A)?
The U.S. Tax Code is stacked against Foreign Trusts. In other words, the failure to properly your foreign trust on a form 3520-A can lead to significant fines and penalties (as the U.S. Government may see it as your attempt to shelter money offshore in a Foreign Trust). To learn more about Foreign Trust Reporting, Please Click Here.
What if I Never Reported my Foreign Business Interest (Form 5471)
In order to avoid the problem of U.S. Taxpayers sheltering money offshore in foreign business (and not reporting the earnings), the IRS takes a hardline against individuals with unreported Foreign Business Interest. For individuals required to file form 5471, the failure to filing the form can lead to penalties upwards of $50,000 per return and the returns are due annually. To learn more about reporting your Interest in a Foreign Business, please Click Here.
I have a PFIC and/or Foreign Mutual Fund that I never Reported (Form 8621)?
The IRS reserves the most complicated and complex tax computation for the infamous “PFIC aka Passive Foreign Investment Company.” Moreover, the IRS essentially deemed that all Foreign Mutual Funds fall under the PFIC umbrella. Therefore, that Foreign Mutual Fund you purchased offshore that is accruing and/or distributing Interest or Dividends may be subject to a monster tax analysis — especially if it qualifies as issuing an “Excess Distribution.” For a comprehensive analysis of PFIC 8621 reporting, please Click Here.
I Opened and Closed Accounts Several Bank Accounts
The most important thing to keep in mind is that the same money is not counted twice. Thus, it is very important to make sure the duplicity of account money issue is properly vetted on the application, so that the IRS is aware and understands the transfers.
I Submitted a Previous Quiet Disclosure, Can I Really Still Enter OVDP?
Yes. There are some people who may have submitted a “Quiet Disclosure” because they were unaware of the whole OVDP process, or though they could just amend the tax return late and file late FBAR statements.
What is GATCA/CRS?
CRS is the Common Reporting Standard, which is otherwise known as GATCA (Global Account Tax Compliance). The OECD has developed a new reporting standard in the shadow of FATCA to facilitate global tax compliance on an international scale. Therefore, chances are no matter how you set up your foreign accounts and in which country you are operating in — at some point or another one of the foreign financial institutions is going to report you.
What does “Under Examination” mean?
Leave it to the IRS to keep one of the most important aspects of qualifying for OVDP a nebulous uncertainty. Under examination generally means that you are either in an audit, or otherwise being questioned about your financial information by the IRS. To that end, depending on when you were contacted, how you were contacted, what information the auditor did or did not ask, the facts and circumstances surrounding your particular case, and many other concepts that can make your head spin – you may still be able to enter the program (depending on what stage of inquiry you received from the IRS).
Can I enter the Streamlined Program First to See if I am Willful/Non-Willful?
No. You only get one chance at this, so it is important that you really evaluate the facts and circumstances around your failure to report, in order to determine whether you were willful or non-willful. While technically, there is no way to know whether you are willful – you just have to know.
By speaking with an experienced OVDP Lawyer you may be able to get a better idea of whether you were willful or non-willful.
Streamlined Program FAQ
The streamlined program is an alternative for individuals who were non-willful. The parameters of the program are different, with less reporting requirements, less financial exposure, and less protection. It is important to keep in mind that the program is relatively new but if you were not willful then you do not require criminal protection and therefore submitting to OVDP could be considered “overkill”
Do I Receive Criminal Protection?
No. The reason is that people enter the streamlined program because they were non-willful. That means that they did not intentionally attempt to avoid paying US tax or reporting the accounts – they simply did not know of the requirement. This is common for individuals who were merely earning passive income on a foreign account in the country they previously worked in or resided in, are new to the United States, or their only foreign accounts are from an inheritance.
What is Non-Willful?
There is no definition of the term non-willful beyond the fact that it is a totality of the circumstances application in which the government will look at all of the factors and determine whether they agree that the person was not willful.
What if my Application is Rejected?
If your application is rejected, you would not be accepted into the program and probably subject to an IRS audit. This also means that you have now disclosed all of your financial information to the IRS (there is no pre-clearance for the streamlined program).
*This is another reason why it is absolutely crucial to have an experienced OVDP/Streamlined Program Lawyer. Even if you are rejected form the program, if you have competent counsel you should be able to fight the issue and work to avoid more serious penalties.
My CPA/Accountant/Attorney told me I was low risk
There is no way to know what your risk level is. By that, we mean that at any time the Internal Revenue Service may get wind of information regarding your case, whether it be from a Foreign Bank, FATCA reporting, Former Spouse, Jealous Lover, Angry Business Partner, etc…Trust us, we have seen it before on many occasions.
We hope this helps give you a better understanding of OVDP and the Streamlined Programs. The following is a summary of the difference between OVDP and the Streamlined Program.
OVDP vs. Streamlined
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. Click Here to learn about some of our more recent OVDP and Streamlined accomplishments.
In order to assist you better understand the distinction between the two different IRS foreign account disclosure programs, we are providing the following summary for your reference:
If you or your business has unreported or undisclosed foreign accounts, offshore assets, or foreign income then you may be considering whether you should enter the Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program, and what the definition of “Willful” is.
Whether or not you enter Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program will depend on the facts and circumstances of each taxpayer’s situation. Not two tax situations are identical, and the failure to properly submit to the correct program can have serious consequences for the unsuspecting taxpayer.
Why Comply with IRS Foreign Disclosure Laws?
Because if you fail to comply with FATCA (Foreign Account Tax Compliance Act) as well as general IRS Foreign Disclosure Laws, the IRS has the authority to penalize you upwards of 100% of the value of your offshore assets and accounts as well as:
- Collect Taxes for prior tax years
- Collect Interest on outstanding tax liability for prior years
- Penalize you for the failure to report foreign accounts on the tax return (Schedule B and 8938)
- Penalize you for the failure to report foreign gifts (3520)
- Penalize you for the failure to report foreign Trusts (3520 and 3520A)
- Penalize you for the failure to report ownership in Foreign Corporations (5471 and 5472)
- Penalize you for the failure to report ownership in a PFIC (8621)
- General Negligence and Fraud Penalties
- Investigate you for Criminal Tax Fraud & Criminal Tax Evasion if you willfully failed to report your assets & foreign income.
The reason why international tax law compliance has taken center stage is because under the new FATCA (Foreign Account Tax Compliance Act) laws, foreign countries are actively reporting the bank and financial accounts of US citizens and US legal permanent residents. If a foreign country is interested in working with the United States, the foreign country will enter into an “ Intergovernmental Agreement” (IGA) with the United States. These agreements are reciprocity agreements, which means that not only will the foreign country report the information to the IRS, but the IRS will also reciprocate by providing the same information to foreign country tax authorities.
Why Enter either OVDP or the Modified Streamlined Program?
Individuals and businesses who are trying to avoid 100% FBAR penalties and/or Criminal Prosecution may seek to voluntary disclose, pay a penalty (unless abated), and avoid criminal prosecution.
There are the only two approved programs by the Internal Revenue Service that can bring a taxpayer into compliance. Instead of entering the programs, a taxpayer may qualify to directly report under the reasonable cause exception, in which the taxpayer directly submits the forms with a statement explaining why they were not properly filed instead of paying a penalty.
*The IRS is not known to be sympathetic, and if the IRS does not believe you and audits you and/or you are under examination, you are disqualified from entering either the OVDP or Streamlined Program AND the IRS is now informed regarding all of your undisclosed accounts.
**If the taxpayer submits the forms to the IRS without submitting to the IRS Disclosure Programs, it can be considered “silent disclosure” or “quiet disclosure.” If the IRS learns of the Quiet or Silent Disclosure, he IRS will penalize you heavily as well as consider initiating criminal proceedings against you. In this scenario, not only will the IRS seek to take all of your money and assets through the implementation of penalties and levies, but you may be spending the next 2 to 20 years in prison for tax evasion or tax fraud.
What is the Difference between OVDP and the Streamlined Program?
Before making a decision regarding voluntary disclosure, it is important to understand the difference between the two main programs.
OVDP (Offshore Voluntary Disclosure Program Requirements)
In accordance with OVDP filing requirements, The Applicant will then be required to pay the outstanding tax, along with estimated interest, a 20% penalty on the outstanding tax, as well as an “FBAR” 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 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!
When it comes to the Streamlined Program, the penalty is limited to 5% on the highest “year-end” balance for the last 6-years. The reason is that if the person was non-willful, they should not be overly-penalized if there was an artificial increase in the value of the bank accounts – such as from the sale of a home during the tax year.
(A complete breakdown of OVDP requirements can be found on our OVDP Page, by Clicking Here)
OVDP is Unfair for Non-Willful Taxpayers
Before the implementation of the modified streamlined program, it was difficult for individuals who were non-willful (no specific definition, but generally without intent to deceive or defraud) to become compliant. Why? Because if you are non-willful, you still had to go through the filing procedures as if you were willful, and then opt-out of the penalty structure — and open yourself up for audit.
Not such a big deal, except for the fact that you also had to pay 20% penalty on the outstanding taxes that you owed along with a 27.5% penalty on the highest year’s annual aggregate (unless you successfully “opted out” from the penalty structure – which came with a whole other set of headaches). As you can imagine, for individuals who simply inherited some money overseas, had no international dealings, and had no idea that they were required to report foreign passive income (Interest income), sometimes in a country that does not tax its own citizens on passive income earnings — providing this information to the IRS was a huge burden.
What is the Modified Streamlined Program?
In order to avoid “non-willful” applicants from having to go through the entire OVDP process before opting out, the IRS and Department of the Treasury modified a small program in existence, called the streamlined program, which was very limited. The IRS expanded the program to basically allow anyone who was non-willful to enter the program.
The program reduced the amount of documentation that applicants were required to file to only three (3) years of amended tax returns and six (6) years of FBAR (Foreign Account Reporting Statements). In addition, there was no penalty on the tax amount that was due and no penalty on the value of income generating foreign real estate that was not previously disclosed. Moreover, the 27.5% penalty was reduced down to 5%, or completely waived if the foreign residence requirements are met.
Penalty Waiver: there is a small facet of the modified streamlined program called the Modified Foreign Offshore Program. If a person qualifies for the modified stream of program (which means they acted non willfully) and they can prove they lived overseas for a total of 330 days out of the tax year in any year within the last three years, then they may qualify to have the penalty waived.
The Streamlined Programs sounds great, right? Well it is, unless you are attempting to wrongfully evade the 27.5% penalty by entering the program when you knew you were willful.
What if you are caught trying to sneak into the Streamlined Program?
I cannot stress to you enough the dangers and serious repercussion of submitting to the Streamlined Program if you were willful. If you knowingly enter the streamlined program and it is found that you acted willfully in your failure to disclose and report your overseas and foreign assets and income — you will most likely be investigated and prosecuted by the IRS and DOJ.
The IRS made this fact known in a recent public relations statement. From the IRS’ perspective, if you wrongfully enter this program in order to avoid paying the full penalty amount what you have done is stolen 27.5% or 50% of the penalty amount due to the IRS – and this does not make the IRS very happy.
Even worse, is that you may be subject to criminal prosecution. And, since you have already disclosed all your foreign financial information in your Streamlined Program application, you will be in a tough position to try and defend yourself.
Why is the Modified Streamlined program in Jeopardy?
Just like in everything in life, a few bad apples spoil the whole bunch. The IRS has identified several applicants who were Willful in their failure to report undisclosed foreign tax and bank information, and have been caught trying to sneak into the modified streamlined program in order to pay a reduced penalty – or avoid the penalty altogether This contradicts the IRS’ intention, which was to modify and expand the Streamlined Offshore Disclosure Program to assist taxpayers who otherwise would be overburdened by having to enter the OVDP, and have to undergo a comprehensive opt-out of the penalty structure.
There is No Reason to be Scared of the OVDP or the Streamlined Programs
The goal of this article is not to scare you. Rather, it is to warn you to just be cautious if you are entering one of the Voluntary Offshore Disclosure Programs. There are an inordinate number of inexperienced and unscrupulous attorneys, CPAs and enrolled agents who try to use these programs as a way to scare individuals, and take advantage of the “fear factor.”
If You are going to enter a Foreign Disclosure Program, use an Attorney
While CPAs and enrolled agents (who are not also attorneys) may charge less than an attorney, it is important to note that you do not have any attorney-client privilege with CPAs and enrolled agents. That means that if the IRS rejects your streamlined program and the IRS wants to speak with your representative, unless your representative is an attorney, there is no attorney-client confidentiality privilege between a CPA and Taxpayer when a Criminal Matter is at issue.
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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