Non-Willful, But Do Not Qualify for Streamlined Domestic Offshore Procedures?
As an International Tax Law Firm that focuses exclusively on offshore voluntary disclosure, we have spoken to thousands of clients with offshore disclosure issues over the years. Many people who do not qualify for the Streamlined Domestic Offshore Procedures may still qualify for a Reasonable Cause Statement.
In speaking with our clients, we have learned that there is entirely misleading and inaccurate information posted on numerous websites.
Why Mislead the Public?
When a firm or CPA intentionally uses misinformation to goad a client into OVDP (read: Collect Higher Fees) it is very upsetting to us. Besides explaining the correct process to the client, we have to “unravel” what the other firm initially told the client.
Most recently we received an inquiry from a senior-citizen individual (81 years-old) who later became a client; when he contacted us, to say he was besides himself in fear is an understatement.
He had a situation in which he was clearly non-willful, but did not qualify for the streamlined program. Instead of offering the option of “reasonable cause,” the attorney/CPA (who shall remain nameless but advertisers everywhere online and enjoys “borrowing” our Ad Copy) told the individual that he would have to go OVDP to avoid jail.
He falsely told the client that were no other options – even though this was a lie, since the applicant was non-willful, and that “5 Years in Prison was a very real outcome.”
It wasn’t; not at all.
Facts – David
David is 81 years old and originally from Japan. David earns minimal money in the United States and therefore mistakenly believed he did not have to file a tax return in the United States.
It turns out, that while David only earns minimal income in the United States, he earns upwards of $250,000 in passive income overseas from a lifetime of hard work and proper investing. He also pays significant taxes, to the degree that once the foreign tax credit is applied, he would owe no tax in the United States.
When David spoke with this Attorney/CPA, the attorney told him that he has to go OVDP. When David asked why, the attorney told him he did not qualify for streamlined and there were no other options. He told David he would need “$100,000 upfront to represent him to avoid David going to jail.”
**We have prepared hundreds of Domestic Streamlined Applications in the short 2.5 years the program has been around, and have consulted with IRS Agents and trial counsel on various issues not directly dealt with in the FAQs. While a late-filed return may still be considered valid (technically, the Streamlined Program wants all prior returns to have been timely filed, but the IRS may waive that requirement on a case by case basis), they will not accept a prior year original return as part of the package. Moreover, if you file an original return and then immediately include it in the Streamlined Application, it goes against the “spirit” of the program and may result in significant fines and penalties.
Scaremongering & Voluntary Disclosure
If you saw an elderly man walking down the street, would you run up and punch him in the face? Of course not — so why would you run up and try ripping $100,000 out of his hands.
David had several facts in his favor:
- David was from Japan
- David had all of his accounts in Japan
- David’s accounts are all under his own name
- David earned all of the money while living in Japan
- David had no money in any other foreign country
- David earned all of his money legally
- David did not owe much US tax by time all proper credits were applied.
- 90% – 95% of his money was in retirement funds or foreign pension
Does this sound willful to you?
Inexperienced attorneys and scaremongers feed off of your fear, but they do not know the law. They do not have the experience in representing clients in this area of law and therefore do not know the nuances and alternatives available.
When David retained our firm, we explained the different options to him. He could of course go OVDP and then Opt-Out, but presumably the IRS would still penalize him – and under these facts that seemed entirely unfair. We ended up submitting a reasonable cause application for David (he did owe a few thousand in tax liability even after the credit was applied –due to the increase in tax of his Social Security), which was successful. Reasonable cause does not apply to everybody, but in this type of situation where David did not qualify for the streamlined program, David determined it was his best option and we believed in him.
**For streamlined foreign offshore procedures a person could have un-filed tax returns and still qualify. For streamlined domestic offshore procedures (Applicant does not reside outside of the country for at least 330-days in any one of the last 3 tax years and/or meets the substantial presence for each of the last three tax years) a person must have filed tax returns.
Want to learn more about Offshore Disclosure?
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 if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlikes the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.