Offshore Disclosure “Real-Life” Examples – Unreported Foreign Bank & Income
International Income Tax Fraud and the maintaining of Hidden Bank Accounts overseas in foreign countries is nothing new; it has been a “strategy” implemented by financial professionals around the world for many years.
The reason why you are hearing so much about international tax fraud as of lately, is because the IRS has implemented numerous tools and programs to assist it in the elimination of international Tax Fraud and Tax Evasion. Some of the more commonly known tools, include:
- FATCA – Foreign Account Tax Compliance Act
- FBAR – Report Of Foreign Bank And Financial Accounts
- 8938 – Statement Specified Foreign Financial Assets
The most important question a potential Offshore Disclosure applicant will have to grapple with is whether he or she (or the business) “Knew what they were doing Was Fraudulent?”
Guilt vs. “Fear” of Guilt
We have many clients at our law firm who tell us they would never commit intentional tax fraud. For these people, when they realize that they have failed to report foreign accounts and foreign income, their knee-jerk reaction is to run into OVDP and pay the massive penalty in order to obtain “criminal protection.”
We have to constantly remind these people that it is perfectly understandable to have a fear of the unknown and that the idea of losing resident status or going to jail is a real-life concern – but if their actions were truly “non-willful,” meaning they never had any intent to defraud or evade tax, then traditional OVDP (and the staggeringly high penalties) is not necessary.
How do I know my level of…Guilt?
At Golding & Golding (a law firm the practices exclusively in offshore disclosure) we have found that sometimes the easiest way to understand international tax fraud is through examples. Therefore, we provided the following list of examples to assist you in determining your level of culpability:
**These are just examples, and each person’s individual circumstances are different. Therefore, these examples cannot be used to determine which offshore disclosure program you should enter before speaking with an experienced international tax law offshore disclosure attorney.
Example 1: You inherited money overseas that either earns income through interest or is otherwise invested and you never thought about, nor do you regularly access the money: in this scenario, assuming the money was not placed specifically overseas for the sole purpose of keeping it out of the reach of the IRS.
- This would presumably not be tax fraud and would qualify as “Non-Willful” for the “Streamlined Program (Reduced Penalty) Program.
Example 2: You relocated to the United States from a foreign country. In that specific foreign country you maintain foreign accounts (or maintain foreign accounts in multiple countries, but you legitimately lived in each one of those countries and received Gifts or Inheritances in those countries – whether the income was taxed or not taxable such as Singapore, Hong Kong, Philippines, etc.):
- This would presumably not be tax fraud and would qualify as “Non-Willful” for the “Streamlined Program (Reduced Penalty) Program.”
Example 3: You opened a foreign account many years ago, never accessed the money, and had no idea that you were required to report any income or the foreign accounts. (.e.g., you did not open the account with the intent of keeping the money outside the reach of the IRS)
- While this would presumably not be tax fraud, on its face, depending on the facts and circumstances, it could begin to manifest into Tax Fraud.
Example 4: Same as example 3, but later-on you learn of the U.S. Foreign Account reporting requirements but do not do anything about it (i.e., begin reporting the money on your tax return or FBAR).
- Although this situation may have started as non-willful, the moment you learn of the requirement to report but did not do so, it manifested into “Willfulness” — since at that point you began to intentionally avoid reporting the monies.
Example 5: You have accounts in foreign countries, which you have not been reported in the United States. When your CPA or accountant asks if you have foreign money or foreign accounts overseas, you say “no” because you believed that investment accounts is not what the CPA or accountant meant.
- This is a much more common scenario than you might think, and in this type of situation you should speak with an experienced offshore disclosure where to really evaluate the facts and circumstances surrounding the nondisclosure.
Example 6: Same facts as example 5 only you did not tell the CPA for Because you were scared that you should have been “reporting all along.”
- This is an example of willfulness and most likely you would need to submit to the traditional OVDP.
Which Offshore Program do I Qualify For?
As a law firm that focuses exclusively in offshore disclosure, we can tell you that we have literally seen hundreds, if not thousands, of different facts scenarios – and no two are exactly alike.
In order to better understand what is involved in offshore disclosure, below please find a summary of the distinction between OVDP and the streamlined program. These are the two main offshore disclosure programs in the United States to help out-of-compliant taxpayers get into IRS, DOT and US government tax compliance:
OVDP vs. IRS Streamlined Offshore Disclosure Program
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 with outstanding unreported foreign accounts ranging from $50,000.00 to over $30,000,000.00
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 a person enters Offshore Voluntary Disclosure Program (OVDP) or the IRS Streamlined Offshore Disclosure Program will depend on the facts and circumstances of each taxpayer’s situation. No 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)
- Genera 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 to the IRS and U.S. Government.
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 you choose the “Reasonable Cause/Delinquency FBAR Submission” option and the IRS does not believe you, you may be subject to IRS Audit and/or examination, as well as being disqualified from entering either the OVDP or Streamlined Program. Worse yet, the IRS has all of your unreported and undisclosed foreign account and foreign income information – which can lead to serious fines and penalties.
**If the taxpayer submits the forms to the IRS without submitting to the FBAR Delinquency/Reasonable Cause or IRS Disclosure Programs, it can be considered a “silent disclosure” or “quiet disclosure.” If the IRS learns of the Quiet or Silent Disclosure, the 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) 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 years of amended tax returns and six 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 were 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 to not try and enter 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 prosecuted by the IRS.
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 the 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 learned that several individuals who were willful in their failure to report undisclosed foreign tax and bank information 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 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 into these programs. Way too many inexperienced and unscrupulous attorneys, CPAs and enrolled agents see these programs as a way to scare individuals.
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 is important to note that you do not have an attorney client privilege with CPAs and enrolled agents. What that means, is that if it turns out you wrongfully entered the streamlined program and the IRS wants to speak with your representative, unless your representative is an attorney, there is no privilege between a CPA and Taxpayer when a Criminal Matter is at issue.
Here is a link to recent article we authored “OVDP – Frequently Asked Questions” or “Streamlined Program – Frequently Asked Questions”
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.)