Offshore Tax Evasion – Get into FBAR & FATCA Compliance Now!
Offshore Tax Evasion is a key enforcement priority for the U.S. Government, including the Internal Revenue Service, Department of Justice and Department of Treasury.
Tax evasion is the when person or business knowingly evades tax. Tax evasion is illegal, unlike tax avoidance which is a legal way individuals and businesses attempt to reduce their taxes.
*If the failure to report foreign accounts and foreign income was non-willful, than it is not a crime, since the element of “intent” is missing.
Here is a typical example: If Jennifer hires a Tax Lawyer to evaluate her tax returns and accounting to determine whether there are additional deductions that she can legally take, this is tax avoidance. Moreover, if Jennifer and her Tax Lawyer take a position as to an accounting issue, in which the position is reasonable and not frivolous, then this is also a form of tax avoidance as well. If the IRS disagrees with their position, it does not mean Jennifer is guilty of Tax Evasion.
Rather, if Jennifer simply does not report certain income she has in order to not pay tax on it — that is tax evasion and can result in extremely high fines and penalties including possible criminal investigation by the US government.
When a person tries to avoid paying tax on foreign money or intentionally hides money overseas in an attempt to avoid paying tax on it, it is called offshore tax evasion.
Offshore Tax Evasion
The Internal Revenue Service publishes the “Dirty Dozen” tax scams to be cautious of, and offshore tax evasion always makes the list. Why? It is very common for individuals and businesses to attempt to move money offshore in order to avoid detection by the US government.
This type of behavior is highly frowned upon by the US government, which is why this type of enforcement priority is key for the IRS, DOJ and DOT.
The following are a few examples of offshore tax evasion:
– Earning money offshore through a passive holding company or other foreign investment company and not reporting it on a tax return or FBAR (Report of Foreign Bank and Financial Account) Form.
– Earning money overseas, which is intentionally not distributed to the person who earned the money already in the United States, but rather is distributed to a 3rd party and later ‘transferred’ to the U.S. Person, in an attempt to avoid US tax on those earnings.
– Asking the foreign financial institution responsible for the investment to not issue a 1099 or 1099-equivalent, so that the IRS is unaware that the investment exists.
– Not telling the foreign financial institution that you are a US person.
– Not reporting information about your foreign business on the proper reporting form such as a 5471 or 8621.
Penalties for Offshore Tax Evasion are Brutal
There are various different types of penalties and fines a person can be subject to as a result of offshore tax evasion; the following is a brief summary of some of the more common types of 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..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.
- 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. 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 is subject to a prison term of up to five years and a fine of up to $250,000. 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.
OVDP – Reduce Penalties and Avoid Criminal Charges
OVDP is the offshore voluntary disclosure program. It is a program used to reduce penalties and fines associated with being audited by the IRS before you have a chance to disclose your foreign information and acknowledge your “willfulness.”
OVDP (Offshore Voluntary Disclosure Program) is a very complicated process, which requires comprehensive international tax law knowledge and experience.
Our firm has successfully submitted numerous OVDP applications since the program’s inception back in 2009. As a result, we have put together this comprehensive OVDP FAQs from the trenches.
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 in the country.
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 in trouble with foreign reporting and OVDP is that 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 received many 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 individuals have to worry about when they are considering entering the Offshore Voluntary Disclosure Program. While the IRS has its own set of FAQs, they are focusing 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.
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, then 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. 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 does not get their chance to tax your money.
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 an 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 account (some restrictions apply but with FBAR and FATCA 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 over 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 will make you and the bank 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 identified facilitator banks “Bad Banks.” Therefore, if you have 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 subject to the 50% penalty unless you were willful. That is because a person could be non-willful and still have their money in one of these bad banks – that should not make them subject two of 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 of which 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.
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 “Quite 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 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 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 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)
- 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. 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) 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, it 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.
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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