Offshore Voluntary Disclosure Program Updates – Important Facts To Know
Offshore Voluntary Disclosure Program
As the IRS, DOJ and DOT continue to peel away the outer layers of offshore entities to reveal the complexities of Offshore Tax Shelters, Foreign Trusts and other vehicles used to conceal money overseas — the U.S. Government has expanded the requirements necessary to make an OVDP submission; this has resulted in the Offshore Voluntary Disclosure Program becoming even more complicated than it used to be.
Conversely the IRS, DOJ, and U.S. Government as a whole have been pushing for higher penalties and increased lengths in prison sentences for tax fraud and tax evasion.
Thus, the increase in Offshore Voluntary Disclosure Program information disclosure requirements should not be enough to dissuade you from entering the Offshore Voluntary Disclosure Program — especially when you realize what the penalties are if you get caught in an International Criminal Tax investigation before submitting.
For the typical applicant who had unreported money, income or assets overseas, and who did not necessarily conspire with others to avoid reporting the information and/or paying U.S. Tax, the heightened disclosure requirements are not all that severe.
The additional disclosure will primarily impact individuals, businesses and trusts who conspired, colluded, or otherwise worked with 3rd party individuals or businesses to implement complicated foreign structures designed to hide or shelter money – usually involving foreign advisors and/or business associates to make the scheme work.
Offshore Voluntary Disclosure Program Basics
If the current trend in Offshore Voluntary Disclosure Program continues, penalties will continue to rise and applicants will be required to divulge more and more information regarding the facts and circumstances surrounding the non-disclosure of foreign accounts, assets and income in order to be allowed to continue through the program.
The Offshore Voluntary Disclosure Program is a government program designed to assist individuals, businesses, estates, and other applicants with getting into tax compliance by reporting foreign account information, foreign asset information, foreign investment information — and most importantly, unreported foreign income.
OVDP has seen many changes since its inception back in 2009 (when it was called OVDI – Offshore Voluntary Disclosure Initiative). Since then, international tax enforcement has become a major priority for the Internal Revenue Service (IRS), along with the Department of Treasury (DOT) and Department of Justice (DOJ). On a global scale, hundreds of countries have also made international tax enforcement a major priority with the introduction of CRS (Common Reporting Standard).
Golding & Golding – Offshore Disclosure is All We Do!
As one of the only Tax Law Firms worldwide that focuses their entire practice on Offshore Disclosure (OVDP, Streamlined Compliance Procedures, FBAR Delinquency, and FBAR Fraud) we have seen the landscape change dramatically over the last eight years, and there is no telling where the program is heading. While there is always talk about the IRS discontinuing OVDP, the simple fact that the IRS has recovered upwards of $10 Billion dollars in revenue through Voluntary Disclosure (Read: The IRS sits back while you do all the work), chances are the program is here to stay.
To that end, we are providing you with 10 Key Issues involving OVDP/Global Tax Enforcement, and how the OVDP ‘Program’ has changed since the program’s inception — which significantly impacts how an applicant can come forward and get into compliance:
One of the main factors in determining whether a person wants to go through with OVDP are the penalties – and the penalties are severe. There are two main penalties to contend with: the first penalty is a 20% penalty, which is issued annually for each year’s worth of unreported tax during the eight (8) year compliance period. For the most part, that penalty has not changed. If you do not owe any tax liability for those years, then there is no “Unpaid Tax Penalty.” For example, maybe you have sufficient unused tax credits to offset the unreported income.
The second and usually more important penalty is the FBAR/8938 Penalty. Initially, the penalty phase was 20%, with reduced penalty alternatives depending on the specific facts and circumstances of your disclosure — namely the amount of unreported funds overseas you may have had.
Current Offshore Disclosure Penalty
Under the current version of the program the penalties are much different. The penalty is at least 27.5% (absent an opt-out) of the highest year’s maximum balance of unreported accounts. In other words, for each year, you aggregate the highest values of all of your unreported foreign accounts. Then you determine what the annual aggregate total is for each year, pick the highest year, and multiply it by 27.5%, unless…any of your money is in what is considered to be a bad bank a.k.a. (Foreign Financial Institutions or Facilitator)
Being on this Bad Bank List is a…bad thing — it means your institution is known for facilitating tax fraud by enticing individuals and businesses to open accounts which were hidden from the IRS. For example, banks such as UBS in Luxembourg would proactively assist, if not motivate, US taxpayers to open numerical accounts, instead of name accounts and/or open accounts under false names or false company names in order to hide the money. If any of your money that is unreported is in one of these bad banks, then all of your penalty is subject to a 50% penalty instead of the 27.5% penalty.
There may be additional penalties for failing to have filed prior returns timely and/or paying previously outstanding tax liabilities.
FATCA and FATCA Form 8938
FATCA is the Foreign Account Tax Compliance Act. It was written into law in 2010, but did not become enforced until 2014. When it comes to offshore reporting by individuals and businesses, the main aspect to FATCA is the introduction of Form 8938. This form is very similar to the FBAR, except there are higher threshold requirements before a person is required to file. Moreover, it includes (as well as excludes) certain accounts that are required to be reported on the FBAR, and even if a person has no foreign accounts, if he or she is married and filing jointly with a person who does have foreign accounts, then both spouses can be subject to the penalties — since the tax return itself is subject to the misreporting.
This is different than the FBAR in which only a person who is required to file an FBAR may be subject to penalties – even if parties file married filing jointly (although that is not to say the IRS is going to exclude for lien or levy that is owned by both parties is one of the spouses become subject to FBAR penalties)
**The penalties for the 8938 can reach as high as $60,000.
Requirement to Extend the Statute of Limitations
Under the earlier version of OVDP, the rules were not as stringent. As such, a person had more room to negotiate with the IRS while they were pursuing an OVDP. Namely, if a person did not want to agree to extend the statute of limitations for the IRS to seek recovery of FBAR and other penalties, they could feasibly refuse to sign it and continue in OVDP. In other words, the applicant could continue with OVDP without actually agreeing to extend the statute of limitations, and if the statute of limitations happened to run out before the IRS had a chance to enforce it, then you hit the lotto.
As the program progressed and modified over time, the rules were modified to require applicants to agree to extend the statute of limitations in order to agree to allow the IRS more time to enforce penalties and tax liability.
Expansion of the 14454 and 14457 Information Forms
The submission of the 14454 (Attachment to Offshore Voluntary Disclosure Letter) and 14457 (Offshore Voluntary Disclosure Letter) signifies the initial submission to OVDP.
In earlier versions of the OVDP program, the IRS was unsure if it was going to be a success or not. As such, the IRS OVDP Program did not require the disclosure of such specific information regarding the funds as is required today. For example, under the current version of the program, the IRS expands the inquiry to ask very specific and detailed questions regarding the origin and transfer of the money — which was not required in earlier versions of the program.
If applicable, the IRS will ask you about the specific circumstances, facts, dates, and other information regarding the specific origin of the money. They want to know who you spoke with at the bank, what specifically they told you – along with the individuals names and contact information.
As such, it is harder to avoid providing information that may otherwise be used to incriminate you or another person, whereas back in the day it was easier to simply define the unreported assets and information, provide that information to the IRS, pay the penalty and go on with your life. With that said, since you are in OVDP, you will be protected to the degree you make a full disclosure, with the IRS rarely if ever seeking criminal prosecution against OVDP Applicants as long as the complete the program — and make a full disclosure.
Preclearance Requires More Disclosure
When OVDP/OVDI was first launched, preclearance was much simpler. It only required a very minimal amount of information in order to determine whether a person could pass the criminal investigation, and receive authorization to enter OVDP.
Under the current version of OVDP, the applicant is not only required to disclose all of the account identifying information, but they must provide the institution’s name, address, telephone number, etc. along with an affirmative statement as to whether they have any entities, such as a corporation, trust, holding company, etc. linked and/or identified with the account(s).
8621 Filing Requirement
When OVDP first launched, the rules regarding passive foreign investment companies were different, if not more lax. There was no requirement to file a form 8621 unless an excess distribution was issued, and Foreign Mutual Funds were not heavily scrutinized; these rules have changed, and not in favor of U.S. Taxpayers. Moreover, it should be noted that OVDP was launched prior to FATCA, and so enforcement of offshore tax fraud and tax evasion was not as big of priority as it is today (at the time OVDP was launched, the IRS did not know that it would subsequently recover upwards $10 billion through Voluntary Disclosure)
Under current PFIC reporting rules (since 2013) individuals are required to file a form 8621 (a Monster of a form), when they have a PFIC and/or foreign mutual funds — unless they meet very narrow exemptions.
Why is this so important? Because the failure to file this form may result in a tax return staying “open” for an unlimited amount of time. Therefore, it is crucial that if you have PFIC (passive foreign investment companies) and/or Foreign Mutual Funds that they are properly disclosed during the OVDP Process; otherwise, your returns could still be audited.
If you received an excess distributions and/or you never made a mark-to-market election (or do not want to make such an election), you are in for a whirlwind of a tax computation. We have provided the following summary for individuals to reference when they are faced with the 8621 PFIC Excess Distribution dilemma.
You May be Able to Avoid Filing a 5471, 3520, 3520-A and Other forms.
One of the more interesting additions to OVDP, is the ability to possibly forego filing a form 5471. A form 5471 is utilized by individuals who have certain interests and ownership in foreign companies. At its most basic level, if a person has at least 10% ownership of a foreign company, they are generally required to file an information form 5471 detailing information regarding the foreign business. a 3520 form is a similar type of form used to disclose foreign gifts and trust distributions, while a form 3520-A is required for owners of Foreign Trusts (similar in concept to a form 5471). An 8621 PFIC may also qualify (please see above).
In all reality, many foreign businesses were formed for the sole purpose of avoiding and evading US tax and detection by the US government. By entering OVDP, the presumption is that you are willful and thus the IRS already knows that you were attempting to avoid detection.
To that end, the IRS is actually developed in compliance method in which it may exclude the requirement for you to file a form 5471 in certain situations – namely, become clean and acknowledge that the only reason you started the business was to avoid tax/detection.
As provided specifically by the IRS OVDP FAQ (#29):
– My OVDP assets were held in the name of a foreign entity that I controlled. However, the sole purpose of the entity was to conceal my ownership of the assets, and I intend to abandon the entity now that I am making a voluntary disclosure. Do I still have to file the delinquent information returns for the entity?
– A taxpayer who holds OVDP assets (see FAQ 35) through a foreign entity he controls, such as a corporation or a trust, is required to file information returns for that entity (e.g., Form 5471 for a foreign corporation and Forms 3520 and 3520-A for a foreign trust), regardless of whether the taxpayer honored the form of the entity in his dealings with the OVDP assets. However, in cases where the taxpayer certifies under penalty of perjury that the entity had no purpose other than to conceal the taxpayer’s ownership of assets and liquidates and abandons the entity, the Service may agree to waive the requirement that delinquent information returns be filed if it concludes it is in the Service’s interest to do so. Taxpayers wishing to request the Service to disregard a foreign entity will be required to certify under penalty of perjury that the entity had no purpose other than to conceal the taxpayer’s ownership of assets and that it has been liquidated and abandoned by filing a Statement on Abandoned Entities.
The Bad Bank List
Since the inception of the OVDP program, the IRS has been gunning after foreign entities that are known to be facilitators of tax fraud. For example, many foreign institutions would entice account holders from United States or with US tax requirements to open “number accounts.” These are accounts that are identified only by number and not the actual owner — similar to how “Bitcoin” is operated. As such, for many years account holders were able the fly below the radar in order to avoid detection.
The IRS has identified more than 100 foreign financial institutions as foreign facilitators. If you happen to have any money at one of these identified institutions and you are willful (and therefore entering OVDP) vs. non-willful and going “streamlined”, then your penalty is increased from 27.5% to 50% – for all of the money you have undisclosed offshore.
In other words, if you have $5 million of unreported money and only $10,000 of it is in one of these “bad banks” — the entire $5 million is subject to a 50% penalty and not a 27.5% penalty
New Offshore Enforcement Programs
The Internal Revenue Service, Department of Justice, and Department of Treasury are trying to stay ahead of the curve when it comes to enforcing offshore tax fraud and offshore tax evasion.
To that end, the US government has developed numerous programs designed to catch international tax criminals. Thus, if you are caught in this web of offshore tax fraud for tax evasion before you had a chance to enter OVDP, you lose the opportunity to enter OVDP. Please click here for a comprehensive article we prepared involving the different programs used to investigate international tax fraud.
Instructions to Pursue Applicants Who Dropped out of OVDP
In years prior, the IRS did little to enforce penalties against individuals or businesses who simply dropped out of OVDP. Rather, the IRS would tend to forget those applicants and move on with the applicants that were either continuing through OVDP or pursuing an Opt-Out.
It should be noted, that in a recent announcement by the IRS, they have indicated that the IRS is pushing the OVDP agents to actively pursue penalties against individuals and businesses who initially began the OVP process, but for one reason or another discontinued the application.
If you entered OVDP, but are now getting cold feet because you cannot afford the penalty and/or should have never been submitted to OVDP in the first place, it is better to try to put the fire out when it is small and try to negotiate around the OVDP parameters, and/or opt-out instead of just dropping out of the program — and facing extremely harsh fines and penalties…not the least being a possible criminal investigation by the IRS Special Agents.
Want to Learn More about OVDP?
Golding & Golding is one of the only law firms around the globe that focuses their entire practice on offshore voluntary disclosure, streamline compliance filing procedures, and FBAR related issues.