When people enter OVDP, they are subjecting themselves to extremely high fines and penalties, but what about Foreign Retirement or Pension?
In fact, OVDP penalties on the FBAR/Form 8938 form alone can reach 50% of the total value of all of the offshore accounts. The benefit of course, is to get into compliance and almost always avoid any chance of criminal prosecution – or higher penalties.
For example, if an individual has money in various bank accounts, but even some of the money is located in a “Bad Bank,” then all of the money that is overseas is subject to a 50% penalty.
This is unfair; even more so, when a portion of the money is in a retirement account — which is even more unfair.
Why? Because usually (read: laundering Money through retirement funds) retirement money has been earned legally and taxes may have already even been withheld at source before being contributed to the Retirement Fund or Pension.
The IRS is offering some options to people in OVDP who have money in a foreign retirement, beyond retirement funds just in Canada. In prior years, the IRS rules penalty exemption rules were limited to primarily retirement accounts (RRSP and RRIF) in Canada.
OVDP Penalty Exemptions – RRIF and RRSP
In prior years, the IRS rules provided that if the money was situated in two specific types of retirement accounts (RRSP and RRIF) in Canada, that money would be exempt from the penalty.
In other words, if a person had $1.5 million of unreported foreign accounts, but $1.25M of the money was sitting in a RRSP or RRIF, that portion of the money would not be subject to the penalties and the applicant would skate on a very high portion of the penalty. But, what about the millions of other individuals who have money in other types of foreign retirement accounts such as (CPF – Central Provident fund in Singapore); (EPF employer Provident fund in Malaysia or Thailand); (PPF – Public Provident fund in India), etc.
For these individuals, it was completely unfair an unjust to not allow them the opportunity to avoid penalties on their retirement funds as well. As such, the IRS that introduced FAQ 55.
What is FAQ 55?
FAQ 55 is your opportunity to get out of the penalty proportions of the money that are located in a foreign retirement type fund. It provides the following:
“I have a retirement or pension plan in a foreign country (other than a Canadian RRSP, RRIF, or other similar Canadian retirement plan) that I do not believe should be included in the offshore penalty base. What should I do?
If you have a retirement or pension plan in a foreign country (other than a Canadian RRSP, RRIF, or other similar Canadian plan) for which you believe there is no U.S. reporting requirement and that you believe should not be included in the offshore penalty base, you should contact the OVDP hotline at (267) 466-0020.
Please provide the OVDP Hotline specific information including (i) the country where the plan is maintained, (ii) whether the plan is employer-sponsored, and (iii) whether any income tax treaty provisions may apply.”
Why is this Important?
The reason why FAQ 55 is so important, is that depending on the facts and circumstances of your case, you may be able to avoid a penalty on your foreign retirement. Thus, if a substantial or major portion of your penalty is based on a foreign retirement (especially if it is a government or quasi-government sponsored type of retirement) you may be in a good position to avoid the harsh reality of OVDP for the specific accounts.
Before entering OVDP, it is important that you speak with an experienced international tax lawyer to get a better idea of the facts and circumstances surrounding offshore disclosure. The following is a summary of IRS voluntary disclosure in general for your review.
What is IRS Voluntary Disclosure?
Tax law is very complex.
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