OVDP Lawyer | Foreign Banks Report Accounts to the IRS – International Tax
OVDP Lawyer: The IRS Offshore Voluntary Disclosure may be a U.S. Taxpayer’s best defense to the potential 100% FBAR Penalty.
When it comes to foreign account reporting, the IRS is actively enforcing International Tax Law against U.S. taxpayers. Moreover, the number of foreign banks that are proactively reporting US account holders to the IRS and US government continues to increase.
There are various programs in place to facilitate offshore compliance of foreign banks, including the Swiss Bank Program and the continually updated list of Foreign Financial Institutions or Facilitators. In accordance with foreign reporting requirements, if an individual or foreign business owned by US taxpayers failed to report foreign accounts, they may be subject to staggeringly high penalties which may reach 100% of the account value.
* The “100% penalty” does not include any additional taxes, interest, and penalties on the taxes that may be due.
The biggest problem a US taxpayer will have to face when stepping in the offshore compliance arena is if the Internal Revenue Service learns of the foreign account and begins examining the taxpayer before the taxpayer has had the opportunity to report the accounts.
Moreover, if one of the accounts is in an identified “bad bank” then all of the unreported offshore money may become subject to a much higher penalty that otherwise would if the money was in any other foreign bank.
Willful or Non-Willful
Whether or not the US taxpayer was willful or non-willful in their failure to disclose foreign accounts will determine which amnesty program they can enter, and what the penalty will be.
If a person has their money in one of the bad banks and they are contacted first by the IRS before they have had the opportunity to enter one of the programs, it will be more difficult to show they were not willful.
**If the money is in a bad bank but the US taxpayer was not willful, then the US taxpayer is not subject to the 50% penalty. With that said, it is much easier to proactively report a non-willful account under the IRS streamlined program rules then to be examined by the IRS and try to prove non-willfulness.
OVDP or Streamlined Program
With the IRS offshore disclosure noose tightening every day, it is important to proactively seek a penalty reduction or elimination by entering one of these two programs.
The following is a summary of the difference between the Offshore Voluntary Disclosure Program (OVDP) and IRS Streamlined Offshore Disclosure Programs:
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 modified streamlined program.
Both programs provide peace of mind to the taxpayer – but it will depend on the facts and circumstances of each taxpayer’s situation, to determine which program(s) they qualify for. It is important to note that the failure to properly submit to the correct program can have serious consequences to the taxpayer.
Why Comply with IRS Foreign Disclosure Laws?
Because if you fail to do so, the IRS has the authority to penalize you upwards of 100% of the value of your offshore assets and accounts as well as prosecute you for criminal tax fraud and tax evasion if it is found that you acted willfully in failing to report your assets and 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). These agreements are reciprocity agreements, which means 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 looking for a way to avoid the very steep penalties 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, 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.
*Please note, the IRS is not known to be sympathetic and if the IRS does not believe you and audits you anyway then you are disqualified from entering either the OVDP or streamlined program AND the IRS is have more of your overseas/foreign financial information you would like probably like.
Moreover, if the taxpayer improperly submits the forms to the IRS it can be considered “silent disclosure” or “quiet disclosure,” in which if detected by the IRS, the IRS will penalize you heavily as well as probably initiate criminal proceedings against you. In this scenario, not only with the IRS seek to take all of your money and assets through the implementation of penalties and levies, but chances are you will also 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)
OVDP stands for the Offshore Voluntary Disclosure Program, which came into effect in 2009 and was modified again in 2011, 2012 and 2014.
Before the implementation of the modified streamlined program (which is strictly for individuals who were non-willful in their failure to report their overseas assets and income) the penalty structure was generally (and continues to be for willful participants) 27.5% of the highest years annual aggregate total and 50% if any of your money was held in one of the identified “bad banks.”
In other words, if you have foreign accounts that were unreported to the IRS and Department of Treasury, then to determine your penalty structure you would need to total up all of your unreported overseas and accounts for each year, for the last eight years, and then take the highest year’s highest balance and multiply it by 27.5% to arrive at the penalty amount due. (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, no penalty on the value of foreign real estate that was not previously disclosed, and the 27.5% penalty was reduced all the way 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 in any number of different countries 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 enter the streamlined program if you do not qualify; in other words, suck it up and pay the penalty. Why? Because 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 in March 2015. Essentially, 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 not only are you subject to criminal prosecution – but now you’ve already disclosed all the foreign financial information and thus you’re in a pretty difficult position to defend yourself. The IRS has let it be known that they will enforce criminal tax prosecution laws in these types of situations.
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 gotten wind that several individuals who were willful in their failure to report undisclosed foreign tax and bank information are trying to sneak into the modified streamlined program and thus reduce their penalty to 5%. As you can imagine, this upset the IRS who created this modified program for the sole purpose of assisting taxpayers who otherwise would be overburdened and 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.