OVDP Lawyers – Get Compliant before you are Under Examination | International Tax
- 1 Not Under Examination
- 2 The Concept of OVDP is “Voluntary”
- 3 Notice of Examination
- 4 OVDP Submission Strategy Considerations
- 5 OVDP Submission
- 6 Why Comply with IRS Foreign Disclosure Laws?
- 7 Why Enter either OVDP or the Modified Streamlined Program?
- 8 The Difference between OVDP and the Streamlined Program?
- 9 OVDP is Unfair for Non-Willful Taxpayers
- 10 What is the Modified Streamlined Program?
- 11 Willful and Entering the Streamlined Program – Think Twice!
- 12 Why is the Modified Streamlined program in Jeopardy?
- 13 Protect Yourself and Use an Attorney for OVDP Submissions
With FATCA (Foreign Account Tax Compliance Act)and Foreign Bank Reporting at an all-time high, it is important to get compliant with foreign account reporting before you are under examination by the IRS — and it becomes too late for you to enter one of the Voluntary Disclosure Programs.
OVDP is the Offshore Voluntary Disclosure Program and is a program designed for individuals or businesses that have intentionally or “Willfully” attempted to avoid disclosing their foreign assets, international bank accounts, and offshore income to the United States. There are various reasons why a person may fail to disclose their foreign financial information, but if the taxpayer did so with the intent of the IRS not finding out about the money and/or to evade tax, then they could be in serious trouble and receive serious fines and penalties if they are discovered by the IRS – as well as criminal prosecution.
As a result, many individuals and businesses have entered OVDP with the hopes that they will avoid paying an even larger penalty and/or be subject to criminal investigation by the special agents if they are discovered by the IRS before entering the OVDP “program.”
One of the biggest concerns individuals and businesses have is whether they will qualify for OVDP treatment. There are various requirements that the applicant must meet, with one of the most important requirements being that the applicant is Not Under Examination.
Not Under Examination
As usual, the IRS likes to try to cover all of its basis by providing a fairly ambiguous term. The term not under examination can mean many different things. For example, if you receive a notice of audit but the examination has not begun yet, technically you may not be considered under examination. Moreover, if you were recently examined by the IRS and did not disclose the information about your foreign accounts to the agent (because the agent did not ask, even though you have a general duty to disclose) and you are just waiting for your 4549 (notice of examination changes) to go through, you may technically not be under examination either.
With that said, in either one of these two circumstances you must be careful before submitting a preclearance letter, since doing so may open you up to substantial tax and criminal liability.
The Concept of OVDP is “Voluntary”
There are many unscrupulous attorneys and CPAs as firms who spend lots of money on advertising as “OVDP Lawyers” or “OVDP Attorneys” but really have no idea what they are doing in the international tax arena. These attorneys/CPAs have no problem just submitting your application and if you get in trouble, what do they care – it’s not their money, right?
Notice of Examination
Receiving a notice of examination or notice of audit by the IRS means that essentially you have been discovered. Once you have received a notice of audit, you are technically under examination to the extent that if you were to go in and try to make a voluntary disclosure you may find yourself being rejected from the program because you received a noticed for an audit.
The issue then becomes what to do next. When a taxpayer receives a notice of an audit they generally have 10 days to call the IRS and schedule the audit.
OVDP Submission Strategy Considerations
If the person who received a notice of audit then tries to enter OVDP after they receive notice of an audit, they can be rejected based on the mere fact that they are technically going to have an upcoming examination and therefore are not really entering the program voluntary (they are doing so in response to the notice of audit).
On the one hand, if the person makes an application to OVDP and is rejected, when it comes time to have the audit the applicant will be very hard pressed to not disclose the foreign accounts – the failure to do so based on these circumstances may amount to tax evasion for tax fraud.
On the other hand, if the person does not make an OVDP application and is then audited in which the auditor does not bring up the foreign accounts there is some more “wiggle room” that may benefit taxpayer. If the auditor does not question the taxpayer about whether or not he or she has foreign accounts it really is the taxpayer’s responsibility to disclose the information anyway. But, if the auditor does not ask and the taxpayer does not disclose during the audit, there could be many reasons why the taxpayer did not disclose – it could quite well be that the taxpayer did not know he or she had to disclose the foreign information during the audit.
Example: If the notice of audit only references certain aspects of the taxpayers finances such as domestic issues involving real estate or business deduction and the auditor does not ask questions regarding the foreign and offshore accounts, then the taxpayer may not be thinking about the foreign accounts and/or may not know they are at issue – and fraud would not be an issue (if there was no intent to not disclose, just negligence that the taxpayer should have disclosed).
Thus, if after the audit closes the taxpayer determines that he or she now wants to enter an offshore disclosure program (or only then first learns about OVDP & FATCA) then technically the taxpayer is not under audit and may be able to enter OVDP – despite the fact that they just finished an audit.
This is a very complicated scenario and it really does require the assistance of a very experienced international tax lawyer with substantial OVDP experience. Of course, the best thing to do is enter the program before being contacted by the IRS. It is also important to remember that there are different programs depending on whether the taxpayer was willful or non-willful
The following is a summary of the difference between the two main programs OVDP and the IRS Streamlined Program (willful vs. non-willful):
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.
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 willfulparticipants) 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 highet 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.
Willful and Entering the Streamlined Program – Think Twice!
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.
Protect Yourself and Use an Attorney for OVDP Submissions
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.
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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