OVDP Lawyers – Hiding Money Offshore in a Foreign Country | International Tax Lawyers
One of the toughest parts about living the United States is paying taxes. While most nations have tax liability for personal income tax, the United States utilizes a unique worldwide income test when it comes to taxing a US person’s earnings.
As a result, many people find it difficult to comply with US tax law and sometimes take an alternative route by hiding their money offshore in a foreign entity. (aka “Overseas in a Foreign Bank Account”)
Worldwide Income Tax
The United States taxes individuals on their worldwide Income. This means that no matter where you earn your income from, if you are considered a US taxpayer (which is generally a US citizen, Legal Permanent Resident, or Foreign National subject to US tax as with the Substantial Presence Test) you are subject to U.S. tax on all of your income.
It does not matter if you reside overseas, and it does not matter if the income is earned in a foreign country – the baseline rule is that the United States taxes you on your worldwide income no matter where the income is earned and no matter where you live.
Why is this a Big Deal?
The reason why this is so difficult for many people to comprehend is that – especially for foreigners who relocate United States as a Legal Permanent Resident or Foreign National living in the United States for a significant period of time – many countries do not tax individuals on passive income or income earned outside of their country.
Residence – South Korea: When a person comes to the United States from South Korea to work, then depending on which test they qualify for, they would generally be required to pay US tax on their earnings – which is fair. Meanwhile, because the person (even if they are a citizen of South Korea) is not residing in South Korea, they are technically not a current “resident” of South Korea and therefore South Korea does not tax the employee on his or her foreign income earned in the United States. This is typical of most countries.
Passive Income – Singapore: When a person opens a bank account in Singapore, chances are that bank account earns interest income. Interest income is a type of passive income, which is earned simply by the money being parked in the account. In the United States, a person is taxed on their interest income as passive income. This is different than many other countries, which exclude passive income from taxable income. As a result, when a person from Singapore relocates to the United States and become subject to US tax they are suddenly subject to taxation on income which is previously not taxed at the source back in Singapore.
Hiding Money Offshore
It is not uncommon US person subject to US taxation to try to limit their tax as much as possible. For individuals who earned money overseas or otherwise receive money which they believe the government cannot track, they may deposit these funds overseas in offshore accounts, foreign trusts, international business companies, and other foreign mutual funds or PFIC (Passive Foreign Investment Company) to try and avoid detection.
It does not matter where you place the money and if you place it in a tax-free country or tax haven – if you earn that money than it is subject to US tax no matter where you transferred the money to.
Tax Evasion and Tax Fraud
When a person intentionally, willfully, or knowingly fails to pay tax on income or hide funds offshore, it is considered a form of tax evasion and tax fraud. Under the new tax compliance regimes filing compliance regulations such as FATCA (Foreign Account Tax Compliance Act) and FBAR Reporting (Report of Foreign Bank and Financial Accounts), it is much harder to hide funds overseas and if you get caught the United States government is actively enforcing civil and criminal penalties.
If you have funds overseas that you intentionally hid or transferred and did not pay tax on it, you may consider entering the Offshore Voluntary Disclosure Program (OVDP) to try and get compliant.
The following is a summary of OVDP Law as provided by Golding & Golding:
OVDP and FATCA – An Introduction
As a US taxpayer (US citizens, Legal Permanent Residents, and Foreign Nationals otherwise subject to US income tax and reporting requirements), you are required to report and disclose your foreign bank accounts, foreign financial accounts, and certain offshore assets – as well as report your foreign income on an FBAR, Schedule B, and 8938 Form.The main reason for the United States’ sudden interest in international tax law is because the Internal Revenue Service (IRS) has recovered billions of dollars from taxpayers who did not comply with international tax law filing requirements.
Examples of Reportable Accounts include:
- Foreign Bank Accounts
- Foreign Savings Accounts
- Foreign Investment Accounts
- Foreign Securities Accounts
- Foreign Mutual Funds
- Foreign Trusts
- Foreign Retirement Plans
- Foreign Business and/or Corporate Accounts
- Insurance Policies
- Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
- Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
The failure to timely and properly report foreign income and overseas assets and accounts can result in staggeringly high penalties, which the Internal Revenue Service enforces against all taxpayers. If you find yourself in this impossible situation, what are your options?
The most common option for individuals and businesses that have unreported and undisclosed offshore and foreign accounts is to enter the OVDP (Offshore Voluntary Disclosure Program). OVDP is the International Tax Law Program for U.S. Taxpayers (including Legal Permanent Residents and Expats) seeking IRS tax law compliance. The main reason why people enter the OVDP is because by doing so, they can almost always avoid criminal prosecution of their international tax crimes.
Minimal Unreported Foreign Income
It is important to keep in mind that “Account Values” and “Culpability” are two completely different concepts. In other words, knowingly or willfully failing to report offshore assets and foreign income, no matter how small, is considered tax evasion and/or tax fraud and can subject a person to criminal prosecution and penalties reaching 100% of the account value (as well as outstanding taxes, interest and other fines).
Why Enter the OVDP Program?
The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.
The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.
What Type of Accounts Qualify Under OVDP?
Any account that would have to be included on either an FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property (reduced by any outstanding mortgage) would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.
An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.
What are the Requirements of OVDP?
The goal of OVDP is to bring individuals and businesses with unreported foreign and overseas accounts and income into U.S. Tax law compliance. While the requirements may seem overwhelming, if you select an international tax attorney who is experienced in handling these types of submissions, it can be a fairly simple routine — even in this sophisticated area of law — while providing you protection under the Attorney-Client Privilege.
The Result: A stress-free compliance plan program that works for you, your family, and your business to bring you into compliance!
The Key points to OVDP are as follows:
OVDP Pre-Clearance Letter
First, the OVDP Applicant submits a request to enter the OVDP Program (Pre-Clearance). The OVDP pre-clearance letter is simple and straightforward. Essentially, the taxpayer is asking Internal Revenue Service’s criminal investigation unit whether they will qualify for submission. In other words, before a taxpayer is required to divulge all of his/her foreign financial information to the IRS, the taxpayer will have the opportunity to know if they qualify for the program.
For the most part, Pre-Clearance is standard procedure and unless the taxpayer is under a criminal investigation by the Internal Revenue Service or other government authority, the applicant should qualify for the program.
IRS Criminal Investigation Unit Evaluation
The IRS Criminal Investigation Unit determines if the applicant is “cleared” for entrance into the OVDP program. Generally, the process should not take more than 30 days. At around 30-day mark, if the applicant has been successfully approved, then the attorney or applicant (if the applicant directly submitted to the program) will receive a letter from the Internal Revenue Service confirming the applicant’s entry into the program and requesting that the initial OVDP application be submitted within 45 days of the date of the letter.
The next phase (45-day letter submission) is not the full submission, but rather, it is a summary of the information the taxpayer is going to submit under the program and includes more specific information about the bank accounts, account numbers, and other identifying information.
Initial OVDP Application Submission
After the Internal Revenue Service receives the applicant’s OVDP letter and attachments, the Internal Revenue Service will review the information. If it is sufficient, then the IRS will send a second letter requesting that the taxpayer submit the full, comprehensive Offshore Voluntary Disclosure Program Application. The next phase of the OVDP is much more intensive and requires the preparation and submission of several documents to the Internal Revenue Service for their review and approval.
What is Included in the Full OVDP Submission?
The full OVDP application includes:
- Eight (8) years of Amended Tax Return filings;
- Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
- Penalty Computation Worksheet; and
- Various OVDP specific documents in support of the application.
Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.
Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).
The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount. For example: if the taxpayer owed $20,000 in taxes over the last eight years then they would also have to include in check the amount of $4,000 the cover the 20% penalty on the $20,000 in outstanding taxes, as well as estimated interest.
What Are the Fees/Penalties under the OVDP Program?
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.
Why Should You Enter the OVDP Program?
It’s simple: if you qualify to enter the IRS OVDP Program, then you can significantly reduce your outstanding tax penalties and usually avoid criminal prosecution.
- Under the new FATCA laws (Foreign Account Tax Compliance Act), thousands of Foreign Financial Institutions (FFIs) are reporting foreign income, assets, and bank and financial accounts belonging to U.S. Citizens, Legal Permanent Residents, and Non-Residents who live in the U.S. or maintain a U.S. address. Once the IRS gets wind of this information and begins an examination, you are disqualified from entering either the OVDP or Modified Streamlined Programs.
Moreover, many of these FFI’s are starting to freeze and even forfeit the money in these accounts if the account owner cannot prove compliance with FBAR filing, FATCA, and OVDP (if applicable).
FLAT-FEE & FULL-SERVICE
Our experienced International Tax Lawyers and Enrolled Agents (Highest Tax Credential issued by the IRS) have represented numerous individuals and businesses in over 35 countries with OVDP. Unlike other firms, our Tax Attorneys handle the entire OVDP Application process and Streamlined Program application process in-house, on a flat-fee arrangement from start-to-finish – including preparing applicant tax returns. We do not “pawn” you off to an Associate or accountant – usually with little to no experience in International Tax Law and OVDP.
Be Aware – Fraud Warning!
In the last few years, we have been repeatedly contacted by individuals letting us know that they were “sold” by inexperienced attorneys and CPAs with no real International Tax experience (CPAs may have Accounting or Auditing experience, but not necessarily any ‘Tax’ experience) who “scared” them into entering the program before they felt ready to do so. Unfortunately, these unscrupulous attorneys use scare tactics and “low introductory fees” to bait taxpayers, which results in the OVDP Applicant(s) suffering serious tax issues and complications with the IRS.
Our flat fee, in-house arrangement allows our clients to concentrate on getting themselves and their families OVDP compliant, while allowing our firm to stand by our clients in every phase of process, each step of the way!
Here is a Link to a comprehensive OVDP FAQ article we authored on several key issues involving Offshore Disclosure.