OVDP Opt Out Review – 3 Examples of When Opting Out of OVDP may work
- 1 OVDP vs. Streamlined Program
- 2 But You’re Already Stuck in In OVDP…
- 3 Is Opting Out Safe?
- 4 FAQ – Summary
- 4.1 Can My Immigration Status Be Impacted by OVDP?
- 4.2 My Spouse Does not Want to Enter OVDP
- 4.3 We are Divorced, Not on Speaking terms and filed Tax Returns Jointly
- 4.4 There is No Passive Income Tax in The Country with My Accounts
- 4.5 The Unreported Money does not belong to me?
- 4.6 My Business Never Reported Foreign Accounts
- 4.7 My Business is Held as a Foreign Holding Corporation
- 4.8 The Business is not Under my Name
- 4.9 I did not report my Foreign Retirement Account
- 4.10 I received a FATCA Letter, What Should I do?
- 4.11 Only a Small Amount of money is in a Bad Bank, is All my Money subject to a 50% Penalty
- 4.12 I Sold Foreign Property and Transferred Money into a Foreign Bank Account
- 4.13 Unreported Income from a Foreign Rental Property
- 4.14 What if I have an Unreported Foreign Gift (Form 3520)?
- 4.15 What if I Failed to Report a Foreign Trust (Form 3520-A)?
- 4.16 What if I Never Reported my Foreign Business Interest (Form 5471)
- 4.17 I have a PFIC and/or Foreign Mutual Fund that I never Reported (Form 8621)?
- 4.18 I Opened and Closed Accounts Several Bank Accounts
- 4.19 I Submitted a Previous Quiet Disclosure, Can I Really Still Enter OVDP?
- 4.20 What is GATCA/CRS?
- 4.21 What does “Under Examination” mean?
- 4.22 Can I enter the Streamlined Program First to See if I am Willful/Non-Willful?
The majority of individuals who are non-willful in their failure to report foreign accounts, foreign investments, foreign assets, and/or foreign insurance policies will enter the Streamlined Program instead of OVDP.
OVDP vs. Streamlined Program
Depending on how much research you have conducted (read: worried yourself sick), you may have learned that when it comes to IRS Offshore Voluntary Disclosure, you have two main options – OVDP or the Streamlined Program
For the most part, OVDP is reserved for individuals who were Willful a.k.a. intentional/deliberate in their failure to report foreign accounts.
Alternatively, if an individual was not willful, then they will enter the Streamlined Program which has relaxed reporting requirements and a much lower penalty base – which may even be waived when a person qualifies as a foreign resident.
But You’re Already Stuck in In OVDP…
For individuals who submitted to OVDP prior to July 2014, there are specific protocols in place called the IRS Transition rules to help you move over to the streamlined program — if you qualify as non-willful. Since the streamlined program (or the current modified version of the) was introduced in July 2014, if you submitted to OVDP after July 2014 then you do not qualify for the transition rules..
Nevertheless, now that you are stuck in OVDP, the big question is whether should you opt out. By opting out of OVDP, you are asking the IRS to reduce the penalty (which is either 27.5% or 50% depending on the facts and circumstances of where you keep your money).
Is Opting Out Safe?
It depends. When you opt out, you are risking that the IRS is going to penalize you more than they would under the regular program.. Moreover, if you are opting out after submitting to OVDP post July 2014, the IRS may believe that the only reason you are doing so is to avoid the penalty — which may be a legitimate reason based on the facts and circumstances of your case and whether the majority of unreported money is “Income” or Accounts/Assets”
The following are three examples of when you may still consider opting out of OVDP:
Your Received Bad Legal Advice
Some attorneys are willing to take any case they can to pay the bills. This is true, even when an attorney has literally little to no experience in an area of law. It is actually not uncommon for attorneys with little to no international tax background to take this type of case, because they think it is easy. Unfortunately, there are so many nuances to this area of law, that if the client utilizes an attorney who does not have the proper experience, they may find themselves stuck in OVDP — when they should have never submitted to the Streamlined Program.
These types of attorneys will make statements to the client such as “unless you go OVDP you will not obtain criminal protection,” and “unless you go OVDP, you could end up in jail.”
Now, if you were willful and were intending on defrauding the US government then you should go OVDP. But, if you are non-willful and the only reason you are choosing OVDP is because the attorney scared you into OVDP, you may consider opting out. The reason the attorney pushed you into OVDP is usually one of two reasons:
- The attorney did not understand the program; and/or
- The Attorney was looking for a big payday (Higher Attorney Fees under OVDP)
If you believe you received bad legal advice, you should consider obtaining new counsel and opting out. In situations such as these, we have found in our experience that even the IRS may understand your plight — and agreed to significantly reduce your penalties.
You Submitted a Preclearance Letter Only
The IRS has stated that if you started the OVDP process (Submitted to OVDP), you cannot turn-tail and submit to the Streamlined Program. But, the IRS has not yet stated that if you submit a preclearance letter only (not the subsequent phase of the 14454 and 14457), that you cannot switch gears and instead submit to the Streamlined Program. In other words, if you submitted a Preclearance Letter only, you may be able to still apply to the Streamlined Program, but you should speak with an experienced IRS offshore voluntary disclosure program attorney before making any further communications to the IRS.
Maybe you were willful, but the facts and circumstances somehow justify the willfulness. This is not the type of circumstances in which we can provide examples, but just to know that even the IRS has stated that depending on certain facts and circumstances such as the amount of income generated versus the value of the accounts and assets — the 27.5% or 50% penalty may simply be too high. In these types of circumstances, you may be better off opting out, but it will require a comprehensive analysis by highly experienced offshore disclosure where to go over and review the pros and cons of the situation.
In other words, never lose hope.
To better understand OVDP, we have reproduced our FAQs from the trenches for your review.
FAQ – Summary
We have put together a basic summary of key issues applicants should consider when they are considering entering the Offshore Voluntary Disclosure Program. While the IRS has its own set of FAQs, they are focused more on the technicalities of qualifying for the program. Our summary will provide you more of the “ins and outs” of the actual application for individuals who are unsure of which accounts should be reported, and how entering OVDP can impact their legal status — and freedom.
In the end, if you were willful and you have foreign accounts that are unreported (especially if you are in a FATCA Agreement Country) or bank with a FFI (Foreign Financial Institution) that is reporting (and even more so if your money is in a Bad Bank), you should consider retaining an experienced OVDP lawyer and entering the program.
Can My Immigration Status Be Impacted by OVDP?
Yes, depending on your current status and future intended U.S. legal status, an OVDP application may have an impact. Under some circumstances it may hurt your status, and under other circumstances it may actually benefit your status.
Applying for Citizenship
Your immigration status can be impacted for several reasons. As a general answer, your immigration status can be impacted due to the “willfulness” presumed by applying for OVDP. When a person enters OVDP (as opposed to the IRS Streamlined Program), they are acknowledging that they were willful and/or intended to evade tax.
Therefore, if you are a Legal Permanent Resident or other Visa holder, there is the concern that if you want to apply for Legal Permanent Residence Status (“Green Card”) or U.S. Citizenship, when you are completing your N-400 form and it asks whether you have ever committed a crime, you would have to include the tax issues as a crime. Technically, willfully and/or knowingly not reporting your foreign accounts is a form of tax fraud and tax evasion.
Deportation or Removal
If you are applying for OVDP and you are granted admission into the program, chances are you will not be criminally prosecuted and therefore you would not be deported or removed if your Foreign Bank reports you and the information makes it way to the USCIS. Moreover, once your OVDP application is complete and you are approved (and you submit the OVDP closing letter) it may facilitate obtaining citizenship if that is the endgame you are seeking.
*If you are rejected for OVDP, it could lead to Deportation or Removal, but that is a fact-based analysis depending on the specific circumstances of your case.
My Spouse Does not Want to Enter OVDP
It does not take two to tango when it involves OVDP. The IRS is more than willing to accept a one person OVDP application. Even if your prior tax returns were submitted married filing jointly MFJ, it does not change the fact that one spouse (or one former spouse) has the ability to submit to the program, even if the other spouse will not comply.
It is a much more complicated process, but if you happen to be married to a tax fraud then it is probably in your best interest to consider entering the program while making a dual application for Innocent Spouse as opposed to playing the wait-and-see game for two reasons:
- You never know when the IRS is going to strike – and that can have a major impact on your financial status; and
- You never know how sneaky your spouse, and especially a prior spouse may be – and the first person to go to the IRS usually gets the best deal (aka “first to squeal, gets the deal“)
We are Divorced, Not on Speaking terms and filed Tax Returns Jointly
Again, the IRS does not care if you are no longer married and the prior spouse will not cooperate. If you want to go into the IRS and disclose these accounts — then you have every right to do so.
If you were unaware of your spouse’s foreign assets during the marriage, and/or were unaware of the requirement to report the assets, and/or the money was not yours, then there are other options you may consider before making a full OVDP application.
**Before making any affirmative representation to the IRS you should consider speaking with an experienced OVDP Lawyer.
There is No Passive Income Tax in The Country with My Accounts
Unlike nearly every other country on the planet, the United States taxes US citizens, Legal Permanent Residents and Foreign Nationals Subject to U.S. Tax (Substantial Presence Test) on their worldwide income – despite where they are residing when the income is earned. Thus, merely because you may have your money in Singapore, Taiwan, Hong Kong or another country that does not tax interest income, it does not mean that the United States loses its chance to tax your money.
The Unreported Money does not belong to me?
In many countries, it is not uncommon to have children listed on the financial accounts of the parents – even though the children ”really” have no right to the money. The United States understands this concept and therefore created a different program for non-willful individuals, which is called the Streamlined Program. Moreover, since none of the money belongs to you, you should be able to waive any penalty that would otherwise have been levied against you.
My Business Never Reported Foreign Accounts
Under U.S. law, as long as the business accounts meet certain threshold requirements (more than $10,000), you are required to report these accounts on your annual FBAR (Report of Foreign Bank and Financial Account Statements). It does not matter that the accounts are being held under business account name. If you are an owner of the business and have access to the money, then technically you are supposed to report these accounts to the United States.
My Business is Held as a Foreign Holding Corporation
The IRS knows all of your tricks. Whether your money is being held in a foreign corporation, a foreign holding Corporation, a British Virgin Islands company (BVI), a Cayman Islands company, a Maltese company – it does not matter. If the foreign financial institution where you hold the bank accounts has a US address or any information regarding the US owner on the account on file, chances are that under FATCA, the financial institution is going to err on the side of caution and report the account.
The Business is not Under my Name
Depending on how sophisticated your foreign business and tax planning was, you may have foreign corporations that are not under your name, but to which you have signature or other authority over accounts at the bank – which are under the name of the business. Due to the global priority of promoting “financial transparency” in accordance with FATCA and CRS (Common Reporting Standards), there is a significanrtly increased chance that the corporate veil will be lifted and you will be exposed.
I did not report my Foreign Retirement Account
You are required to report your foreign retirement accounts (some restrictions apply, but it is better to not leave anything to chance). When it comes to foreign retirement accounts, it can get a little more tricky because if the retirement account was a US 401(k) then chances are you would receive deferred tax treatment. Thus, if you did not receive any benefits from the foreign retirement account (especially any withdrawals) then you may not have been willful by not reporting the account. This is because it is understandable to think you would not have to report a foreign retirement account until any distributions were made to you.
***You should speak with an experienced OVDP lawyer on this issue.
I received a FATCA Letter, What Should I do?
If you received a FATCA letter from your foreign bank, then you really need to take action. That is because the bank is waiting for you to reply to both confirm compliance with IRS tax law, as well as indicate whether you qualify for a W-9 or W-8 BEN.
If you are a US taxpayer then you will have to complete the W-9, which means you will be subject to IRS tax reporting, And, if the bank or foreign financial institution sends the information to the IRS and they contact you before you have a chance to enter the program, the chances of you being subject the very stiff penalties skyrockets.
Only a Small Amount of money is in a Bad Bank, is All my Money subject to a 50% Penalty
Yes. At the current time, the IRS will not distinguish between the money you have in “Safe Banks” versus the money you have in banks identified as “facilitator banks” aka “Bad Banks.” Therefore, if you have any of your money in one of these bad banks, then before entering OVDP it is important that you determine whether you were actually willful (50% penalty applies) for non-willful (50% penalty does not apply).
Stated another way, just because you have money in a bad bank does not mean your entire offshore balance is subject to the 50% penalty; you must also be willful. Why? Because a person could be non-willful and still have their money in one of these bad banks — and that should not make them subject to a 50% penalty.
I Sold Foreign Property and Transferred Money into a Foreign Bank Account
The money that resulted from the sale will be included in the penalty calculation, if after you sold the home and placed the funds into a foreign bank account — you did not report the account.
Unreported Income from a Foreign Rental Property
If you have unreported foreign rental income from a home or property and you enter OVDP vs. the Streamlined Program, the value of the home is included in the penalty structure – subject to any mortgage that is due and owing on the home. The same rule does not apply to streamlined program applications (e.g., the value of the unreported income generating real estate is not included in the penalty computation).
What if I have an Unreported Foreign Gift (Form 3520)?
If you failed to report a gift from a foreign person, foreign business or trust distribution, it may be subject to a penalty unless you properly disclose it in accordance with amending your tax returns under OVDP. For more information about Foreign Gifts, please Click Here.
What if I Failed to Report a Foreign Trust (Form 3520-A)?
The U.S. Tax Code is stacked against Foreign Trusts. In other words, the failure to properly your foreign trust on a form 3520-A can lead to significant fines and penalties (as the U.S. Government may see it as your attempt to shelter money offshore in a Foreign Trust). To learn more about Foreign Trust Reporting, Please Click Here.
What if I Never Reported my Foreign Business Interest (Form 5471)
In order to avoid the problem of U.S. Taxpayers sheltering money offshore in foreign business (and not reporting the earnings), the IRS takes a hardline against individuals with unreported Foreign Business Interest. For individuals required to file form 5471, the failure to filing the form can lead to penalties upwards of $50,000 per return and the returns are due annually. To learn more about reporting your Interest in a Foreign Business, please Click Here.
I have a PFIC and/or Foreign Mutual Fund that I never Reported (Form 8621)?
The IRS reserves the most complicated and complex tax computation for the infamous “PFIC aka Passive Foreign Investment Company.” Moreover, the IRS essentially deemed that all Foreign Mutual Funds fall under the PFIC umbrella. Therefore, that Foreign Mutual Fund you purchased offshore that is accruing and/or distributing Interest or Dividends may be subject to a monster tax analysis — especially if it qualifies as issuing an “Excess Distribution.” For a comprehensive analysis of PFIC 8621 reporting, please Click Here.
I Opened and Closed Accounts Several Bank Accounts
The most important thing to keep in mind is that the same money is not counted twice. Thus, it is very important to make sure the duplicity of account money issue is properly vetted on the application, so that the IRS is aware and understands the transfers.
I Submitted a Previous Quiet Disclosure, Can I Really Still Enter OVDP?
Yes. There are some people who may have submitted a “Quiet Disclosure” because they were unaware of the whole OVDP process, or though they could just amend the tax return late and file late FBAR statements.
What is GATCA/CRS?
CRS is the Common Reporting Standard, which is otherwise known as GATCA (Global Account Tax Compliance). The OECD has developed a new reporting standard in the shadow of FATCA to facilitate global tax compliance on an international scale. Therefore, chances are no matter how you set up your foreign accounts and in which country you are operating in — at some point or another one of the foreign financial institutions is going to report you.
What does “Under Examination” mean?
Leave it to the IRS to keep one of the most important aspects of qualifying for OVDP a nebulous uncertainty. Under examination generally means that you are either in an audit, or otherwise being questioned about your financial information by the IRS. To that end, depending on when you were contacted, how you were contacted, what information the auditor did or did not ask, the facts and circumstances surrounding your particular case, and many other concepts that can make your head spin – you may still be able to enter the program (depending on what stage of inquiry you received from the IRS).
Can I enter the Streamlined Program First to See if I am Willful/Non-Willful?
No. You only get one chance at this, so it is important that you really evaluate the facts and circumstances around your failure to report, in order to determine whether you were willful or non-willful. While technically, there is no way to know whether you are willful – you just have to know.
By speaking with an experienced OVDP Lawyer you may be able to get a better idea of whether you were willful or non-willful.