How Does OVDP Willfulness Impact Citizenship (I-485 & N-400)?
Many Tax lawyers, CPAs, and Enrolled Agents do not understand the ramifications of OVDP (Offshore Voluntary Disclosure Program) on foreign nationals seeking to apply for Legal Permanent Residency (“Green Card”) or US Citizenship.
OVDP – Your Citizenship & Legal Permanent Residency are at Stake.
How Does OVDP Willfulness Impact Citizenship?
When it comes to the willful failure to report foreign income and/or foreign accounts, one of the best ways to get into compliance is with OVDP. But, when a person has a pending or imminent Naturalization or Legal Permanent Residency Application, there is a lot to consider before making any proactive representation to the IRS.
**OVDP is not the same as the Streamlined Program, in which a person is certifying they are non-willful, and therefore these issues do not typically apply for Streamlined Applications.
OVDP is not Criminal
Just because a person enters OVDP does not mean they are criminal; OVDP is not a criminal procedure.
But when a person has a pending N-485 or I-400 application pending (that they have already signed) the situation is different. That is because when a person submits immigration documentation, they are already stating that they did not break any laws and/or certified that there taxes were properly filed.
Were you Scared Into OVDP?
One of the main issues we are coming across are foreigners who comes to us after they were sold on the idea of OVDP. They are scared into OVDP before having the opportunity to speak with a knowledgeable international tax attorney in order to explain the ramifications of an OVDP application on other aspects of a person’s life, including naturalization and citizenship.
OVDP & Naturalization or Legal Permanent Residency
If you are currently seeking to apply for Naturalization or Legal Permanent Residency, it is very important to carefully evaluate whether you were willful or not (including international omission and reckless disregard) before submitting to the IRS. If you were non-willful, OVDP may be a bit of an overkill.
While we do represent many people who choose OVDP over Streamlined for many different reasons, when a person is already in the process of Naturalization or seeking Legal Permanent Residency, there are many factors and strategies to consider – along with the timing of the submission.
OVDP vs. Streamlined
It is important to understand the basics of the different IRS Offshore Voluntary Disclosure Programs before making any proactive representation to the IRS.
These two Voluntary Disclosure programs (OVDP and Streamlined) are made available by the IRS to individuals, estates and businesses that are out of compliance regarding the reporting of offshore accounts, income, investments, real estate, retirement, pensions, etc.
What is OVDP?
The easiest way to understand OVDP is to breakdown what each element or requirement of the Program is:
Offshore does not mean you should be conjuring up visions of resting easy in the Bahamas, or stashing millions in the Caymans. Essentially, from an international IRS tax perspective, it simply means you have money overseas. Whether the money is in a foreign account, overseas, or abroad — it is being held “offshore.”
Therefore, in order to qualify for OVDP you must have unreported assets, income or investments abroad. If you do have offshore assets, income or investments, then you can report them with OVDP — and you can include domestic undisclosed money as well.
But, it is important to keep in mind that you do not get the same protection for your domestic undisclosed money that you receive for your offshore undisclosed money. Moreover, if you do not have any undisclosed offshore money, and all of your unreported money is domestic (located in the United States), you can submit to the IRS Domestic Voluntary Disclosure Program, but not OVDP.
Unfortunately, the IRS Domestic Voluntary Disclosure Program does not provide the same protections and reduced penalty structure as the Offshore Voluntary Disclosure Program.
Voluntary means you are entering the program on your own volition.
Usually, it means that you are not under audit or under examination with the IRS. That is because if you are already under IRS audit or examination and then submit to the program, you are not technically doing so voluntarily. Rather, you are entering the program in response to being audited or examined.
The reason the IRS does not allow you to enter OVDP once you are under audit is because you have a proactive responsibility during an audit or examination to bring these issues to the forefront and explain them to the auditor — even if the auditor did not ask about offshore accounts specifically – but assuming he or she asks about additional income, assets, etc.
When you are under audit or examination you can be subject to excessively high fines and penalties which are somewhat mitigated through traditional OVDP. The IRS will not let you out of those penalties, once you are audited, by submitting to OVDP at that time.
By disclosure, the IRS is referring to full disclosure. If you want to voluntarily disclose offshore money, then you have to do a full disclosure and report all of the information you have regarding all of your offshore money abroad.
It does not matter if the money was held in an account within a branch or institution that went out of business. It also does not matter that your money is being held in an anonymous account that you firmly and wholeheartedly believe can never be discovered.
Rather, from the IRS’ perspective, when it is time to disclose you must perform a full disclosure and report all of the information — no matter how low the chances that the IRS could ever discover the information, account information, investments or income otherwise.
OVDP is an approved IRS program. There are specific time requirements and reporting disclosures that must be done according to OVDP milestones. If you fail to meet these milestones timely, the IRS can remove you from the program, which now means the IRS has at least some specific information regarding your offshore finances, and can now enforce incredibly high fines and penalties against you.
Worse yet, you no longer have the protection of OVDP.
What is Streamlined?
There are 2 main types of Streamlined Programs:
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
Streamlined Domestic Offshore Procedures (SDOP)
In order to qualify for Streamlined Domestic Offshore Procedures, you must meet two major requirements:
- Qualify as Non-Willful; and
- Filed all Necessary Prior Year Tax Returns.
Streamlined Foreign Offshore Procedures (SFOP)
In order to qualify for Streamlined Foreign Offshore Procedures, you must meet three major requirements:
- Qualify as Non-Willful;
- Meet the 330-Day Foreign Residence Test/Non U.S. Person; and
- You do not have to have filed all prior year tax returns.
How to Qualify as a Foreign Resident?
If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three (3) tax years or do not meet the Substantial Presence Test in one of the last three (3) tax years) you may obtain a waiver of all FBAR and FATCA penalties.
IRC 911 (Physical Presence Test vs. Bona-Fide Resident Test)
The Streamlined Foreign “330-day rule,” is a hard and fast rule — there are no exceptions. Thus, the Streamlined Foreign “330-day rule” should be distinguished from Internal Revenue Code section 911 which is used by taxpayers trying to claim the Foreign Earned Income Exclusion by showing they qualify for either the physical presence test (330 days) or the bona fide residence test. Thus, even though a person could qualify as a bona fide resident under IRC 911 for the foreign earned income exclusion, it does not mean that they qualify for the streamlined foreign program.
What does Non-Willful Mean?
Qualifying as Non-Willful is by far the most difficult aspect of Streamlined Offshore Disclosure.
You are willful if you knew (or acted with reckless disregard) you were supposed to report and disclose your foreign income and assets but choose not to — as such, you will be required to submit to OVDP instead of the Streamlined Program. In other words, if you knew you had a duty to report the information on an FBAR (Report of Foreign Bank and Financial Accounts) Form 8938 (Statement of Specified Foreign Assets), or any other number of different IRS forms, but intentionally do not report your accounts, then you act “willfully.”
You are non-willful if you acted unintentionally, and did not know you were required to either report or disclose your foreign income, accounts, or other specified assets.
If you are Non-Willful…
And you filed all necessary prior year tax returns (Domestic) or qualify as a Foreign Resident (even if you did not file all of your prior returns timely), you should qualify for the Streamlined Offshore Procedures.
Streamlined Program Summary
- Amend the last 3 years of Tax Returns (or file original returns for Streamlined Foreign)
- File required forms such as 3520, 3520-A, 5471, 8621
- File 6 Years of FBAR (FinCEN 114) – Report of Foreign Bank and Financial Accounts
- Take a “snapshot” of the aggregate offshore unreported balances on 12/31
- Pick the highest year’s 12/31 annual aggregate value
- Multiply the value by 5%
- Pay the outstanding Tax, Interest on Taxes due, along with the 5% percent penalty (or waiver if Streamlined Foreign)
There are only a handful of Law Firms that focus their entire tax practice on IRS Offshore Voluntary Disclosure (We are one of them). We have represented several hundred clients in OVDP, Streamlined and Offshore Disclosure.
You will want to make sure you use an OVDP Attorney who has:
- Litigation Experience
- IRS Audit Experience
- At Least 15-20 years of Attorney Experience
- An advanced Master’s of Tax Law Degree (LL.M.); and
- Either a CPA or Enrolled Agent (EA) license.
Why? Because you never know how the OVDP or Streamlined submission will go. Sometimes, a person is already under IRS investigation and may not know it. Then, when the person submits to OVDP they are rejected. In this type of situation, you need an Attorney with all the above required experience.
Using a CPA or Junior Attorney with no real experience, is not going to help (and you will then realize why the fees they charged were so low). We know this, because each year we receive many inquiries from clients seeking to retain our services after their initial OVDP or Streamlined junior tax attorney (without the experience mentioned above) flubbed their submission and made numerous mistakes in the submission process.
Alternatively, once you are in OVDP, you may want to:
- Make an MTM Election
- Argue a FAQ 55 Penalty Reduction
As a result, for this highly specialized area of law, you need an OVDP Attorney who is experienced specifically in OVDP, but also has the background and experience to fight on your behalf.
Ready to Hire an OVDP Attorney?
Once you are ready to hire an OVDP Attorney, it is very important to separate fact from fiction. Here is a recent article involving the different pitfalls, scams and sales pitches you need to watch out for: Attorney Fees for OVDP – Separating Fact From Fiction.
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