- 1 Streamlined Offshore Voluntary Disclosure Program
- 2 Common Streamlined Offshore Voluntary Disclosuree Terminology
- 3 Non-Willful & Streamlined Offshore Voluntary Disclosure
- 4 Filing Tax Returns under Streamlined Offshore Voluntary Disclosure
- 5 5% Streamlined Offshore Voluntary Disclosure Penalty
- 6 There is No Penalty on the Tax
- 7 You Can Still be Audited under Streamlined Offshore Voluntary Disclosure
- 8 Common Streamlined Offshore Voluntary Disclosure Reporting Forms
- 9 Golding & Golding: About Our International Tax Law Firm
Streamlined Offshore Voluntary Disclosure Program
Streamlined Offshore Voluntary Disclosure: The Streamlined Voluntary Disclosure program is a great program. When a person is non-willful, they may qualify to streamline their offshore voluntary disclosure submission with streamlined procedures. The two programs are the Streamlined Domestic and Streamlined Foreign. The IRS developed the program(s) in response to increased enforcement of foreign accounts compliance.
Streamlined Voluntary Disclosure Program is a safe and cost-effective method for getting into IRS compliance for unreported offshore accounts, assets, income or investments. The Streamlined Offshore Voluntary Disclosure Program is a non-willful alternative to voluntary disclosure.
Common Streamlined Offshore Voluntary Disclosuree Terminology
Streamlined Voluntary Disclosure is a catchall for the various different types of streamlined programs. Streamlined Disclosures go by many different names, including:
- Streamlined Program
- Streamlined OVDP
- Streamlined Filing Compliance Procedures
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
The following are key important aspects of the the Streamlined Voluntary Disclosure Program:
The Traditional Offshore Voluntary Disclosure Program. People who are both Willful and Non-Willful may enter the program, but non-willful individuals typically only submit to OVDP under specific scenarios (MTM Elections, Opt-Out).
It was discontinued on 9.28.18.
IRS Streamlined Program
The IRS Streamlined Program was created in 2014 to assist individuals who are non-willful and meet other filing requirements. It is a much more “Streamlined” submission with less reporting requirements.
The general term that refers to voluntarily coming into IRS Offshore Compliance by reporting Foreign Bank Accounts, Financial Assets, Income and other Foreign Investments.
You are entering the program “voluntarily,” which means you are not currently under audit or examination.
While the IRS likes to keep this term a big secret, it generally means a person acted with either Intent, Knowledge or Reckless Disregard in not reporting Foreign Accounts, etc. It is based on a totality of the circumstances surrounding the non-disclosure.
It means somebody did not act “Willful.” The term is also not defined.
FBAR (FinCEN 114)
This is the Report of Foreign Bank and Financial Account Form. It is required for U.S. Person with more than $10,000 in annual aggregate total in foreign accounts on any given day of the year. This is filed separately from your Tax Return
This is the process of filing your FBAR directly on the BSA website.
BSA and BSA E- Filing
Refers to the Bank Secrecy Act. While it sounds very “Cloak and Dagger,” it’s not – it is the same site whether you have accounts in Switzerland, Cayman Islands, Bahamas, Japan or India.
FATCA Form 8938
The is the Foreign Account Tax Compliance Act Form for Individuals. It is to report “Specified Foreign Financial Assets.” It is filed along with your Tax Return, if you meet the threshold requirements.
Non-Willful & Streamlined Offshore Voluntary Disclosure
There is no bright-line test to determine willfulness.
It is a ‘Totality of the Circumstances‘ test based on whether or not your specific facts and circumstances reflect that you knew, or should have known that you were required to disclose and report your foreign accounts and offshore income — and made the decision not to disclose.
Generally, if a person was unaware that there was a foreign account/foreign income/foreign asset reporting requirement, the client begins in the “non-willful” category, but more analysis is needed.
How to Analyze Willful vs. Non-Willful
- What is your U.S. status?
- How long have you been in the United States for?
- How many years have you filed U.S. tax returns?
- What types of investments do you have overseas?
- Do you utilize a financial planner?
- Do you have a CPA or EA?
- Is your CPA or EA experienced in international tax?
- Did your CPA or EA send you questions in writing asking about Foreign Accounts or Income?
- Did you respond truthful to the CPA or EA?
- Did you complete a schedule B?
- Are you tax compliant in the country in which the accounts are maintained?
- Did you have unreported income as well?
Filing Tax Returns under Streamlined Offshore Voluntary Disclosure
The process for filing tax returns differs under the SDOP and SFOP.
Original Returns under the Streamlined Domestic Program
If a person qualifies for the Streamlined Foreign Offshore Procedures, which is the same as the domestic procedures (e.g. both programs are designed to facilitate the voluntary reporting of offshore/foreign money) except that the person resided outside of the United States for at least 330 days in any year, the person can file original tax returns through the program.
The rationale seems to be that if a person resides outside of the United States for 11 out of 12 months in a year, the IRS will cut them a break as tax filing.
Original Returns under the Streamlined Foreign Program
If a person does not qualify for the Streamlined Foreign Offshore Procedures (e.g., they do not qualify as a “Foreign Resident”) then they must submit under the Streamlined Domestic Offshore Procedures. Under the Streamlined Domestic Offshore Procedures, a person cannot file original returns through the program.
Moreover, the person must have filed timely returns — although in our experience in working with the IRS, there may be some wiggle room as to that threshold (aka how untimely were the original returns)
5% Streamlined Offshore Voluntary Disclosure Penalty
The 5% penalty under the streamlined domestic offshore procedures is not paid on the Maximum balance of the FBAR and FATCA assets as some people incorrectly believe, and it is only based on the highest year-end balance — not every year.
Specifically, there is only one 5% penalty, and it is only paid for one year’s worth of unreported accounts and asset value — for the year tat has the highest 12/31 annual aggregate value.
In other words, a person will aggregate the total value of their accounts and assets on December 31 for each year individually. Then, the person will pick the highest December 31 annual aggregate total, and use that total only as the penalty base.
As stated above, the penalty is limited to 5%.
Example of the 5% Summary Calculation
There is no penalty for the Streamlined Foreign Program. The Streamlined Domestic has a 5% penalty. The penalty calculation is best explained when it broken down into steps:
There is No Penalty on the Tax
Under traditional OVDP, there is a 20% penalty for each year of unpaid tax liability. Under the Streamlined Voluntary Disclosure Program, there is no penalty on the taxes that are due – although interest is due for each year of tax liability.
You Can Still be Audited under Streamlined Offshore Voluntary Disclosure
Under the streamlined program, a person can still be audited. Unlike traditional OVDP, in which the IRS pretty much states that as long as a person fully discloses and fully cooperates with the IRS, he or she will not be audited — under the streamlined program the IRS can still audit the applicant.
For many individuals, depending on the facts and circumstances of their case, they may still choose to enter traditional OVDP in order to avoid the unknown of whether they will be audited or examined under the streamlined program.
This is important, because the IRS is not required to provide a clear-cut definition/analysis of how a person is to determine whether they are willful or not. Therefore, while a person may believe they are non-willful – the IRS may differ.
Moreover, even if a person is audited for an issue outside the Streamlined Program, they may still be questioned and examined about the Offshore Disclosure (usually up to 6 Years)
Common Streamlined Offshore Voluntary Disclosure Reporting Forms
The following is a list of common forms which many people were never aware they had to report, but which the failure to report may lead to extensive fines and penalties:
Reporting Foreign Accounts (FBAR)
If you are a U.S. Person, it does not matter whether or not you have to file a US tax return to determine if you have to file an FBAR. The threshold question is whether you have an annual aggregate total of foreign/offshore bank accounts, financial accounts, retirement accounts, etc. that when combined, exceed $10,000. If so, you are required to file the FBAR Form and report all of the accounts.
FATCA Form (8938)
FATCA is the Foreign Account Tax Compliance Act. For individuals, it requires reporting of financial accounts and certain specified foreign assets (ownership in businesses, life insurance, etc.). There are different threshold requirements, depending on whether a person is Married Filing Jointly (MFJ) or Married Filing Separate (MFS)/Single, and whether a person resides in the United States or outside of the United States.
Foreign Gift Form (3520)
If you receive a gift or inheritance from a foreign person that exceeds $100,000 either in a single transaction, or a series of transactions over a year, you are required to report the gift on this form. You have the file this form, even if you are not required to file a tax return (although it is normally filed at the same time as your tax return).
Foreign Corporation or Foreign Partnership (5471 or 8865)
The rules are somewhat different for these two forms, but essentially the same (with the 5471 being much more commonplace for U.S. investors). If you own at least 10% ownership in either type of business, you required to report the information on either a form 5471 or 8865. Both of these forms require comprehensive disclosure requirements, involving balance statements, liabilities, assets, etc. Moreover, the forms need to be filed annually, even if a person does not have to otherwise file a tax return
Passive Foreign Investment Company (PFIC)
One of the most vilified type of financial assets/investments (from the U.S. Government’s perspective) is the infamous PFIC. A PFIC is a Passive Foreign Investment Company. The reason the United States penalized this type of investment is because it cannot oversee the growth of the investment and income it generates. In other words, if a U.S. person invests overseas in a Foreign Mutual Fund or Foreign Holding Company — the assets grows and generates income outside of IRS and U.S. Government income rules and regulations.
Foreign Trust (3520-A)
A Foreign Trust is another type of Foreign Investment that is frowned upon by the IRS. From the IRS’ perspective, the only purpose behind a Foreign Trust is to illegally avoid US reporting and income tax requirements by moving money offshore. While there are many people who may operate illegally in this fashion, there are various legitimate reasons why you would be a trustee or beneficiary of a Foreign Trust (Your cool grandma really loves you and placed $5 million in trust for you overseas). Form 3520-A is a relatively complex form, which must be filed annually by anybody that owns a foreign trust.
Foreign Real Estate Income
Even if you are earning rental income from property that is located outside of the United States, you still must report the income on your U.S. taxes (even it is exempt from tax in the foreign country). Remember, United States taxes individuals on their worldwide income. Therefore, the income you are earning from your rental property(s) must also be included on your US tax return.
A few nice benefits of reporting the income is that the United States allows depreciation of the structure – which many foreign countries do not allow. Moreover, you can take the same types of deductions and expenses that you otherwise take the property was located in the United States.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.