When a person was non-willful, they may be able to avoid the traditional OVDP, and instead qualify for “Streamlined OVDP.”
Non-Willfulness is Required
We cannot stress this fact enough. Yes, the chances of being audited in general are low and the chances don’t seem to increase much solely because a person enters the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.
Nevertheless, if a person is audited and the IRS believes that the individual misrepresented the facts within their certification statement and were actually willful – or acted with reckless disregard – the IRS may take them to task. This could result in the individual paying significantly more fines and penalties than they would otherwise have paid in OVDP – especially if they had successfully opted out of the program.
Moreover, it could also lead to charges for Offshore Tax Fraud, Offshore Tax Evasion and Offshore Money Laundering. This is not to scare you, but rather for you to really evaluate your facts and confirm in your own mind that you are non-willful…and being led astray by inexperienced counsel trying to make a quick buck off you.
Streamlined OVDP is a great option for individuals who were non-willful in having not been in compliance with U.S. Tax Law and Reporting of Foreign Assets, Investments and Income. Streamlined Voluntary Disclosure goes by many different names:
- Streamlined Program
- Streamlined OVDP
- Streamlined Filing Compliance Procedures
- Streamlined Domestic Offshore Procedures
- Streamlined Foreign Offshore Procedures
Streamlined Voluntary Disclosure Basics
Streamlined compliance is more “streamlined” than the traditional Offshore Voluntary Disclosure Program (OVDP) and requires significantly less paperwork than OVDP.
While the streamlined voluntary disclosure program has risks, for the most part, as long as you are non-willful (and are confident in your non-willfulness), the program may be a good fit.
Other issues such as Mark-to-Market elections, and elimination of nearly any risk of Audit on Unreported Income may still make OVDP a better option — so it is important to speak with an experience Offshore Voluntary Disclosure Lawyer before making an affirmative representation to the IRS.
Since we receive so many inquiries about the Streamlined Voluntary Disclosure Program, we wanted to take an opportunity to provide some clarification for individuals and estates that are interested in the program.
Original Tax Returns
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 facilitating 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.
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% Penalty is Based on the Year-End Value
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%.
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 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)
Want to learn more about the different Offshore programs?
At Golding & Golding, we limit our entire tax law practice to IRS offshore voluntary disclosure. The following is a summary of the main three different programs.
* Reasonable cause is also an option but it is an option that you should speak in detail with experience Council first to understand the pros and cons of making this type of submission
Offshore Voluntary Disclosure Options
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.
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.
Any account that would have to be included on either the 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 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 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 nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.
Then there is the “FBAR/8938” 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 of 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!
2. Streamlined Domestic Offshore Disclosure
The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.
What am I supposed to Report?
There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.
In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.
Reporting Specified Foreign Assets – FATCA Form 8938
Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.
The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.
The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.
Other Forms – Foreign Business
While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:
- If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
- If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
- If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
- And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.
Reporting Foreign Income
If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.
It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.
In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.
3. Streamlined Foreign Offshore Disclosure
What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?
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 tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.
Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)
*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.