Undisclosed Foreign and U.S. Income or Bank Accounts – Offshore Disclosure
Unfortunately, for many of our clients who have unreported foreign/offshore accounts and assets, the enforcement of FACTA and FBAR Reporting may lead to serious fines and penalties.
With the globalization of the U.S. and world economies, it is not uncommon for individuals unfamiliar with U.S. Tax Law and reporting requirements to have a combination of unreported U.S. Income, unreported Foreign Accounts and unreported Foreign Income that have not been reported to the Internal Revenue Service.
If the failure to report these accounts was willful, then the Individual (Estate or Business) may be subject to very high fines and penalties. Moreover, depending on the amount of unreported money and reason for the nondisclosure (aka intentional/willful) they may find themselves subject to a criminal investigation by the IRS.
This article will focus on willfulness and OVDP.
OVDP is an IRS Voluntary Disclosure Program for reporting undisclosed foreign financial information. It is designed to “forgive” the potential maximum penalties by settling on overall reduced penalties to facilitate compliance. (While there is another program in place solely for domestic disclosures it is usually not as forgiving as OVDP). The reason the program is less popular is because the IRS does not provide as much sympathy for individuals and businesses that did not report US accounts.
*It should be noted that you can submit a dual Offshore/Domestic Disclosure submission under OVDP – but you should speak with an experienced offshore disclosure attorney before making any representation to the U.S. Government.
More About OVDP
Golding & Golding is one of the only law firms in the country that focuses their practice exclusively on offshore disclosure such as streamlined disclosures, OVDP (offshore voluntary disclosure program), FBAR Fraud, etc. We have offered a very popular “Offshore Disclosure – FAQs from the Trenches” which is been reproduced for you below:
OVDP (Offshore Voluntary Disclosure Program) is a very complicated process, which requires comprehensive international tax law knowledge and experience.
Our firm has successfully submitted numerous OVDP applications since the program’s inception back in 2009. As a result, we have put together this comprehensive OVDP FAQs from the trenches.
Golding & Golding is an International Tax Law Firm, and one of the most experienced boutique OVDP (Offshore Voluntary Disclosure Program) and International Tax Law firms in the country.
We have represented numerous businesses and individuals around the world with international tax law and OVDP submissions, with unreported assets and/or financial accounts exceeding $35,000,000.
The reason why individuals and businesses are getting into trouble with foreign reporting and OVDP is because there are so many aspects to OVDP that an inexperienced attorney, CPA or accountant would not know to look out for, and/or even warn the client about.
Over the last few years, there has been a recent increase in OVDP applications. In addition, our firm has received many referrals from clients who previously sought the help of other tax professionals who steered them in the wrong direction and nearly got them in trouble.
This is a list of the most common questions and/or mistakes made by inexperienced OVDP Attorneys that have negatively impacted our clients:
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 – . 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.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)