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Criminal Tax Attorney David M. Garvin, P.A.
Located at 200 S. Biscayne Blvd, Suite 3150 Miami, Fl.
CRIMINAL AND TAX ATTORNEY
DAVID M. GARVIN, P.A.
200 S. Biscayne Blvd. - Suite 3150 - Miami (305) 371-8101
David Garvin AV Rated Criminal and Tax Lawyer in Miami
Miami Criminal Tax Lawyer
Offshore Voluntary Disclosure Program OVDP
The Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.
Amazingly and thankfully the third IRS Amnesty Opportunity originally called the 2012 Offshore Voluntary Disclosure Program (OVDP) continues well into 2014, with no definite final deadline in sight. Yet. That could change at any time.
This does not mean however that all has been quiet on the IRS front regarding previously undisclosed Offshore/Foreign Financial Accounts.
The IRS continues to close in on those who have chosen to continue to flagrantly, or, in many cases, somewhat innocently, ignore United States reporting and filing requirements in two basic tax and financial reporting areas: on IRS Forms 1040 and on Form TD F 90-22.1 (Foreign Bank Account Report-FBAR).
Also, a FATCA Form 8938 regarding all overseas investment assets-not simply "bank accounts"-- must also be filed, usually to accompany an annual Form 1040.
Diplomatically and legislatively, with the increasing implementation of the Foreign Account Tax Compliance Act (FATCA) regulations, through Intergovernmental Agreements (IGAs), country after country-the various stages of IGA implementation or negotiations are listed below by country-- has recently declared after immense diplomatic and other pressure from U.S. Taxing authorities they intend to disclose to the IRS United States citizen/equivalent account owners.
IRS OFFSHORE VOLUNTARY DISCLOSURE PROGRAM (OVDP)
Offshore Voluntary Disclosure Program
Questions 1 to 8 Frequently Asked Questions and Answers Effective for OVDP Submissions Made On or After July 1, 2014
1. Is this a new offshore voluntary disclosure program?
No. This is a continuation of the program introduced in 2012 with modified terms, but for purposes of referring to this modified program, it may be referred to as the 2014 OVDP. The IRS’s prior Offshore Voluntary Disclosure Program (2009 OVDP), and Offshore Voluntary Disclosure Initiative (2011 OVDI), and the 2012 OVDP have demonstrated the value of uniform penalty structures for taxpayers who come forward voluntarily and report their previously undisclosed foreign accounts and assets. These initiatives have enabled the IRS to centralize the civil processing of offshore voluntary disclosures and to resolve a very large number of cases without examination. Because the implementation of the Foreign Account Tax Compliance Act (FATCA) and the IRS and Department of Justice offshore enforcement efforts continue to raise the risk of detection of taxpayers with undisclosed foreign accounts and assets for the foreseeable future, it has been determined that 2012 OVDP should be modified and made available to taxpayers who wish to voluntarily disclose their offshore accounts and assets to avoid prosecution and limit their exposure to civil penalties but have not yet done so.
Unlike the 2009 OVDP and the 2011 OVDI, the 2014 OVDP has no set deadline for taxpayers to apply. However, the terms of this program could change at any time. For example, the IRS may increase penalties or limit eligibility in the program for all or some taxpayers or defined classes of taxpayers or decide to end the program entirely at any time.
1.1. Were any significant changes made to the 2012 OVDP? If so, what are they?
Changes have been made to the 2012 OVDP, including some which may be considered significant.
A 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation. See FAQ 7.2. As described below, FAQ 17 concerning filing delinquent Report of Foreign Bank and Financial Accounts (commonly known as an FBAR) has been replaced and superseded. See “Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets”.
As described below, FAQ 18 concerning filing certain delinquent international information returns has been replaced and superseded. See “Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets”.
The reduced penalty structure under former FAQs 52 and 53 has been eliminated due to the expansion of the Streamlined Filing Compliance Procedures. See “Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets” for a discussion of the various options for taxpayers with international tax compliance issues. FAQs 31 through 41 pertaining to the asset base to which the offshore penalty applies have been modified to promote clarity and consistency of application.
FAQ 23 has been modified to require additionalinformation for pre-clearance by Criminal Investigation.
The Offshore Voluntary Disclosures Letter and attachment have been modified. FAQ 7 has been modified to require that the offshore penalty be paid at the time of the OVDP submission.
FAQ 25 has been modified to require that account statements be provided for all foreign financial accounts regardless of account balance and to provide that voluminous documents not requiring original signatures may be submitted on CD or DVD.
The following FAQs have been deleted as moot: 16, 17, 18, 19, 51.1, 51.2, 52, and 53
1.2. What is the effective date of these modified FAQs?
These modified FAQs are effective for all new submissions made on or after July 1, 2014.
1.3. If I applied to OVDP prior to the effective date of these modified FAQs and my case has not yet been resolved by means of a closing agreement (Form 906), may I request consideration under these FAQs?
Yes. A taxpayer who made an OVDP submission prior to July 1, 2014 may elect to have his case considered under these FAQs. A taxpayer or his representative must communicate that request in writing to the examiner assigned his case and provide all documents and information required by these FAQs. See FAQ 25. If no examiner has been assigned, send the documents and information to:
1.4. If I applied to OVDP prior to the effective date of the expanded Streamlined Filing Compliance Procedures, may I request consideration under those procedures? See the separate set of Frequently Asked Questions for information about eligibility and the process for requesting transitional treatment under the terms of the Streamlined Filing Compliance Procedures in your OVDP case.
4. Why should I make a voluntary disclosure?
Taxpayers holding undisclosed foreign accounts and assets, including those held through undisclosed foreign entities, should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties, and generally eliminate the risk of criminal prosecution for all issues relating to tax noncompliance and failing to file FBARs. In contrast, taxpayers simplyfiling amended returns or filing through the Streamlined Filing Compliance Procedures do not eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution. The IRS remains actively engaged in identifying those with undisclosed foreign financial accounts and assets.
Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and from other sources and will become more available under the FATCA and Foreign Financial Asset Reporting (IRC § 6038D).
5. What are some of the civil penalties that might apply if I don't participate in the OVDP and the IRS examines me?
Depending on a taxpayer’s particular facts and circumstances, the following penalties could apply:
A penalty for failing to file FBARs. United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048.
This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person. A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business
Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
6. What are some of the criminal charges I might face if I don't participate in the OVDP and the IRS examines me?
Possible criminal charges related to tax matters include tax evasion (IRC § 7201), filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.
A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
7. What are the requirements of the Offshore Voluntary Disclosure Program?
Under the terms of the Offshore Voluntary Disclosure Program, taxpayers must:
Provide all documents required by FAQ 25;
Cooperate in the voluntary disclosure process, including providing information on foreign accounts and assets, institutions and facilitators, and signing agreements to extend the period of time for assessing Title 26 liabilities and FBAR penalties;
Pay 20-percent accuracy-related penalties under IRC § 6662(a) on the full amount of your offshore-related underpayments of tax for all years;
Pay failure-to-file penalties under IRC § 6651(a)(1), if applicable;
Pay failure-to-pay penalties under IRC § 6651(a)(2), if applicable;
Pay, in lieu of all other penalties that may apply to the undisclosed foreign accounts, assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period, a miscellaneous Title 26 offshore penalty equal to 27.5 percent (or 50 percent in circumstances described in FAQ 7.2) of the highest aggregate value of OVDP assets as defined in FAQ 35 during the period covered by the voluntary disclosure (the 27.5 percent and 50 percent penalties are together referred to in these FAQs as the “offshore penalty”);
Submit full payment of any Title 26 tax liabilities for years included in the offshore disclosure period, applicable interest, an offshore penalty, accuracy related penalties for offshore-related underpayments, and, if applicable, the failure-to-file and failure-to-pay penalties or, if the taxpayer is unable to make full payment, make good faith arrangements with the IRS to pay in full (see FAQ 20 for more information) (note: the suspension of interest provisions of IRC § 6404(g) do not apply to interest due in this program);
Execute a Closing Agreement on Final Determination Covering Specific Matters, Form 906; and Agree to cooperate with IRS and Department of Justice offshore enforcement efforts, if requested, by providing information about financial institutions and other facilitators who helped the taxpayer establish or maintain an offshore arrangement.
7.1. What if I have unreported income from a domestic source or some other undisclosed income tax liability that is not related to foreign financial accounts?
As was the case with the 2009 OVDP and the 2011 OVDI, the OVDP is available to taxpayers who have both foreign and domestic issues to disclose. The Voluntary Disclosure Practice requires a complete, accurate, and truthful disclosure. Consequently, in addition to disclosing all items relating to foreign financial accounts, OVDP submissions must correct any previously unreported income from domestic sources, inappropriate deductions or credits claimed, or other incomplete, inaccurate or untruthful items on the originally filed returns. The offshore penalty structure only resolves liabilities and penalties related to offshore noncompliance. Domestic portions of a voluntary disclosure are subject to examination. See FAQ 24.
7.2. What if the government is investigating the foreign financial institution where I hold my account or another facilitator who assisted in establishing or maintaining my offshore arrangement?
Beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50-percent miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation: an event has already occurred that constitutes a public disclosure that either (a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person; (b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person or (c) the foreign financial institution or other facilitator has been identified in a court- approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a “John Doe summons”) at the foreign financial institution or have accounts established or maintained by the facilitator. Examples of a public disclosure include, without limitation: a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator. A list of foreign financial institutions or facilitators meeting this criteria is available. Once the 50-percent miscellaneous offshore penalty applies to any of the taxpayer’s accounts or assets in accordance with the terms set forth in the paragraph above, the 50-percent miscellaneous offshore penalty will apply to all of the taxpayer’s assets subject to the penalty (see FAQ 35), including accounts held at another institution or established through another facilitator for which there have been no events constituting public disclosures of (a) or (b) above.
8. How does the offshore penalty framework work? Can you provide an example?
The offshore penalty applies to OVDP assets as defined in FAQ 35. The values of OVDP assets are aggregated for each year and the offshore penalty is calculated at the applicable rate (either 27.5 percent or 50 percent) of the highest year’s aggregate value during the period covered by the voluntary disclosure. If the taxpayer has multiple OVDP assets where the highest value of some OVDP assets is in different years, the values of OVDP assets are aggregated for each year and a single offshore penalty is calculated at the applicable rate of the highest year’s aggregate value. For example, assume the taxpayer had the following amounts in a foreign financial account over the period covered by his voluntary disclosure. It is assumed for purposes of the example that the $1,000,000 was in the account before 2005 and was not unreported income in 2005.
Year Amount on Deposit Interest Income Account Balance
(NOTE: This example does not provide for compound interest, and assumes the taxpayer is in the 35-percent tax racket, does not have an investment in a Passive Foreign Investment Company (PFIC) and files a return but does not include the foreign financial account or the interest income on the return. This example further assumes that the taxpayer is subject to a 27.5 percent offshore penalty.)
If the taxpayer in the above example comes forward and his voluntary disclosure is accepted by the IRS, he faces this potential scenario: He would pay $553,000. This includes:
Tax of $140,000 (8 years at $17,500) plus interest,
An accuracy-related penalty of $28,000 (i.e., $140,000 x 20%), and
A miscellaneous offshore penalty (see FAQ 7) of $385,000 (i.e., $1,400,000 x 27.5%).
If the taxpayer didn’t come forward, when the IRS discovered his tax and FBAR noncompliance, he would have to pay substantially more in penalties. The taxpayer would also be liable for interest and possibly additional penalties, nd an examination could lead to criminal prosecution.
The civil liabilities outside the Offshore Voluntary Disclosure Program potentially include: The tax, accuracy- related penalties, and, if applicable, the failure-to-file and failure-to-pay penalties, plus interest, as described above, FBAR penalties totaling up to $3,825,000 for willful failures to file complete and correct FBARs (2007 - $575,000, 2008 - $600,000, 2009 - $625,000, 2010 - $650,000, and 2011 - $675,000, and 2012 - $700,000),
The potential of having the fraud penalty (75 percent) apply, and
The potential of substantial additional information return penalties if the foreign financial account is held through a foreign entity such as a trust or corporation and required information returns were not filed. In addition, if the taxpayer is not in OVDP and the foreign noncompliance started before 2005, the Service may examine tax years prior to 2005.
Internal Revenue Service 3651 S. I H 35 Stop 4301 AUSC Austin, TX 78741 Attn: OVDP Determination
2. What is the objective of this program?
The objective remains the same as the 2009 OVDP, the 2011 OVDI, and the original 2012 OVDP: to bring taxpayers that have used undisclosed foreign accounts and assets, including those held through undisclosed foreign entities, to avoid or evade tax into compliance with United States tax and related laws.