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Offshore Voluntary Disclosure Program (OVDP)

ovdp

Americans with undisclosed foreign financial accounts

US taxpayers with undisclosed foreign financial accounts and assets, including those held through undisclosed foreign entities, may choose one of the following options to become compliant with the US tax laws:

  1. Offshore Voluntary Disclosure Program (OVDP)
  2. Streamlined Filing Compliance Procedures (Domestic and Foreign)
  3. Quiet Disclosure
  4. Forward Compliance
  5. Delinquent FBAR Submission Procedures
  6. Information Returns Submission Procedures
  7. Seek Relief based on “Reasonable Cause” or:
  8. Do nothing.

Taxpayers should consult an OVDP Tax Attorney experienced in handling undisclosed foreign financial accounts, because each option has its own nuances and advantages and disadvantages.

I- IRS Offshore Voluntary Disclosure Program ( 2014 OVDP)

In January 2012, the IRS started an open-ended offshore voluntary disclosure program (OVDP) on the aftermath of strong interest in its 2009 and 2011 programs.

This program 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 modifications are effective July 1, 2014 and this may come to an end at any time in the future.

This is another opportunity the IRS is offering to taxpayers with undisclosed offshore income to become compliant with the US tax laws and get current with their tax returns.

The 2014 OVDP has 27.5% penalty which is higher than its 2011 program which had 25% penalty and its 2009 program with 20% penalty, unless the foreign financial institutions (FFI) or their officers/advisors are under investigation by the Department of Justice (DOJ), and are cooperating in their investigations by DOJ.

The account holders of these banks pay 50% penalty. See: Super Penalty

Under this program, an eligible offshore account holder enters the program, generally with assistance of legal counsel, and preferably represented by an OVDP tax attorney, and go through the following three phases:

A) Pre-Clearance

Taxpayers or representatives may fax to the IRS Criminal Investigation Lead Development Center the following:

  1. Applicant identifying information including complete names, dates of birth (if applicable), tax identification numbers, addresses, and telephone numbers.
  2. Identifying information of all financial institutions at which undisclosed OVDP assets were held. Identifying information for financial institutions includes complete names (including all DBAs and pseudonyms), addresses, and telephone numbers.
  3. Identifying information of all foreign and domestic entities (e.g., corporations, partnerships, limited liability companies, trusts, foundations) through which the undisclosed OVDP assets (see) were held by the taxpayer seeking to participate in the OVDP; this does not include any entities traded on a public stock exchange. Information must be provided for both current and dissolved entities. Identifying information for entities includes complete names (including all DBAs and pseudonyms), employer identification numbers (if applicable), addresses, and the jurisdiction in which the entities were organized.
  4. Executed power of attorney forms (if represented). In the case of jointly filed returns each spouse should request pre-clearance.

IRS Criminal Investigation will then notify taxpayers or their representatives via fax whether or not they have been cleared to make a voluntary disclosure using the Offshore Voluntary Disclosures Letter (Form 14457) and attachment (Form 14454).

Note: Pre-clearance does not guarantee a taxpayer acceptance into the Offshore Voluntary Disclosure Program.

B) Offshore Voluntary Disclosure Letter

If the taxpayer chooses to submit a pre-clearance request, after the taxpayer receives a pre-clearance notice, the taxpayer will have 45 days from the date of that notice to complete the Offshore Voluntary Disclosure Letter and the Forms 14437 and 14454. If the taxpayer chooses to bypass the pre-clearance process, the taxpayer must still mail the Offshore Voluntary Disclosures Letter and attachments (Forms 14457 and 14454) to the following address:

Internal Revenue Service
Criminal Investigation
ATTN:  Offshore Voluntary Disclosure Coordinator
Philadelphia Lead Development Center
1-D04-100
2970 Market Street
Philadelphia, PA 19104

The IRS will review the Offshore Voluntary Disclosures letter and attachment(s) and notify the taxpayer or representative by fax whether the voluntary disclosure has been preliminarily accepted or declined.

C) Submission of Complete OVDP Requirements

Once the voluntary disclosure has been preliminarily accepted, the taxpayer should send the full voluntary disclosure package (all documents required by FAQ 25) to:

Internal Revenue Service
3651 S. I H 35 Stop 4301 AUSC
Austin, TX  78741
ATTN: 2014 Offshore Voluntary Disclosure Initiative

The account is assigned to an IRS employee who reviews the file in details and asks for additional records if needed. At the end of this process, the IRS issues a settlement IRS Form 906, and generally this saga comes to an end, and the taxpayer avoids a potential criminal prosecution.

For additional information, see Taxpayers Having Unisclosed Foreign Accounts

For the latest OVDP Frequently Asked Questions and Answers, see: IRS OVDP FAQ

New 50% Penalty

Effective June 18, 2014, the revised OVDP kept the old 27.50% penalty, eliminated the old 5% and 12.50% penalties, and added a new 50% penalty for some of those who enter the OVDP after August 3, 2014.
Those taxpayers will still be eligible to enter the OVDP, but they will be subject to a 50% offshore penalty instead of the current 27.5% penalty, if a taxpayer’s name has already been provided to the IRS. Some may not be eligible for the OVDP.

That is true about account holders of the Foreign Financial Institutions that are publicly under investigation or as are being facilitators as part of the bargain with the government.

The following are the published names of the foreign financial institutions or facilitators. It is always possible for the IRS to add other names to this list at any time, and make many taxpayers ineligible for the OVDP:

The Internal Revenue Service has updated its Foreign Financial Institutions or Facilitators list as of December 26, 2014.

Because the following institutions or the advisors of the account holders of these institutions are under investigation, the account holders of the following financial intuitions and banks will pay the OVDP penalty of 50%.

For the latest list of 50% banks, follow this link: Super Penalty  Click below for the update list of non-prosecution agreement executed under the Swiss Bank Program. Swiss Bank Program

Look-back period

The US Treasury authorities have indicated that once they receive disclosure from foreign financial institutions with respect to their US account holders, they will review all accounts including the closed ones back to August 1, 2008.

Therefore, closing an account in a foreign financial institution and transferring it to another one or to another country may not be a viable and proper remedy for FATCA or FBAR purposes.

II-Streamlined Filing Compliance Procedures

The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from preclearance conduct.

The streamlined procedures are designed to provide to taxpayers in such situations:

  1. streamlined procedure for filing amended or delinquent returns and
  2. terms for resolving their tax and penalty obligations.

The non-willfulness is determined based on facts and circumstances of each taxpayer. It is crucial to discuss the underlying facts with a tax attorney experienced in this particular tax law before selecting this option.

These procedures will be available for an indefinite period until otherwise announced.

Tax returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will be processed like any other return submitted to the IRS.

However, generally they are sent from the office of tax attorney with writing in red at the top of the returns stating that “Processed under Streamlined Filing Compliance Procedures”.

Consequently, receipt of the returns will not be acknowledged by the IRS and the streamlined filing process will not culminate in the signing of a closing agreement with the IRS. This is unlike the OVDP which ends in a closure by singing the IRS form 906.

IRS Warning regarding OVDP or Streamlined Procedures

The IRS has indicated that Taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful conduct and who therefore seek assurance that they will not be subject to criminal liability and/or substantial monetary penalties should consider participating the Offshore Voluntary Disclosure Program and should consult with their professional or legal advisers.

 A- Streamlined Foreign Offshore Procedures

Eligible taxpayers residing overseas submit:

  1. Statement of non-willfulness (IRS form 14653) under penalty of perjury
  2. Last three years’ amended tax returns
  3. Last six years’ Report of Foreign Bank and Financial Accounts (FBAR, FinCen form 114) FBAR
  4. No FBAR penalty.

For more information, Streamlined Procedures

B- Streamlined Domestic Offshore Procedures

Eligible taxpayers residing in the US submit:

  1. Statement of non-willfulness (IRS form 14654) under penalty of perjury
  2. Last three years’ amended tax returns
  3. Last six years’ Report of Foreign Bank and Financial Accounts (FBAR, FinCen form 114) FBAR
  4. 5% of the highest December 31st balance of the last six years, as FBAR penalty.

For more information, Streamlined Procedures

III-Quiet Disclosure

Under this option, non-compliant taxpayer would file amended prior years and file the delinquent FBARs. The IRS has already warned these taxpayers and stated that they are aware of these filings and may audit them.

IV-Forward Compliance

Under this option, non-compliant taxpayers ignore the past requirements and start complying from this point on.
This may expose the taxpayer to the IRS inquiry since they will receive new information with no comparable past information, especially the FBAR form 114 and FATCA form 8938, that contain questions about the inception of the financial accounts, and trigger IRS audit.

V-Delinquent FBAR Submission procedures

This method may be appropriate in cases where the client:

  1. Has not filed FBARs; (Comparable to former IRS FAQs 17 and 18)
  2. Is not under an IRS civil examination or CI
  3. Has not been contacted by the IRS about the delinquent FBARs
  4. Adds a statement explaining the reason for late FBAR filing
  5. On the e-file forms FinCEN 114, selects and explains the reason for late filing; and,
  6. Generally, no penalty, if the related foreign income reported on B.

Although, delinquent FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.

Advice of a Tax Attorney experienced in delinquent FBAR filing will be crucial in proper handling this method.

VI-Information Returns Submission procedures

Taxpayers who have not filed “information tax returns” may use this alternative under the advice of their Tax Attorney, if they:

  1. Have not filed required international information returns
  2. Have reasonable cause (RC) for not timely filing them
  3. Are not under the IRS civil examination or a criminal investigation
  4. Have not been contacted by the IRS on delinquent information returns
  5. File the returns
  6. Attach a RC statement for late filing to each return
  7. On the RC, certify that any entity for which the underlying entity was not engaged in tax evasion
  8. Attach all Forms other than 3520 & 3520-A, to an amended return; and
  9. File the Forms 3520 &3520-A according to their instructions.

Although, delinquent returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes.

Establishing Reasonable Cause

The following facts and circumstances should be taken into account in establishing reasonable cause:

  1. What happened and when did it happen?
  2. What prevented filing returns and paying taxes?
  3. How did the facts & circumstances affect filing, paying taxes, or perform other responsibilities?
  4. Once the facts and circumstances changed, what actions did you take to file and pay taxes?
  5. In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?

VII- Seek Relief based on Reasonable Cause

Taxpayers, who are not eligible for any of the above programs, may seek relief under “Reasonable Cause”, with consultation with their Tax Attorney:

  1. Reasonable Cause (RC), based on “facts and circumstances”
  2. “Ordinary business care and prudence” to meet their Federal tax obligations, but were unable
  3. The IRS will consider sound reasons
  4. Sound reasons; fire, casualty, natural disaster or other disturbances, inability to obtain records, death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family, others (specify); and
  5. Lack of funds, not RC. The reasons for the lack of funds may be RC.

Establishing Reasonable Cause

The following facts and circumstances should be taken into account in establishing reasonable cause:

  1. What happened and when did it happen?
  2. What prevented filing returns and paying taxes?
  3. How did the facts & circumstances affect filing, paying taxes, or perform other responsibilities?
  4. Once the facts and circumstances changed, what actions did you take to file and pay taxes?
  5. In the case of a Corporation, Estate or Trust, did the affected person or a member of that individual’s immediate family have sole authority to execute the return or make the deposit or payment?

 VIII- Do nothing

Considering the tremendous efforts launched by the US government to combat tax evasion, this may not be reasonable option. Under the Foreign Account Tax Compliance Act (FATCA) and the network of intergovernmental agreements (IGAs) between the U.S. and foreign jurisdictions, automatic third-party account reporting began this year (Canada and Britain, being the first two as of this writing), making it less likely that offshore financial accounts will go undetected by the IRS.

There are approximately 100 countries, and over 90,000 foreign financial institutions that have signed some type of cooperation agreements with the US.

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