Continued from Part I
Voluntary Disclosure Program
Each of the IRS Offshore Voluntary Disclosure programs has required the filing of 8 years’ of back tax returns and FBARs. In addition, volumes of supporting documentation are required. Choosing this option is very time-consuming and generally is very expensive, both in terms of professional fees and penalties. These programs, however, are a welcome relief for taxpayers who face a real likelihood of criminal penalty sanctions. More information on the most recent program, the 2012 OVDP, can be accessed here. Here is a broad overview of the OVDP terms:
Generally, by entering the OVDP, a taxpayer is subject to the payment of tax deficiencies and interest on the back taxes due for the OVDP Time Period, which is generally 8 years. Interest is compounded daily.
For each year in the OVDP Time Period, the taxpayer is subject to the normal failure to file and failure to pay penalties (which is basically 50% of the tax due each year) and/or the accuracy-related penalty which is 20% of the tax due.
In place of all other tax or information return penalties that may be applicable, a 27.5 percent “in lieu” penalty on the highest aggregate offshore account / asset value in any year covered by the OVDP. The offshore penalty is intended to apply to all offshore holdings that are related in any way to tax noncompliance. Thus, the value of a home purchased abroad with untaxed salary would be dragged into the penalty base; similarly the value of an overseas apartment on which rental income had not been reported by the taxpayer.
Certain taxpayers may be eligible for a reduced “in-lieu” / “FBAR” penalty. Under the general terms of the program, as mentioned, this “in lieu” penalty is assessed at 27.5% . The ability to reduce it to 12% or 5% is a huge benefit. All of the exceptions are not possible to discuss in a blog posting, and professional advice should be sought in order to obtain the best information as it applies to a particular taxpayer’s set of facts. In my practice I am using the 5% reduced penalty provision with some success. This provision has been very significant for US persons living in a country where they have been paying tax (e.g., Switzerland), or living in a country, typically in the Middle East region, where many jurisdictions have no individual income tax or have a tax asserted by withholding (e.g., on bank account interest). The ability to use this provision also means the taxpayer may be able to remove any real estate, business interests, and other assets from the penalty base.
Under the IRS announcement pertaining to OVDP, a reduced 5% penalty can apply if the individual is a non-US resident and meets all of the following requirements for all relevant years in the voluntary disclosure:
“taxpayer resides in a foreign country; taxpayer has made a good faith showing that he or she has timely complied with all tax reporting and payment requirements in the country of residency; and taxpayer has $10,000 or less of U.S. source income each year. For these taxpayers only, the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence. This exception only applies if the income tax returns filed with the foreign tax authority included the offshore-related taxable income that was not reported on the U.S. tax return.”
Part III will discuss: “Quiet” or “Soft” Disclosure
In accordance with Circular 230 Disclosure
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