Answers to the Most Frequently Asked Questions Regarding OVDP

As a tax attorney specializing in the Offshore Voluntary Disclosure Program (OVDP), nary a day goes by that I don’t get a call from a person inquiring about the OVDP. The questions asked are relatively the same. After a while, I began to make a list of the most frequently asked questions. Below are my answers to them: (continued)

VI. How is the offshore penalty calculated?

The starting point is to sum up the values of all foreign accounts and foreign assets for each year. The corresponding penalty is calculated at 27.5% of the highest year’s aggregate value during the look-back period. If the taxpayer has multiple accounts or assets where the highest value of some accounts or assets is in different years, the values of accounts and other assets are summed up for each year and a single penalty is calculated at 27.5% of the highest year’s aggregate value.

An example will help illustrate this rule. Assume that Jack holds the amounts listed in the chart below in a foreign account over the period covered by his voluntary disclosure. He files a return but does not include the foreign account or the interest income on his return. Jack decides to apply to the voluntary disclosure program. Assume further (1) that Jack deposited the $ 500,000 in his account before 2003, properly reporting it; (2) that Jack’s voluntary disclosure is accepted by the IRS; and (3) that Jack is in the 35-percent tax bracket.

 

 

 

 

 

 

 

Within the OVDP framework, Jack would pay $ 276,500. This includes:

• Tax of $ 70,000 (8 years at $ 8,750/year) plus interest;

• An accuracy-related penalty of $ 14,000 (i.e., $ 70,000 x 20%); and

• An additional penalty, in lieu of the FBAR penalty, of $ 192,500 (i.e., $ 700,000 x 27.5%).

If Jack didn’t come forward, when the IRS discovers his offshore activities, he would face up to $ 2,271,500 in tax, accuracy-related penalty, and FBAR penalty. He would also be liable for interest and possibly additional penalties. And if the doomsday scenario comes to fruition, he could ultimately be prosecuted.

Outside of the offshore voluntary program, Jack’s civil liability includes:

• Tax, accuracy-related penalties, and, if applicable, the failure to file and failure to pay penalties, plus interest;

• FBAR penalties totaling up to $ 1,912,500 for the willful failure to file complete and correct FBARs:

(1) 2005: $ 287,500 (.5 x $ 575,000),

(2) 2006: $ 300,000 (.5 x $ 600,000),

(3) 2007: $ 312,500 (.5 x $ 625,000),

(4) 2008: $ 325,000 (.5 x $ 650,000),

(5) 2009: $ 337,500 (.5 x $ 675,000),

(6) 2010: $ 350,000 (.5 x $ 700,000).

• A potential fraud penalty of 75%; and

• The potential of substantial additional information return penalties if the foreign account or assets is held through a foreign entity such as a trust or corporation and required information returns were not filed.

Had the foreign activity started before 2003 and Jack decided not to enter the program, the IRS may even examine tax years prior to 2003.

Next:  VII. When determining the highest amount in each undisclosed foreign account for each year or the highest asset balance of all undisclosed foreign entities for each year, what exchange rate applies?

VIII. I have an interest in a PFIC (passive foreign investment company). What are my options?

IX. I’m currently under examination. Can I still come in under voluntary disclosure?

In accordance with Circular 230 Disclosure