Issues With Potential Criminal Charges: Voluntary Disclosure-FBAR-OVDI

Lance Wallach

From the IRS website:

New Filing Compliance Procedures for Non-Resident U.S. Taxpayers

The IRS is aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), Form TD F 90-22.1. Some of these taxpayers have recently become aware of their filing obligations and now seek to come into compliance with the law. The Service is announcing a new procedure for current non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns to file their delinquent returns. This procedure will go into effect on Sept. 1, 2012.

Description of proposed new procedure:

While more details will be forthcoming, taxpayers utilizing the new procedure will be required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years. All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.

Unfiled Returns

The remedy is to get the returns filed

There are two advantages to filing as soon as possible:
Generally, if a taxpayer is due a refund for withholding or estimated taxes paid, it must be claimed within 3 years of the return due date or risk losing the right to it. The same rule applies to a right to claim a tax credit such as the Earned Income Credit (EIC).
Self-employed persons who do not file a return will not receive credits toward Social Security retirement or disability benefits. Failure to file results in not reporting any self-employment income to the Social Security Administration.
Taxpayers who haven’t filed returns always want to know what problems could result from failure to file returns. The following is from the IRS website:
A long-standing practice of the IRS has been not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation. The taxpayer must make an honest effort to file a correct return and have income from legal sources. A letter from the IRS concerning taxes is not a notice that a taxpayer is under criminal investigation.
The IRS helps to get people back into the system as part of its long-term plan to improve voluntary tax compliance. The IRS wants to get people back into the system, not prosecute ordinary people who made a mistake. However, flagrant cases involving criminal violations of tax laws will continue to be investigated.

Attention taxpayers who have undisclosed foreign accounts

You need to consider the 2012 Offshore Voluntary Disclosure Program (OVDP)
From question 4 of Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers:
Taxpayers with undisclosed foreign accounts or 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. 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 ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and will become more available under the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (new IRC § 6038D).
From question 3 of Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers:
When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.

IR-2012-5, Jan. 9, 2012

WASHINGTON — The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies.  He is an American Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications.  For more information and additional articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us, lawyer4audits.com or call 516-938-5007

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.

www.fincen.gov/forms/files/FBAR Notice re Extended Filing Date %28532-2013%29_editSig.pdf

www.fincen.gov/forms/files/FBAR Notice re Extended Filing Date %28532-2013%29_editSig.pdf

Attention taxpayers who have undisclosed foreign accounts You need to consider the 2012 Offshore Voluntary Disclosure Program (OVDP)

Taxpayers with undisclosed foreign accounts or 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. 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 ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and will become more available under the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (new IRC § 6038D).

From question 3 of Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers:

When a taxpayer truthfully, timely, and completely complies with all provisions of the voluntary disclosure practice, the IRS will not recommend criminal prosecution to the Department of Justice.

IR-2012-5, Jan. 9, 2012

WASHINGTON — The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and getright with us before we find you,” Shulman said. “We are following more leadsand the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up-front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

IRS Announced the Reopening of its Offshore Voluntary Disclosure Program

Lance Wallach

On January 9, 2012, the IRS announced the reopening of its offshore voluntary disclosure program (now in its third iteration) to assist people who have been hiding offshore accounts in becoming compliant with their tax liabilities. The 2012 offshore voluntary disclosure initiative (OVDI) offers reduced penalties for a taxpayer who failed to report non-us financial accounts and assets on an FBAR (IRS form TD F 90-22.1, "Report of Foreign Bank and Financial Accounts") and who failed to report income from those accounts and assets on his or her us income tax returns, but who comes forward before the IRS identifies them.

In 2009 and 2011, the IRS offered similar voluntary disclosure programs. The 2012 OVDI is a response to the success of the 2009 and 2011 programs and to the continued interest on the part of taxpayers and practitioners. Those who came forward after the 2011 OVDI, which ended on September 9, 2011, are eligible for the 2012 OVDI. Those who come forward under the 2012 OVDI can mitigate their risk of criminal prosecution. Unlike the 2009 and 2011 OVDI programs, the 2012 OVDI has no set deadline for an application. However, the IRS has indicated that the terms of the program could change at any time. Moreover, the IRS may decide to end the program at any time.

The civil penalty scheme under the 2012 OVDI is as follows: (1) a one-time 27.5 percent penalty on the highest aggregate annual balance in the unreported accounts during the look back period (an increase from the 20 percent penalty under the 2009 program and the 25 percent penalty under the 2011 program); and (2) a 20 percent accuracy-related penalty or delinquency (late filing and late payment) penalties on the amount of us income tax that should have been paid during the look back period on any unreported income. The look back period for the 2012 OVDI is eight years.

A taxpayer with offshore accounts or assets that, in the aggregate, did not surpass $75,000 in any calendar year covered by the 2012 OVDI qualifies for the 12.5 percent rate on the highest aggregate annual balance in unreported accounts (the same rate offered under the previous programs). A 5 percent rate may also apply in limited circumstances, including for a long-term non-US resident who earned a de minimis amount of US-source income and who has been compliant with his or her tax obligations in his or her country of residence.

The potential penalties that the IRS could impose on a person who does not come forward under the 2012 OVDI include the civil fraud penalty (75 percent of unpaid tax); penalties for failure to file various information returns (such as form 5471); and penalties for willful failure to file the FBAR (the greater of $100,000 and 50 percent of the foreign account balance). All of these penalties apply annually.

A taxpayer who participates in the 2012 OVDI must submit all original and amended tax returns and information returns (including FBARS) for the last eight years and must pay taxes owing, interest, the applicable one-time penalty on the highest aggregate annual balance in the unreported accounts, and the 20 percent accuracy-related penalty or delinquency (late filing and late payment) penalties. As was the case under the 2009 and 2011 programs, a person who believes that the applicable penalty under the 2012 OVDI is disproportionate may opt out of the program and instead undergo an examination in order to persuade the IRS to impose a lesser penalty.

The IRS recently indicated that it is currently developing procedures by which dual citizens and others who are delinquent in filing but who owe no us tax can come into compliance with US tax laws. On December 7, 2011, the IRS released Fact Sheet FS-2011-13, which provides guidance to us citizens who reside outside the United States and who have failed to file US tax returns and information returns, including FBARs. The fact sheet recommends that those taxpayers file returns for the previous six years and indicates that the IRS may consider reasonable-cause arguments for the waiver of penalties for failure to file US tax returns and FBARs.

In announcing the 2012 ovm, Commissioner Douglas H. Shulman warned taxpayers that the IRS is "following more leads and the risk for people who do not come in continues to increase." However, there are still many unanswered questions about the 2012 OVDI, particularly with respect to dual citizens and other non-residents who were unaware of their us tax and information reporting obligations. US citizens living in Canada should carefully consider their options for coming forward, including whether to proceed with the filing of six years of returns (as suggested by the fact sheet) if they have a reasonable cause for not filing previously.

We suggest filing for tax amnesty and then opt out. In that way you can fight the fines in appeals. In our opinion that is the best way to reduce your penalties. We also suggest that you use an ex IRS agent that was in the international or appeals division of the IRS. He should also be a CPA with years of experience.

If you do not opt out correctly you will have lots of problems.

Do not let your accountant learn on the job. The result is usually not good for you. If he knew what he was doing, you would not have this problem to begin with.

 Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies.  He is an American Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications.  For more information and additional articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us, lawyer4audits.com or call 516-938-5007.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.