Life isn’t fair. Neither is the IRS’s most recent settlement initiative designed to entice taxpayers to proactively resolve their international tax non-compliance, such as failing to report foreign income, foreign accounts, foreign entities, etc. In both instances, some people win and some people lose, often with little or no regard to what is equitable. Among those basking in the benefits of favored status lately are certain Canadians, residing either in the United States or the homeland, who have neglected their tax-related obligations with Uncle Sam. Indeed, thanks to recent modifications to the offshore voluntary disclosure program (“OVDP”) and the introduction of a special “streamline procedure” for select expatriates, many Canadians are able to resolve their tax transgressions on terms vastly superior to those applicable to the masses. This is particularly true for persons with specific types of Canadian retirement plans. The article, “IRS Introduces Two Unique Remedies for U.S. Persons with Unreported Canadian Retirement Plans and Accounts,” which was published in the most recent edition of the International Tax Journal, analyzes the unique options available to Canadians.
Posted tagged ‘OVDI’
IRS Introduces Two Unique Remedies for U.S. Persons with Unreported Canadian Retirement Plans and AccountsFebruary 6, 2013
Detection Risk Continues To Grow As The IRS Expands Its Offshore Bank Account Investigation Into LiechtensteinJune 12, 2012
By: Dustin Covello
Late late year, we asked what’s next for foreign bank account holders after OVDI? Although the answer to this question continues to evolve, it is becoming increasingly clear that the risks of detection have only grown – and will continue to do so. The latest news on this front comes from Business Week, which reported Sunday that the IRS has requested account holder information from Liechtenstein’s second largest bank, LLB. Specifically, the IRS has asked for information pertaining to accounts holding $500,000 or more anytime since 2004. Current and former LLB account holders who continue to hold undisclosed offshore assets now have a rapidly closing window of opportunity to come into compliance before the IRS contacts them for an investigation. By coming forward voluntarily, an account holder reduces the chance of criminal prosecution and probably qualifies for the miscellaneous 27.5% penalty in lieu of potentially significantly higher tax and FBAR penalties.
LLB’s clients are likely not the only Liechtenstein account holders at significant risk of detection. Although the IRS’ previous investigation primarily targeted banks, there is anecdotal evidence that the IRS has also begun to pressure Liechtenstein advisors (e.g., lawyers, accountants, trust companies, and the like) to disclose their clients’ identities. Moreover, if Switzerland is any guide, the IRS will likely expand its Liechtenstein investigation to other banks after establishing a successful precedent with LLB’s likely forthcoming disclosure.
Given the ever-expanding scope of the IRS’ investigation (not to mention FACTA’s new financial-institution withholding and individual-reporting requirements), any person who previously chose not to disclose his or her offshore accounts should consider reexamining whether risking detection remains prudent. As of now, OVDI and other methods of coming into compliance — including quiet disclosures and prospective compliance — may still be reasonable choices. However, all of these options fall off the table if the IRS contacts a taxpayer before disclosure. Taxpayers in this position should strongly consider contacting an experienced tax advisor to discuss their options.
By: Dustin Covello
On February 14, the Financial Crimes Enforcement Network (FINCEN) issued Notice 2012-1, which extends the 2011 and 2012 FBAR filing deadline for certain individuals to June 30, 2013. The notice extends relief previously granted by FINCEN to employees and officers with signature authority over bank accounts owned by subsidiaries of certain regulated entities (e.g., banks, commodity traders, and investment advisors). See Notice 2012-1; Notice 2011-1; Notice 2011-2; 31 C.F.R. § 1010.350(f)(2).
For those keeping score, the government has tinkered with the FBAR filing requirements and deadlines at least seven times in the last three years, each time for different categories of FBAR filers, and each time instituting a different filing deadline. A quick review: Prior to 2008, the FBAR filing requirements were only described thoroughly in the instructions to the FBAR form itself. As a result, many persons obligated to file FBARs simply did not know of this obscure requirement. In 2008, the IRS announced that it intended to enforce the FBAR fling requirement more vigorously. However, given the obscure and ambiguous “signature authority” and “commingled fund” definitions in the FBAR instructions, filers remained confused even after the IRS publicized more vigorous enforcement. Recognizing the ambiguity, the IRS began issuing notices that eliminated or suspended the filing requirements for certain filers for various amounts of time. See Notice 2009-62, Notice 2010-23. These notices targeted limited categories of filers, but separately, as part of OVDI, the IRS announced that all filers who failed to file earlier FBARs could file without penalty, provided that they owed no income tax. Then, the IRS pushed back that deadline after Hurricane Irene. (more…)
Following the release of Ann and Mitt Romney’s tax returns, the news media and political commentators of all stripes have – to paraphrase Arlo Guthrie – detected, neglected, selected, rejected, and inspected those returns for a variety of commercial and political purposes. As expected, the return shows substantial income, largely from passive investments.
One of the most interesting aspects of the Romneys’ returns – from a tax practitioner’s perspective – is the geographic location of a significant portion of their investments. As MSNBC reported:
His 2010 return shows a number of foreign investments, including funds in Ireland, Switzerland, Germany and Luxembourg. Most of Romney’s vast fortune is held in a blind trust that he doesn’t control. A portion is held in a retirement account.
Romney’s advisers acknowledged Tuesday that Romney and his wife, Ann, had a bank account in Switzerland as part of her trust. The account was worth $3 million and was held in the United Bank of Switzerland, said R. Bradford Malt, a Boston lawyer who makes investments for the Romneys and oversees their blind trust, which was set up to avoid any conflicts of interest in investments during his run for the presidency.
For tax practitioners, this excerpt poses the natural question: have the Romneys filed foreign bank account reports (“FBARs”), which have been the subject of much media attention in recent weeks? The answer might not be as straightforward as it would initially seem. (more…)
Fox Business invited me to appear yesterday on “After The Bell” with Liz Claman and David Asman to discuss (i) the IRS reopening the disclosure initiative for offshore bank accounts and (ii) the ongoing debate about whether Congress should implement a corporate repatriation holiday. A link to the video is below the fold. (more…)
IRS Reopens Offshore Voluntary Disclosure Initiative (OVDI) For Delinquent FBAR Filers: 27.5 Percent PenaltyJanuary 10, 2012
The IRS announced yesterday a reopening of its 2011 offshore voluntary disclosure initiative (“OVDI”). This program will have essentially the same terms as the 2011 OVDI, but with a penalty rate of 27.5 percent (rather than 25 percent) of the highest account balance during the period covered by the initiative. The program requires filing eight years of amended tax returns and unfiled FBARs and the payment of tax, interest and a possible accuracy-related penalty on unreported income as well as the above-mentioned lump-sum penalty. In certain cases, a reduced penalty for failure to file FBARs is available. Unlike the prior initiatives, the reopened OVDI has no deadline; however, the government can always choose to impose a deadline or terminate the program at its discretion.
See the announcement at the IRS website here and “How to Make an Offshore Voluntary Disclosure” here. The IRS’ Frequently Asked Questions page provides significant guidance to determine whether individuals are eligible for OVDI. (more…)
Over the weekend, a variety of Canadian news sources (see, e.g., the Financial Post and the Edmonton Journal) reported on anticipated guidance from the IRS, which would result in the waiver of penalties on certain U.S. citizens living in Canada for past failures to file Form TD F 90-22.1, commonly known as the “FBAR.” According to the news reports, the IRS will waive failure-to-file penalties for such individuals who file delinquent tax returns and FBARS so long as the individual owes no taxes. In addition, taxpayers who were unaware of the FBAR filing requirement will be able to file delinquent reports and not be penalized so long as they can demonstrate reasonable cause in a disclosure statement accompanying the delinquent forms. At this point, it remains unclear how many years of tax returns and FBARs would be required to participate in this new opportunity. Interestingly, according the articles, taxpayers who participated in (and paid penalties under) the 2009 and 2011 offshore voluntary disclosure initiatives (OVDIs) would be permitted to opt out and reapply for the new zero-penalty offer. (more…)
For taxpayers who entered the IRS’s second Offshore Voluntary Disclosure Initiative (“OVDI”) prior to August 31, 2011, November 29th marked the end of the extended deadline that some taxpayers requested for submitting all of the materials included in the disclosure (e.g., amended returns, FBARs). Coincidentally with the timing of this deadline, many individuals who only recently learned of their reporting obligations (or, in some cases, of the existence of their accounts in the first place) are asking themselves what they can do now, having missed the opportunity to participate in the OVDI. (more…)
Apparently, there are a large number of U.S. citizens living outside the United States as well as a large number of individuals who are dual citizens of the United States and their country of residence (estimated to be in the millions). Judging from the phone calls that I have been receiving from my contacts at foreign law and accounting firms, a large number of them have recently become aware of the IRS Offshore Voluntary Disclosure Initiative (“OVDI”) providing reduced penalties for U.S. citizens who come forward to report previously undisclosed foreign financial accounts.
The deadline for participating in the program – August 31, 2011 – is rapidly approaching so U.S. citizens living abroad, including dual U.S. citizens, must decide immediately whether to participate in the program. Many of these individuals have not filed U.S. income tax returns and have not filed Treasury Forms TDF 90-22.1, more commonly knows as the FBAR, to report interests in foreign financial accounts.
A significant number of these individuals appear to be getting advice to make so-called “quiet disclosures.” An individual making a quiet disclosure does not participate in the IRS’s OVDI, but merely files delinquent or amended income tax returns and delinquent FBARs. The hope is that the IRS will not discover and audit the taxpayer, or if the IRS does audit the taxpayer, that the taxpayer will qualify for lesser penalties that apply to non-willful violations of the applicable income tax and FBAR provisions.1
For many, following the advice to make quiet disclosures may not be the best approach. The IRS has created a special reduced penalty regime applicable to U.S. citizens living abroad who have complied with their tax obligations and filings in their country of residence. For individuals that qualify, the IRS will apply a special 5 percent penalty for failing to report the foreign financial accounts if the individuals make a voluntary disclosure under the OVDI. The penalty applies to the highest balances in the individual’s foreign financial accounts for the period from 2003 through 2010 so the penalty, although reduced, may still be quite substantial for some. Nevertheless, the 5 percent penalty pales in comparison to the penalties that might otherwise apply.
The IRS has indicated that it will be looking for individuals who make quiet disclosures and will audit those individuals. Also, the IRS has stated that it will consider criminal prosecution of those individuals when appropriate. If criminal prosecution is not warranted, the IRS said that it will impose the maximum penalties that apply, including the penalty for willfully failing to file an FBAR — the greater of $100,000 or 50 percent of the amount in the foreign financial account for each violation.
U.S. citizens living abroad (including dual citizens) are taking a significant risk in filing quiet disclosures, particularly if they would otherwise qualify for the reduced 5 percent penalty under the IRS’s OVDI. They may find out that their quiet disclosures will not be “quiet” after all and they may face much harsher penalties when the IRS discovers and audits them.
Going quietly into the night may not be the best choice.
1 The individuals may also have been advised that the FBAR penalty can be waived if that taxpayer had reasonable cause for failing to file the FBARs and all income from the foreign financial accounts was reported. For those individuals living abroad who have not filed U.S. tax returns, the waiver of the penalty would not apply. The penalty for a non-willful failure to file an FBAR is $10,000 per violation.
As part of its current Offshore Voluntary Disclosure Initiative (“OVDI”), the IRS is strongly encouraging taxpayers against making so-called “quiet” disclosures, in which taxpayers file amended tax returns, pay the applicable taxes and interest, and hope that the IRS doesn’t identify them for further investigation. These disclosures are described as quiet because they involve neither alerting the IRS to the amended returns nor offering to pay any applicable penalties. Because taxpayers may rightfully perceive the 25-percent penalty required to participate in OVDI as a rather expensive pound of flesh, taxpayers holding undisclosed offshore accounts may conclude that making quiet disclosures, rather than entering OVDI, is a more palatable method to come into tax compliance. (more…)