The 2012 OVDI, which is still open, is patterned after the 2011 OVDI, but increases the maximum Report of Foreign Bank and Financial Accounts (FBAR)-related penalty from 25 percent to 27.5 percent of the highest account value at any time between 2003 and 2010. The 2012 OVDI does not have a stated expiration date. 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.
Under the Bank Secrecy Act, U.S. residents or a person in and doing business in the U.S. must file a report with the government if they have a financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year. Taxpayers comply with this law by reporting the account on their income tax return and by filing Form 90–22.1, the FBAR. Willfully failing to file an FBAR can be subject to both criminal sanctions (i.e., imprisonment) and civil penalties equivalent to the greater of $100,000 or 50 percent of the balance in an unreported foreign account — for each year since 2004 for which an FBAR wasn't filed.
The 2009 OVDP brought in at least 14,700 U.S. taxpayers (disclosing accounts in more than 60 countries) through the front door of IRS Criminal Investigation and untold thousands through a process of quietly amending returns and filing delinquent FBARs with the government. For eligible taxpayers who applied the OVDP provided the certainty of no criminal prosecution and civil penalty relief — they were required to pay back-taxes from 2003 to 2008, interest and a 20-25 percent penalty on the delinquent taxes. The IRS also imposed a 20 percent FBAR-related penalty equal to the highest aggregate value of the financial account between 2003 and 2008. In limited situations, the FBAR-related penalty could be reduced to five percent of the account value or $10,000 per tax year. If they got a great CPA with experience to help them, the fine was a lot less.
The 2011 OVDI, brought in an additional 12,000 eligible taxpayers who filed original and amended tax returns and agreed to make payments (or good-faith arrangements to pay) for taxes, interest and accuracy-related penalties. The 2011 OVDI FBAR-related penalty framework required a 25 percent “FBAR-related” penalty equal to the highest value of the financial account between 2003 and 2010. Only one 25 percent offshore penalty is to be applied with respect to voluntary disclosures relating to the same financial account. The penalty may be allocated among the taxpayers with beneficial ownership making the voluntary disclosures in any way they choose. . Participants in the 2011 OVDI also had to pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Subject to certain limitations, financial transactions occurring before 2003 were generally irrelevant for those participating in the OVDI. With good advice many people paid a lot less.
There are many considerations before a taxpayer should determine whether to pursue a voluntary disclosure of prior tax indiscretions. When reviewing the OVDP and the OVDI, many made decisions based on whether they could be considered a realistic candidate for a criminal prosecution referral by the IRS or prosecution by the Department of Justice. (If so, the determination to participate was relatively quick and easy). In other cases, the questions included:
- Was there a possibility of reducing that prospect by filing amended or delinquent returns and FBARs in lieu of a direct participation in the OVDP/OVDI?
- What would be the potentially applicable penalties upon an examination of such returns and FBARs?
- Could the government actually carry their burden of demonstrating that the taxpayer “willfully” violated the FBAR filing requirements?
- What would be the cost to the taxpayer of voluntary disclosure through OVDI versus remaining outside the program? Should they apply and then opt out?
Since the OVDI asserted an offshore penalty based on foreign financial accounts and asset valuations, for many with smaller financial account values the aggregate offshore penalty determination, even for multiple years, was actually less outside the OVDI.
The ability of a U.S. taxpayer to maintain an undisclosed, “secret” foreign financial account is fast becoming nonexistent. Foreign account information is flowing into the IRS under tax treaties, through submissions by whistle blowers, and from other taxpayers who participated in the 2009 OVDP and the 2011 OVDI who have been required to identify their bankers and advisers. Additional information will become available as the Foreign Account Tax Compliance Act (FATCA) foreign financial asset reporting (Form 8938 and new IRC § 6038D) become effective.
It is likely that the U.S. will require foreign financial institutions doing business in the United States to disclose account holders having relatively small accounts and earnings. There have been rumors of discussions regarding accounts having a high balance of the equivalent of $50,000 at any time between 2002 and 2010. U.S. persons having interests in foreign financial accounts should not find comfort in a belief that their foreign financial institution will somehow refrain from disclosing very small accounts in the current enforcement environment.
Taxpayers having undisclosed interests in foreign financial accounts must consult competent tax professionals before deciding to participate in the 2012 OVDI. Others may decide to risk detection by the IRS and the imposition of substantial penalties, including the civil fraud penalty, numerous foreign information return penalties, and the potential risk of criminal prosecution. Although the 2012 OVDI penalty regime may seem overly harsh for many, the decision to participate should include an economic analysis of the taxpayer's projected future earnings from funds held offshore. Some people have left the U.S. to try to avoid the fines.
Another option is to apply for amnesty and then opt out and go to appeals. We think that for most people this will result in paying a lot less taxes. According to a CPA who was in management for 37 years with the IRS international division you may want to first apply for amnesty to avoid the criminal prosecution. Then you should compare the taxes that you owe with the deal that you usually get in appeals. You go to appeals as a result of opting out. In all of the situations that this ex IRS agent has seen, opting out gets you a much better IRS deal. If you want to reduce your taxes by using this strategy you need someone who is an expert in it with years of experience. I suggest you use a CPA who was in the international division of the IRS. If he also had experience with the appeals division you have the perfect professional to help you. The person that I interviewed for this article has this experience, and has been successful helping people.
Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, abusive tax shelters, financial, international tax, and estate planning. He writes about 412(i), 419, Section79, FBAR, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Public Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as the AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, firstname.lastname@example.org or visit http://www.taxadvisorexpert.com.
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.