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FBAR OVDI Offshore Tax Issues


     By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction Expert Witness

PhoneCall Lance Wallach at (516) 938-5007


In 2012 the IRS announced another offshore voluntary disclosure program (the 2012 OVDI). These programs offer reduced penalties in exchange for taxpayers’ voluntarily coming into compliance before the IRS is aware of their prior tax indiscretions.
The 2012 OVDI 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 IRS can terminate it at any time as to specific classes of taxpayers or as to all taxpayers. 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 OVDI program.
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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. Potentially applicable penalties are identified in a series of Frequently Asked Questions available at irs.gov. 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.

Under the 2011 OVDI, taxpayers who are foreign residents and who were unaware they were U.S. citizens may qualified for a reduced five percent FBAR-related penalty (FAQ 52). Others qualified for the five percent penalty if they:

a. Did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account);
b. Have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account-holder information such as a change in address, contact person, or email address;
c. Have, except for a withdrawal closing the account and transferring the funds to an account in the United States not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and
d. Can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). For funds deposited before January 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it is presumed that they were.

Taxpayers whose highest aggregate account balance (including the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) in each of the years covered by the 2011 OVDI is less than $75,000 qualified for a 12.5 percent FBAR-related penalty (FAQ 53). IRS examiners have no authority to negotiate a different FBAR-related penalty.

FBARs for 2011 were due on June 30, 2012, without extension. Taxpayers, who reported and paid tax on all their taxable income but did not file FBARs, should not participate in the 2012 OVDI but should merely file the delinquent FBARs with the Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621 (and attach a statement explaining why the reports are filed late). Under the 2011 OVDI, the IRS agreed not to impose a penalty for the failure to file the delinquent FBARs if there were no underreported tax liabilities and taxpayers filed the FBARs by September 9, 2011 (FAQ 17). Presumably, the IRS will follow the same course under the 2012 OVDI since those with no underreported tax liabilities are not truly within the range of taxpayers the IRS is trying to identify.

Under the 2011 OVDI, taxpayers were not to be required to pay a penalty greater than what they would otherwise be liable for under the maximum penalties imposed under existing statutes (FAQ 50). A similar provision in the 2009 OVDP has caused considerable frustration among taxpayers and their representatives. The understanding of potentially applicable penalties may differ greatly in the eyes of a taxpayer as compared to an examiner. Anyone considering an offshore voluntary disclosure submission must carefully examine all potential civil penalties and evaluate the risk of criminal prosecution.

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?

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 whistleblowers, 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.
Those who think too long may be sorely surprised at the high level of ultimate cooperation of their institution with the U.S. government.

Taxpayers having undisclosed interests in foreign financial accounts must consult competent tax professionals before deciding to participate in the 2012 OVDI. I suggest using an ex IRS agent who worked in the section of the IRS that worked with international tax. He should also be a CPA. I get lots of phone calls from people who have been helped by their own accountants. Most of the help got the taxpayers into trouble. 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.

Participating taxpayers may well benefit by repatriating foreign funds with limited earning potential into a depressed U.S. economy and many business opportunities. If discovered before any voluntary disclosure submission, the results can be devastating. Waiting is not a viable option.

Another option is applying to join the program and then opting out. You then have the advantage of taking your case to appeals. In that way you may end up paying a lot less in taxes. If you do this make certain that the CPA that helps you also had appeals experience. If that CPA was with the IRS in the international division and also was with the IRS in the appeals division that would be the man to use. I happen to know such a CPA and he has been very successful for his clients.

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.

ABOUT THE AUTHOR: Lance Wallach
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.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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