The tax attorneys at Nardone Law Group routinely advise Ohio taxpayers about the Internal Revenue Service’s Offshore Voluntary Disclosure Program. Whether or not the Offshore Voluntary Disclosure Program is beneficial to a particular taxpayer depends upon that particular taxpayer’s facts and circumstances. For example, there are instances in which Nardone Law Group may advise a taxpayer not to pursue the Offshore Voluntary Disclosure Program. This article discusses one situation in which the Offshore Voluntary Disclosure Program may not make sense.
What is the Offshore Voluntary Disclosure Program and What is the Penalty Structure?
The IRS’ 2012 Offshore Voluntary Disclosure Program provides taxpayers with undisclosed foreign accounts or foreign entities the opportunity to become compliant with United States tax laws while limiting exposure to civil penalties and criminal prosecution for nondisclosure. Taxpayers who have undisclosed foreign accounts or entities should make a voluntary disclosure because it allows them to become compliant with federal tax law, eliminate significant civil penalties, and generally avoid the risk of criminal prosecution. Additionally, making a voluntary disclosure enables taxpayers to calculate the total cost of resolving their offshore tax matters with a reasonable degree of confidence. Taxpayers who do not enter the Offshore Voluntary Disclosure Program risk discovery by the IRS, assessment of significant penalties—including penalties for failure to file foreign information returns and fraud—and potential criminal prosecution.
Generally, taxpayers who participate in the 2012 Offshore Voluntary Disclosure Program must pay a penalty equal to 27.5% of the highest aggregate balance in their foreign bank accounts or entities, or the value of their foreign assets during the period covered by the voluntary disclosure. But, in certain circumstances, some taxpayers may qualify for a reduced penalty of 12.5% or even 5% of the highest aggregate balance in their foreign bank accounts or entities, or the value of their foreign assets, as opposed to the general 27.5% penalty. Moreover, under the Offshore Voluntary Disclosure Program, taxpayers must pay a 20% accuracy-related penalty on the full amount of underpayments of tax, as well as failure to file and failure to pay penalties, if applicable.
Opting Out of the Offshore Voluntary Disclosure Program
Because the 27.5% offshore penalty takes the place of various penalties otherwise imposed outside the Offshore Voluntary Disclosure Program, there may be cases where a taxpayer making a voluntary disclosure would owe less if the Offshore Voluntary Disclosure Program did not exist. This is because certain penalties imposed outside the Offshore Voluntary Disclosure Program:
1) May not apply or may apply at a lesser rate to some taxpayers due to mitigating circumstances; or
2) May not apply to the large base to which the 27.5% Offshore Voluntary Disclosure Program penalty applies (accounts, entities, and assets).
For example, assume a U.S. taxpayer held a foreign account with a high balance of $1 million, which generated income of $100,000 each year for the past 5 years. The taxpayer mistakenly assumed he only had to report the income on his foreign tax return, and did not report any of the income on his U.S. tax return. The taxpayer also did not report this foreign account to the IRS on a Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (“FBAR”), as is required for individuals with a financial interest in or signature authority over a foreign financial account. After application of the foreign tax credit for taxes paid to the foreign country, the taxpayer had no tax deficiency for the unreported income, as reflected on the taxpayer’s amended U.S. individual income tax returns.
The Offshore Voluntary Disclosure Program penalty in the above example is $275,000 (27.5% of $1 million). But, if the taxpayer in this example decides to opt out of the Offshore Voluntary Disclosure Program, the penalty for failing to file an FBAR:
1) May not be imposed, if the failure to file an FBAR was based on reasonable cause (i.e., based upon the advice of a tax professional); or
2) May be $10,000 per account per year, if the failure to file an FBAR was not willful (here, $50,000).
Thus, as you can see, opting out of the Offshore Voluntary Disclosure Program may be the best option for some taxpayers. But, it is important to note that the above example is a simplified scenario. In many instances, taxpayers will be facing additional penalties for the following: (i) failure to file certain other required information returns and forms; (ii) failure to file income tax returns; (iii) failure to pay the amount of tax shown on an income tax return; and (iv) accuracy-related penalty on underpayments of tax due. Moreover, taxpayers should understand that opting out opens the case up for examination of all relevant years and issues. Consequently, if issues that were not disclosed by the taxpayer are discovered under a full scope examination, those issues may be subject to review by IRS Criminal Investigation. Thus, it is important to have an experienced tax attorney evaluate your case to decide whether the Offshore Voluntary Disclosure Program is best for you, or whether opting out of the Offshore Voluntary Disclosure Program makes more sense.
Nardone Law Group represents businesses and individuals in federal and state tax issues, including the Offshore Voluntary Disclosure Program. If you have an undisclosed foreign account or entity, you should contact an experienced tax attorney today. Nardone Law Group’s tax lawyers and professionals have vast experience representing clients before the IRS. Our experienced tax lawyers will thoroughly review your case to determine what options and alternatives are available, including the Offshore Voluntary Disclosure Program. Contact us today for a consultation to discuss your case.