U.S. taxpayers with undisclosed foreign financial accounts must understand that they have exposure to serious criminal and civil penalties that may not only threaten financial ruin, but also pose a very real risk of a lengthy prison sentence. Many individuals with current or previously undisclosed foreign financial accounts can utilize the voluntary process to avoid criminal sanctions and to mitigate civil penalties associated with the failure to report the existence of, and income earned on, a foreign account on income or estate tax returns, as well as for non-filing of an FBAR. Individuals who have previously failed to disclose foreign financial accounts may avoid serious liability by initiating a disclosure before the Internal Revenue Service. The manner and means of a voluntary disclosure along with the reporting positions are determined with great care by our firm. This is done by a careful analysis of each client’s relevant facts of the particular case.
IRS Offshore Voluntary Disclosure Program (OVDP)
The Internal Revenue Service has an Offshore Voluntary Disclosure Program (“OVDP”) aimed at encouraging taxpayers to come forward with voluntary disclosures about previously undeclared accounts. A qualified U.S. taxpayer participating in this initiative can potentially avoid criminal prosecution and pay civil penalties that while substantial, are well below that which the Internal Revenue Service and the Department of Justice could, by law, otherwise seek to collect. Generally, participants will be subject to a miscellaneous offshore penalty of 27.5 percent imposed on the highest aggregate value of their undisclosed offshore assets. The miscellaneous offshore penalty is increased to 50 percent for participants who have undisclosed offshore accounts with certain financial institutions. The offshore penalty is assessed on all foreign financial accounts and assets acquired as the result of “noncompliance.” The Internal Revenue Service gives no discretion to its agents to reduce the miscellaneous offshore penalties, they have the opportunity to “opt out” of the program, in which case the Internal Revenue Service will evaluate the case. Finally, the participant will be required to file or amend their tax returns and FBARs and pay all delinquent taxes, interest, and penalties for up to the eight years prior to the submission of the OVDP application. Many persons holding foreign financial accounts have mutual funds which, under federal tax law, are “passive foreign investment companies,” also known as “PFICs.” PFICs are assessed an extremely harsh taxing regime under Internal Revenue Code Section 1291. Through the OVDP, participants are eligible for a favorable “mark to market” taxing regime which offers a tremendous opportunity for tax savings.
The tax attorneys at Diosdi Ching & Liu, LLP have literally represented hundreds of individuals through the OVDP and OVDP opt-out programs. We carefully analyze each submission and aggressively represent our clients through the OVDP process. If you have an undisclosed foreign financial accounts or have had an undisclosed foreign financial account or accounts, contact our firm for a confidential attorney-client privileged consultation.
Streamlined Compliance Procedures Program
In July of 2014, the Internal Revenue Service introduced known as the Streamlined Compliance Procedures. Unlike, the OVDP, the Streamlined Compliance Procedures does not offer any protection from criminal prosecution. Under the Streamlined Compliance Procedures, participants will be subject to significantly reduced penalties as compared to the OVDP. Instead of a 27.5 percent penalty, Streamlined Compliance Procedures participants will be subject to a five percent penalty on the highest aggregate account balance on their undisclosed account(s) for the three previous years of non-compliance.
Any individual participating in the Streamlined Compliance Procedures must submit a certificate to the Internal Revenue Service. The Certificate must include the following:
1. Participants must certify that they failed to report income for one or more foreign financial assets during one or more of three prior years;
2. Participants must certify that their failure to report and pay tax with respect to offshore financial assets was “non-willful.” In particular, participants in the Streamlined Compliance Procedures must certify the following statement:
“I recognize that if the Internal Revenue Service receives or discovers evidence of willfulness, fraud, or criminal conduct, it may open examination or investigation that could lead to civil fraud penalties, FBAR penalties, information return penalties, or even referral to Criminal Investigation.”
Participants in the Streamlined Compliance Procedures are required to certify under penalty of perjury that failure to report offshore accounts was due to non-willful conduct. The Internal Revenue Service defines non-willful conduct as the conduct that is “due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
In addition to the five percent penalty, any participant of the Streamlined Compliance Procedures must pay income taxes and interest attributable to omitted offshore income for the three final years of noncompliance. It is important to note that individuals participating in this program must have filed income tax returns for the three previous years (if returns were required to be filed). Participants are also required to submit six years of past FBARs electronically and identify that the submission is being made under the Streamlined Compliance Procedures.
Some tax practitioners have touted the benefits of the Streamlined Compliance Procedures as a way to decrease the risk of serious civil penalties and the probability of criminal prosecution. Any taxpayer with previously undisclosed foreign financial accounts and income must seriously consider the benefits and risks associated with making a disclosure through the Streamlined Compliance Procedures. The Internal Revenue Service has made it clear that individuals participating in the Streamlined Compliance Procedures are not entitled to the same protections as those taxpayers who enter the OVDP. In some cases, participants of the Streamlined Compliance Procedures could discover that such a disclosure may result in the worst possible outcome, they made a disclosure to the Internal Revenue Service without the protections the OVDP. At Diosdi Ching & Liu, LLP, we carefully review each of our clients’ facts and circumstances to determine if they are a good candidate for the Streamlined Compliance Procedures. If a decision is made to participate in the Streamlined Compliance Procedures, we carefully represent our clients through the entire process.
Qualified Quiet Disclosures
In certain circumstances, individuals can make disclosures to the Internal Revenue Service outside the OVDP and Streamlined Compliance Procedures and avoid the associated penalties with these programs. In appropriate circumstances, our firm discloses previously undisclosed foreign financial accounts, assets, and foreign source income to the Internal Revenue Service without agreeing to a miscellaneous offshore penalty or any other civil penalties. In the proper circumstances, a qualified quiet disclosure can significantly reduce the assessment of penalties and it will begin the running of the statute of limitations for income tax liability and penalties. Qualified quiet disclosure may be an option for taxpayers whose cases exhibit no evidence of criminal or fraudulent activity. We carefully analyze each client’s facts and circumstances to determine if they may be a good candidate to make a disclosure outside the OVDP or Streamlined Compliance Procedures. We also aggressively represent our clients through the entire disclosure process.