Wednesday, July 27, 2011

Bellevue Tax Lawyer | The 2011 OVDI, FBAR Amnesty, Part 2

After my last post on the 2011 OVDI, I have received a number of questions about it and wanted to follow up with answers to a few of the common questions.

The OVDI and the process surrounding it are surprisingly complex.  As the OVDI deadline is quickly approaching, if you are interested in entering the 2011 OVDI, please immediately contact a Tax Professional

What is the OVDI Process?

A quick, and very brief, explanation of OVDI process is: file the initial OVDI letter, then complete the OVDI packet which includes: amended returns, corrected FBARs, statute of limitation waivers, account information, and a payment for the taxes, and penalties (20% on the back taxes, and the OVDI penalty).  The final part is to wait for a confirmation letter stating that your OVDI has been accepted.  The OVDI letter starts the process and includes information about the foreign accounts and assets.

Extensions

Originally, the IRS had a hard deadline for the 2011 OVDI of August 31, 2011.  However, in June the IRS amended the rules and will permit up to a 90 day extension to file the complete OVDI packet if the taxpayer has made a good faith effort to comply with the filing requirements.  The request must be filed on or before August 31 and the taxpayer should already be accepted into the OVDI.

Land, Artwork, other valuable assets

The IRS has two stances on foreign owned assets (land, artwork, etc...):

1) If the land produced income and the income was not reported, the value of the land will be included in the penalty.  Thus, if you lease or rent foreign asset/s and did not include the income produced by the asset/s, you will have to amend your tax returns to include the income, pay the taxes, and pay the penalty on the value of the asset/s.

2) If the land was purchased with non-compliant funds it will be included in the penalty.  Non-compliant funds means that if the money used to purchase the land should have been subject to US tax the value of the property will be included in determining the OVDI penalty.

If the assets are not included in one of the two statements above it will probably be excluded when determining the penalty.

Retirement Accounts

These are tricky and there are a few types of foreign retirement accounts that might not be included in the penalty, but the majority of foreign retirement accounts are required to be listed on the FBAR and the income associated with the account is not tax exempt (reportable income).  These accounts will, generally, be included in determining the penalty.

Foreign Entities: Trusts, Partnerships, Corporations, Etc...

In addition to failing to report foreign financial accounts, the 2011 OVDI permits taxpayers to report foreign entities for which the taxpayer had a reporting requirement.

The reporting requirements for foreign entities are complex and contain too much information to list here but I will give a brief rundown of them.

If you own an interest in a foreign business that you purchased through a US financial institution, the reporting requirements are probably satisfied.

If you directly, indirectly, or constructively own 10% of the value or vote of a foreign business, or if you transferred $100,000 of cash or property to a foreign partnership, you have a reporting requirement.

If you have any interest or transferred money to a foreign trust, you, almost certainly, have a reporting requirement.

The penalties for failing to report a foreign entity are significant, if you think you have a reporting requirement related to one contact a tax professional.

As with everything related to the IRS, it is difficult to provide comprehensive information related to taxes on the web.  Please do not rely on this article without consulting your tax professional.

2 comments:

  1. Hi...can you please explain what does ":Non-compliant funds" mean?

    if I purchased real estate with home loan in a foreign country (100% paid by the bank) and paid the mortgage by transferring after tax US funds to my bank in foreign country (which is unreported) do i have to include the value in 25% penalty calculation? my interest income in foreign back is <$100

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  2. I can't say with certainty, but I think that if you can show that you transferred enough funds throughout the year, you may have an argument that the property was purchased with compliant funds and exempt from the penalty computation. The argument would be stronger if you transferred the funds monthly and can show that it went directly towards the payment of the mortgage.

    One caveat, however, is that if you have a mortgage in a foreign currency the monthly payment can trigger currency gains under section 988. But, I'm not sure this would cause the funds/property to be non-compliant.

    Please do not rely on this information without consulting your tax professional. If you have any questions, please do not hesitate to contact me directly.

    -AR

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