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.

Common IRS Letters and Notices | Bellevue Tax Lawyer

If you received a letter from the IRS, don't panic, and please refer to my previous post on what to do when you receive a letter from the IRS.  

The most common notices (letters) mailed by the IRS are simply requesting information that is missing from your return.  These notices are mailed because you didn't include a schedule, forgot to sign the return, or did not include forms showing withholding such as a 1099 or W2.  If you receive one of these letters, return the missing information and the issue should be resolved.

Other common notices include matching and notification notices.  Notifications are mailed when a change is made to your return and no action is required if you agree with the changes.  

Matching notices occur when the information you provide does not match the information reported to the IRS by employers and financial institutions.  If the numbers in your return do not match, the computer will correct the discrepancy and mail a letter to inform you that a change has been made to your return.  Double check the changes to see if you (or the IRS) has made a mistake.  If the letter is correct, follow the instructions in the letter and respond accordingly.  If you do not agree with the changes, a phone call to the IRS is a good place to start, and if that does not correct the issue you may want to contact a tax professional.

Other letters include audit notices, reminder notices, final reminder notices, and notice of intent to levy.  I will discuss audit notices in one my next posts.  If you receive an audit notice you should contact a tax professional immediately.  The reminder notice occurs when the IRS sends you a notice of a balance due and you did not make a payment.  This is follow by final reminder notice letter and then a notice of intent to levy.

The notice of intent to levy is the most serious notice.  If you ignore this letter, the IRS usually will attempt to garnish wages, social security, levy bank accounts, and place a lien on your assets.  Respond to the letter immediately, either by mailing a response to the address listed on the notice or calling the IRS at the number listed on the first page of the letter.  There are ways to stop a levy, lien, or garnishment and I will discuss these in more detail in another post.

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.  If you have received a letter from the IRS or have questions about a letter received, contact a tax professional.

What to do when you receive an IRS Collections or Examinations (Audit) Letter | Bellevue Tax Lawyer

Over the next couple of posts I am going to talk about the IRS examinations (audits) and collections process.  These are IRS initiated compliance efforts, unlike my previous post when I discussed the OVDI, a self-reported initiative the IRS is currently offering.

A good place to start this series is to talk about what to do when you receive a letter from the IRS.  The audit and collections process usually starts with a letter and these rules will help to insure the best possible result in your IRS dispute.

In my next post, I will talk about the more common IRS letters sent and what to expect after you receive the letter.  If you receive a Statutory Notice of Deficiency, do not ignore this letter!  This is your last chance to contest the IRS tax assessment.  You have 90 days to respond to this letter and the only response is a petition to the US Tax Court.  

I know a couple of these rules sound obvious but ignoring them cause of many of the problems that tax attorneys regularly have to resolve. The rules are: Don't Panic, Read the Letter; Check the Deadlines; Confirm the Statements are Correct; and Don't Sign unless you are sure.

1a) Don't Panic


Don't panic, letters from the IRS are common and are often quickly and easily resolved.  Before you start to hyperventilate, read the letter and see what it actually says.


1b) Read the Letter

I know this sounds obvious but this rule and rule number 2 are easily the most important rules on this list.

The letters you receive will tell you what the IRS is claiming; make sure you read it carefully.  The letter will say what type of letter it is (this matters and will be discussed in more detail in a later post), how much the IRS claims you owe, it will include dates to respond by, and usually a place to sign if you agree to the changes made.  If you do not carefully read the letter you can easily miss an important detail.

2) Check Deadlines

Missed deadlines are the easiest way to sabotage a positive outcome of your IRS dispute.  Every letter includes respond by dates.  Do not ignore theses dates; especially if the letter is a Statutory Notice of Deficiency!

If you do not respond by the dates listed the IRS will assume that you agree to the changes and proceed to the next step of the process.  The next step can include the wrongful denial of deductions and credits, and the assessment of taxes and penalties.

3) Confirm the Statements are Correct

If the letter you received is from Automated Collections Systems (ACS), the letter will have a list of items changed.  The easiest way to explain ACS is that it is a computerized audit.  ACS will compare the items reported on your tax returns versus what was reported to the IRS via W-2s, 1099s, if multiple people claimed a dependent, etc...   If there is a discrepancy, a letter is automatically generated and sent to the tax payer.  Check these statements against what you reported.  If you are sure that the IRS is correct, or if you made a simple computational error, just pay the tax and the issue is over.  If not, get your records in order and call the IRS or contact a tax professional.   

An initial examinations (audit) letter will request more information for the tax year and list the forms/schedules in question, but generally will not include numbers.  If you receive an audit letter, you should contact a tax professional immediately.

4) Don't Sign Unless you are Sure

This one is pretty self-explanatory: make sure you know what you are signing.  Most of the signature lines in IRS letters provide that you consent to the changes made to your taxes and agree to pay the liability.  Do not sign the letter unless you are sure it is correct.

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.  If you have received a letter from the IRS or have questions about a letter received, contact a tax professional.

Bellevue Tax Lawyer | The 2011 OVDI, FBAR Amnesty

If you read my previous post on FBARs, you know that if you have a foreign financial account with a value of $10,000 or more it is likely that you have a filing requirement for this account.  And, if you failed to file the FBARs there are significant penalties associated with this mistake.  The penalties range from $0 to $100,000+ (per year) and the possibility of criminal prosecution.

These penalties are significant and in some circumstances can exceed the value of the accounts.  For example: John had three accounts valued at $250,000 (to make my life easier, we will assume this was not an interest bearing account) and failed to report them on the FBAR for six years.  The statute of limitations for FBAR civil penalties is six years and five years for criminal charges.  If John could prove that the failure to the FBAR was non-willful the penalties would range from 0 to $60,000.  If the failure to file was willful the penalties would be $750,000 and possible criminal prosecution.

Earlier this year the IRS announced the 2011 Offshore Voluntary Disclosure Initiative (FBAR Amnesty, OVDI).  The OVDI gives people a chance to come clean about these accounts to the IRS for a penalty, of course.  The penalty is 25% of the highest aggregate value of your foreign accounts during any of the years covered, 2003-2010.  If you have less than $75,000 during all of the years the penalty is 12.5%.  A 5% penalty is available, but you probably won’t meet the requirements, so I won’t go into details.  If you are accepted and complete the OVDI the IRS will not recommend criminal prosecution of your case to the Department of Justice and the willful non-disclosure penalties will not apply.

If you have properly reported all of the income associated with the foreign accounts but failed to file the FBAR the IRS states that it will not assess penalties.  But, if there was any income associated with the accounts (even a few dollars) and you didn’t report it, you will not qualify for this exception.  There are also a few exceptions listed that exclude certain types of accounts.   

The 2011 OVDI borders on unjust.  The requirements are inflexible and the majority of the people that will use this initiative are honest people that didn’t know they had to file until hearing about the program.  The only people it truly benefits are the ones that have been hiding foreign income and assets.  However, it is better than the alternative of getting caught for not reporting.

The final deadline for the OVDI is August 30th, 2011.  Please note, this is the final deadline and it will take more than a few days to properly prepare all of the documents required for the OVDI.

If you are interested in participating in the OVDI, please 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.