Friday, November 27, 2015

Disclosing Foreign Accounts -- Streamlined Domestic Offshore Procedures (SDOP) | Bethesda Tax Lawyer

In addition to the OVDP, the IRS offers the Streamlined Filing Compliance Procedures. These procedures consist of two programs, one for US tax residents/citizens living in the United States (Streamlined Domestic Offshore Procedures), and a separate program for US tax residents living abroad (the Streamlined Foreign Offshore Procedures).  This post will discuss the domestic procedures.  

Eligibility for SDOP

To enter the SDOP, the IRS requires that a taxpayer: 
  1. Is a US tax resident or citizen who resides in the United States; 
  2. Has filed tax returns for the previous three years; 
  3. Has not reported income from foreign accounts, assets, entities, etc.;
  4. Has not reported the said foreign assets on the FBAR and other required informational federal tax returns; and
  5. She must certify that the failure to report these assets was due to non-willful conduct. 
The general concern with entering the SDOP is that the taxpayer must certify under the penalties of perjury that her non-reporting of foreign assets was non-willful. Additionally, entrance into the SDOP does not provide immunity from criminal prosecution. 

Willfulness

Entry into the SDOP requires taxpayer certification, under the penalties of perjury, that the failure to report foreign accounts/assets was due to non-willful behavior. The IRS defines non-willful conduct as "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." While this definition seems pretty straight forward, it is very nuanced. Moreover, the IRS has intentionally not provided additional guidance on how to interpret the definition, nor has it provided examples of this behavior.  

Another complication to this definition is that it does not address willful blindness.  Willful blindness in the simplest of terms means that a taxpayer should have known to research the filing requirements, but failed to make this inquiry. The test for willfulness is a very fact and circumstances based analysis requiring careful judgment. I will write a separate post about willfulness in a few weeks.      


Required Documents for Entry into the SDOP

  1. Amended tax returns for the three most recent tax years that includes any unreported foreign income and unfiled informational returns; 
  2. The six previous years of FBARs; 
  3. Form 14654; Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures; and
  4. A check for any unpaid taxes and interest from the amended returns and a separate check for the offshore penalty. 

Penalties

  1. 5% penalty based upon the year-end balances of the foreign accounts and assets. 
  2. Unlike the OVDP, the SDOP does not assess penalties on the unpaid taxes.

Dealing with offshore accounts can be a complicated matter, and not selecting the correct disclosure method could have significant long-term repercussions on penalties.  For a free consultation on these and other tax-related matters, please contact 
The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

Monday, November 9, 2015

Disclosing Foreign Accounts -- Disclosing Foreign Accounts -The OVDP | Bethesda Tax Lawyer

The IRS created four programs to resolve your undisclosed foreign accounts and entities for individuals.  These programs are the Offshore Voluntary Disclosure (OVDP); Streamlined Filing Compliance Offshore Procedures for foreign or domestic US Tax residents (SFOP and SDOP, respectively); Delinquent FBAR Submission Procedures; and the Delinquent Internation Informational Return Submission Procedures.  This post will focus on the requirements for the OVDP.  My posts in the upcoming weeks will discuss the other programs.

OVDP

Eligibility for OVDP

The IRS has the following requirements to enter the OVDP:

1) The funds of the undisclosed foreign accounts and entities must be from legal sources.   

2) The OVDP is available only to address a taxpayer’s personal liability. 

3) Individuals who facilitated the tax noncompliance of others are not eligible to participate in OVDP.

4) A taxpayer must cooperate with the IRS in determining his/her correct tax liability;


5) The taxpayer needs to make good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. (An IRS payment plan is permitted if you are unable to pay the balance due at the time the OVDP submission.); and


6) The taxpayer is not under an IRS civil audit/examination or criminal investigation. (The IRS permits a taxpayer to submit a preclearance request to determine whether he is under investigation by the IRS and eligible for the OVDP.)

Willfulness

The OVDP does not require a taxpayer to certify that he was non-willful in his tax non-compliance, failure to file FBARs and information returns.  The other programs all require a certification that the failure to file said forms was non-willful. 

Submission Requirements

To satisfy the requirements of the OVDP, the taxpayer will have to submit an OVDP letter and attachments; eight years of corrected income tax returns, FBARs, and any unfiled informational returns; a check to pay the taxes, penalties and interest; and a separate check to pay the offshore penalty.  There may be additional documents depending on the size of the accounts/assets. 

OVDP Penalties 

There are two penalty regimes under the OVDP: 

1) 50% - A 50% offshore penalty applies if either the taxpayer's foreign financial institution or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation.  The 50% penalty applies to all assets including those that are at different institutions, and the 50% penalty applies even if the asset has been moved to a different bank or brokerage.

The list of foreign banks and facilitators subject to the 50% penalty can be found here


2) 27.5% - The 27.5% penalty applies to all other taxpayers.  

The 27.5% and 50% penalties applies to the year with the highest aggregate balance off all accounts during the eight year OVDP period.  

3) In addition to the OVDP penalty, there is a 20% penalty and interest on past due balances. 

Dealing with offshore accounts can be a complicated matter, and not selecting the correct disclosure method could have significant long-term repercussions on penalties.  For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.