This final installment of this blog series will discuss taxpayers who willfully have not disclosed foreign accounts or paid taxes. Taxpayers who want assurance that they will not be subject to criminal liability and/or substantial monetary penalties should consider participating in the Offshore Voluntary Disclosure Program (OVDP). However, if you have already been notified by the IRS about missing information, it’s too late for voluntary disclosure.
With all the information available and the emphasis by the IRS on foreign accounts, it is becoming harder to prove you did not know that you had to report foreign accounts. That being said, this program is not necessary for the average person who was just unaware of the disclosure and reporting requirements. Although this program gives certain assurances and reduced penalties, it comes with a much higher penalty than the other available voluntary disclosure programs.
OVDP is designed to provide protection from criminal liability and to provide terms for resolving civil tax and penalty obligations. Among other requirements, the taxpayer will need to do the following:
- File amended tax returns for the past eight years.
- File FBARs for the past eight years.
- Complete Form 14452 – Foreign Account or Asset Statement, providing detailed information on each foreign account.
- Submit Form 14457 – Offshore Voluntary Disclosure Letter.
- Consent to extend the time to assess civil penalties for FBAR violations.
- Pay a penalty of at least 27.5% (up to 50% in certain cases) of the highest aggregate balance/value of the taxpayer’s previously undisclosed foreign financial assets during the eight-year period.
- Pay accuracy-related penalties, late payment penalties, and late filing penalties (if applicable) on the underpayments of tax for all years.
Here is an example of this program: Assume the taxpayer had $1,000,000 on deposit in a Swiss account and has earned $50,000 of interest for each of the past eight years. Assume the taxpayer’s marginal tax rate is 35%. If this taxpayer participates in the OVDP, he will pay an accuracy-related penalty of $28,000 (on tax of $140,000) and a miscellaneous offshore penalty of $385,000, for total penalties of $413,000. That’s a hefty amount to pay, but if he waits until the IRS discovers his foreign accounts, he could face potential civil penalties of over $5,000,000. Just as importantly, participating in this program provides the taxpayer with the assurance that the IRS will not bring criminal charges.
Taxpayers holding undisclosed foreign accounts and assets should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties, and generally eliminate the risk of criminal prosecution for all issues relating to tax noncompliance and failing to file FBARs. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.
The Offshore Voluntary Disclosure Program is just one voluntary disclosure option and is primarily for those taxpayers with significant unreported foreign assets and whose noncompliance could be considered willful or perceived as a form of tax evasion. For the taxpayer who was merely unaware of his or her reporting requirements, there are less costly and simpler voluntary disclosure programs. We have discussed some of these programs in previous blogs.
Sciarabba Walker has helped taxpayers participate in the various IRS voluntary disclosure programs. If you have questions or find yourself in need of these types of services, please call Sciarabba Walker to schedule an appointment.