5 Facts About Voluntary Disclosure Every Taxpayer Should Know
Do You Have Accounts Overseas? There’s Tax Obligations You May Not Be Aware Of
If you are like many U.S. taxpayers with investments held overseas, you may think your money is safely tucked away, far from the reach of the IRS. You may be under the impression that your account information is private, and the IRS will never become aware of it. You may also believe that the mere fact that your money is not technically held in the United States means that you won’t have to declare any earnings.
Unfortunately, this couldn’t be further from the truth.
If you have assets in a foreign bank, you may be at risk of the IRS investigating those accounts. What’s worse, if you haven’t disclosed your investments, you may be liable to pay thousands or even millions in fees. But that’s not all; you may also be hit with civil and/or criminal penalties. These are all costs that can far exceed the actual value of your accounts.
Why Are Offshore Accounts Under Scrutiny?
Over the past few years, the U.S. government has been steadily increasing its efforts to reduce tax evasion and has focused heavily on investigating foreign accounts. According to the Foreign Account Tax Compliance Act (FATCA), anyone who has a responsibility of filing taxes in the U.S. and has one or more offshore accounts with an aggregate value exceeding $10,000 at any point during a calendar year is required to report the account(s) to the IRS by filing a Foreign Bank Account Report (FBAR). Moreover, the FATCA requires several international financial institutions to cooperate with the IRS by disclosing U.S. account holder information. Even if you don’t file an FBAR, the financial institution where your assets are held may have already reported your accounts.
Now, this isn’t something that every taxpayer knows about. Hence, why several individuals and businesses fail to properly disclose their offshore investments. Luckily, there is an option that can work for some taxpayers: The Offshore Voluntary Disclosure Program (OVDP). But what exactly is this program and how can you benefit from it? Below, we take a look at 5 important facts about OVDP to help you determine if the program will be a good option for you. First, we’ll lay out the basics of OVDP.
What Is the Offshore Voluntary Disclosure Program?
The Offshore Voluntary Disclosure Program (OVDP) was designed to help taxpayers come into compliance with both FATCA and Foreign Bank Account Reporting (FBAR) requirements. If you weren’t aware of your obligations in reporting foreign-held assets, OVDP can help you save a lot of money and the harsher penalties associated with failing to follow proper offshore account disclosure regulations if the IRS has not yet received information about your foreign accounts. But the program isn’t for everyone. It also doesn’t mean you’ll automatically avoid any penalties.
Read on to find out why.
5 Important Facts About OVDP
1. The OVDP is applicable only to taxpayers that “non-willfully” failed to report their foreign assets
What exactly does it mean to be a “non-willful” tax violator? In a nutshell, it means that you didn’t intentionally try to evade your tax reporting requirements. You may have just misunderstood the requirements for reporting offshore accounts or inadvertently missed a deadline. For example, you may be considered a “non-willful violator” if you may not have been aware of the minimum account value required for reporting, may not have been keeping track of your accounts and failed to see that their aggregate value exceeded $10,000 or did not properly convert the account value into USD.
Aggregate value calculations account for many non-willful violations. This is largely due to a misconception about what the aggregate value threshold actually pertains to. Many taxpayers believe that the aggregate value threshold is applicable only on an individual account basis. However, the rule applies to the combined total of all your accounts. Let’s say you have three offshore accounts that reach a high calendar year value of $2,000, $3,000 and $6,000, respectively. You may have neglected to report these accounts because none of them ever reached $10,000 individually. However, because of the $10,000 threshold is based on the “aggregate value” of all your accounts, they should have all been reported because, combined, the highest value that your accounts reached exceeded $10,000. This is one of the most common mistakes taxpayers make – and for good reason. The terminology used in offshore account reporting rules is never laid out simply.
Another common mistake is attributed to confusion over the responsibilities of signatory authorities. When someone has signatory authority over an account, that means they have a say in what happens to the assets and can make or control account transactions. This can be as simple as just knowing an account password and authorizing a payment. You may never actually earn a profit from the accounts you have signatory authority over, but you still have a responsibility to disclose the account information – yet another reason why many taxpayers fail to comply with foreign account reporting requirements.
Overall, it can be easy to miss a step when reporting foreign accounts because the requirements are so strict and confusing. Anyone can easily make a mistake. However, once you learned that you did, in fact, have an obligation to report your investments and willingly admit you made an honest mistake, you can make the decision to voluntarily disclose the required information to the IRS via OVDP if you qualify for the program.
2. OVDP can drastically lower your tax penalties, but you may still have to pay expensive fees
By voluntarily disclosing your offshore account information via OVDP, you can avoid some of the more severe tax penalties, such as criminal prosecution for charges of tax evasion or tax fraud. However, that doesn’t mean you will walk away from the case without any repercussions.
You will still be responsible for paying back taxes and fees, but for the most part, you can avoid the severe criminal penalties you might face without the program. You also have the option to opt out of the penalties OVDP may set forth, but this can be tricky. When you opt out, that means the IRS can come after you with criminal penalties, though the likelihood is rare if you have substantial evidence to back up your claim that you “non-willfully” failed to report your accounts. If you are facing an OVDP penalty equivalent to 50% of your account values, then opting out may be a viable option. But beware; new penalties can be even greater. If your account values are greater than $1 million, you may end up paying more in FBAR fees than you would have through OVDP.
Opting out can also cause further delays in your case – most commonly, those who decide to opt out can expect their cases to go on for an additional year and a half before a resolution is reached. Do you really want to spend that much more time pondering the status of your case? The anxiety of being left in the dark as to what’s happening can be excruciating for some taxpayers. For many, a faster solution and having to deal with the IRS for far less time can be the decisive factor in accepting OVDP penalties over pushing for an unpredictable FBAR penalty outcome. Because there are so many factors to consider, taxpayers who are on the fence about choosing OVDP over opting out should speak with a knowledgeable tax lawyer, so they can learn about their options in full detail and not worry about making the wrong choice.
3. You cannot qualify for OVDP if the IRS has already initiated an investigation into your accounts
While you may not have known about your offshore account reporting requirements, the IRS may claim that you are only declaring your accounts now because you were “caught” and want to avoid penalties. Though this may be true for some taxpayers, others are in the dark about their disclosure requirements and honestly had no idea what they were supposed to do.
This is where having an experienced tax attorney can make all the difference in your case. A tax attorney will know how to best present your case to the IRS and can help you negotiate lower penalties and fees. They can also provide the necessary documentation and records to show that you were not a “willful” violator.
4. OVDP can protect you in the event your account information is hacked or leaked
In the 21st century, there’s little information that cannot be accessed online. Bank account information is readily available to account holders on the web, but this also means the information has the potential to be hacked. If your foreign accounts are hacked and your transaction or asset history leaked, the IRS can easily obtain this information.
If you haven’t previously disclosed offshore accounts to the U.S. government, you may soon be hit with penalties. Voluntary Disclosure can protect you from the repercussions of a hack or leak because you make the conscious decision to report your asset value to the IRS prior to being placed in a position where your information was made available without your knowledge or approval.
5. The program requires full account history disclosure
Once you decide to enter into the Voluntary Disclosure program, the IRS will have full access to your accounts. If there is any income or profit from what the IRS may deem as an “illegal” source, you may face even stricter penalties than if you would if you chose another option for reporting your foreign-held assets.
In total, taxpayers will need to supply the following information in order to be considered for OVDP:
- Income tax papers for the past eight years (including amended returns)
- Offshore Voluntary Disclosure paperwork
- A check made out to the U.S. Treasury that covers any taxes, interest and penalties for previously undisclosed foreign accounts
- FBAR forms pertinent to offshore accounts for the past eight years
- Other forms that indicate ownership or signatory authority over accounts or businesses
Between all the forms and the information that you need to gather, applying for OVDP can not only take a long time, it can be extremely overwhelming. Even if you are trying to disclose foreign accounts, the sheer volume of paperwork needed to be accepted into the program can make it easy to forget a key piece of information – which can lead to further penalties. Before making the decision to enter the OVDP, it is wise to consult with a tax lawyer ahead of time who can evaluate your accounts and let you know if there is anything the IRS may find suspicious or that can be used against you. A tax attorney also knows what forms need to be filed and will help you gather the information you need to apply for OVDP.
OVDP Not the Best Option for You? Alternatives Are Available. A Tax Attorney Can Help You Determine Your Ideal Plan of Action
Bottom line – OVDP can be a lifesaver for many taxpayers. If anything, the biggest advantage of the program is that it can help taxpayers avoid criminal penalties. Sure, you may have to pay fines, but the program can prevent you from going to jail – a tradeoff many would readily accept.
Still, if you have offshore accounts that haven’t been disclosed (along with foreign trusts, businesses or estates), there are several alternatives available that you may be better suited for, and Thorn Law Group is here to help. To learn whether the Offshore Voluntary Disclosure Program or another option for declaring assets held in foreign financial institutions or other foreign-sourced income is right for you, contact Managing Partner Kevin E. Thorn to schedule a confidential consultation. Kevin E. Thorn is a former IRS attorney who understands the intricacies involved in complex tax matters. He can review your assets and account history, and help you reach a favorable solution to your tax concern that can both save you from making expensive financial payments to the IRS and prevent you from suffering civil or criminal penalties.