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4 Costly Myths Taxpayers Have About the IRS’s Offshore Voluntary Disclosure Program (OVDP)

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People who have undisclosed income in offshore accounts can — and frankly, should — take advantage of the IRS’s Offshore Voluntary Disclosure Program (OVDP).

As the term suggests, the program allows taxpayers to voluntarily disclose all foreign accounts and fully clear their tax liability (including taxes owed, interest and penalties), instead of risk getting flagged in the future and paying much steeper price. While the IRS treats each case individually, penalties for failing to report offshore accounts start at 50 percent of the balance. Furthermore, if there is suspected fraud or tax evasion, criminal prosecutions can commence.  

Although the OVDP has been around since 2009, there remains a significant amount of misinformation and misunderstanding regarding how it works — and just as importantly, how it doesn’t work. Here are four costly OVDP myths that persist: Read more

Your Foreign Bank Is Disclosing You To The IRS

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The IRS has various ways to find out about international or overseas bank accounts.  The Foreign Account Tax Compliance Act (“FATCA”) which was passed by Congress in March 2010 requires foreign financial institutions to register with and report to the IRS certain information about their U.S. account holders.

The foreign financial institutions include, but are not limited to depositary institutions (e.g., banks), custodial institutions (e.g., mutual funds), investment entities (e.g., hedge funds or private equity funds) and certain types of insurance companies that have cash value products or annuities.

The foreign financial institutions are required to report information such as the identities of their U.S. account holders, the social security numbers of the U.S. account holders, the account numbers, account balances and income, such as interest and dividends earned on the foreign account.  If the foreign financial institutions do not register and agree to report, they face a 30% withholding tax on certain U.S.-source payments made to them.  With July 1, 2014 being the deadline under FATCA for compliance, virtually all foreign financial institutions have now established procedures to identify U.S. account holders and have each U.S. account holder sign a Form W-8 BEN or face closure of their account.

Under these procedures, the foreign bank will send you a letter that you have been identified as a U.S. accountholder to be reported to the IRS.  As such, the bank will ask you to submit proof that you have entered into the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  If you have engaged tax counsel and entered into this program, you need not worry.

In addition, under the Bank Secrecy Act of 1970 financial institutions are required to report any deposit, withdrawal and transfer of $10,000 or more to the IRS.  These reporting requirements include international transactions and have been used as a basis to investigate taxpayers who have assets overseas.  So even if a U.S. taxpayer were to refuse to cooperate with the foreign financial institution and that bank were to close the account, the transfer of the funds out of that institution would be reported to IRS.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI).  Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

How Does the IRS Find Out About Foreign Bank Accounts?

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The IRS has various ways to find out about international or overseas bank accounts.  The Foreign Account Tax Compliance Act (“FATCA”) which was passed by Congress in March 2010 requires foreign financial institutions to register with and report to the IRS certain information about their U.S. account holders.

The foreign financial institutions include, but are not limited to depositary institutions (e.g., banks), custodial institutions (e.g., mutual funds), investment entities (e.g., hedge funds or private equity funds) and certain types of insurance companies that have cash value products or annuities.

The foreign financial institutions are required to report information such as the identities of their U.S. account holders, the social security numbers of the U.S. account holders, the account numbers, account balances and income, such as interest and dividends earned on the foreign account.  If the foreign financial institutions do not register and agree to report, they face a 30% withholding tax on certain U.S.-source payments made to them.  With July 1, 2014 being the deadline under FATCA for compliance, virtually all foreign financial institutions have now established procedures to identify U.S. account holders and have each U.S. account holder sign a Form W-8 BEN or face closure of their account.

In addition, under the Bank Secrecy Act of 1970 financial institutions are required to report any deposit, withdrawal and transfer of $10,000 or more to the IRS.  These reporting requirements include international transactions and have been used as a basis to investigate taxpayers who have assets overseas.  So even if a U.S. taxpayer were to refuse to cooperate with the foreign financial institution and that bank were to close the account, the transfer of the funds out of that institution would be reported to IRS.

Another tool used by IRS is to get a Federal Court to issue “John Doe summonses” and have them served on financial institutions to investigate a foreign financial institution’s compliance in reporting U.S. account holders.  Unlike a normal summons which allows the IRS to find out information regarding a specific taxpayer whose identity the IRS knows, a John Doe summons allows the IRS to get the names of all taxpayers in a certain group.  In 2009, this very powerful tool allowed the IRS to get the names of many non-complying taxpayers in its investigation of Swiss banking giant UBS, eventually leading to UBS paying $780 million to settle the investigation.

Finally, the IRS has created a special unit to compare information they have received from the foreign financial institutions with what was reported to the IRS by each taxpayer on his or her present and past income tax returns.  You can bet that if you did not file FBAR’s or report your worldwide income, this group will pick up this discrepancy and have an audit or investigation started on you.

If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law.  Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Deceased Mother’s Undisclosed Foreign Bank Accounts- What to Do?

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Question: My mother just passed away and I inherited $5 million that she kept in offshore bank accounts. The problem is that while she was alive, she did not report the existence of these accounts on the FBAR nor did she report the interest income made on these accounts on her tax returns. What are my reporting obligations, if any? I do not want to get in trouble with the IRS. What should I do?

Answer: It is highly recommended that you come forward and disclose these overseas assets and income to the IRS. The IRS has set up a program called the Offshore Voluntary Disclosure Initiative (OVDI) to allow taxpayers with previously unreported offshore assets and income to come forward and disclose these assets. By voluntarily disclosing these assets, the taxpayer can avoid higher civil penalties that would be imposed if the taxpayer didn’t participate in the program. The taxpayer can also avoid possible criminal prosecution.

The same reporting requirements apply to taxpayers who have inherited previously undisclosed foreign assets. The IRS specifically states that entities such as trusts are eligible to participate in OVDI. (FAQ 13, OVDI 2012).

Not disclosing these inherited assets can lead a taxpayer to suffer the same fate as Henry Seggerman and other members of the Seggerman family. In August 2013, Henry Seggerman pled guilty to charges of tax fraud and evasion for not disclosing over $12 million he and his siblings had inherited from their father who died in 2001. The money was secretly held in Swiss bank accounts. Henry was required to pay $600,000 in restitution and faced up to 11 years in prison. His three siblings had also pled quilty to similar charges and awaited similar fates.

The bright side is that taxpayers who inherit previously undisclosed assets may qualify for a special reduced offshore penalty of 5% if they meet certain conditions. (The standard penalty rate is 27.5%). To qualify for the 5% penalty, the taxpayer must meet all of the following 4 conditions:

(a) he did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account); (b) he must have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address; (c) he must have, except for a withdrawal closing the account and transferring the funds to an account in the United States, not withdrawn more than $1,000 from the account in any year for which the taxpayer was non-compliant; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). (FAQ 52, OVDI 2012).

If you have never reported your foreign investments on your U.S. Tax Returns or you have inherited previously unreported foreign assets, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.