An Opportunity is Soon Closing to Voluntarily Disclose Offshore Assets to the IRS4/4/18 | By: Asher Rubinstein, Esq. and David N. Milner, Esq. | GDB 2018 Spring Newsletter
The IRS Offshore Voluntary Disclosure Program (OVDP) has been an opportunity for U.S. taxpayers who failed to report foreign income and assets to become compliant, pay back taxes, lower their potential penalties and avoid criminal prosecution. The OVDP has been in effect in various incarnations since 2009, coinciding with the U.S. Department of Justice (DOJ) offensive against foreign banks, bankers and U.S. taxpayers who committed tax fraud, and the implementation of the Foreign Account Tax Compliance Act (FATCA). Thus, while the government went after wrongdoers, it also encouraged voluntary compliance via the OVDP, with the reward of leniency and lower penalties. The IRS announced in March that the OVDP will close on September 28, 2018.
If readers have foreign assets and are not in IRS compliance, now is the time to address the issue. Soon, it will be more difficult, and probably more expensive, to become compliant. A few items to keep in mind:
- The IRS “Streamlined Compliance Procedures” will continue to be an option for those taxpayers whose non-compliance was non-willful, i.e., unintentional. Taxpayers have to certify their non-willfulness under penalties of perjury. The standards of non-willfulness are high.
- The OVDP submission must be completed and submitted by September 28, 2018. This means that the taxpayer must go through the steps of obtaining pre-preclearance and preliminary acceptance by the Criminal Investigations Division of the IRS, obtain all relevant foreign financial statements from foreign sources, plus amend as many as eight years of income tax returns - - all by September 28, 2018.
- Penalties inside the OVDP (27.5% of the highest aggregate value of the foreign assets) are almost certainly higher than penalties if discovered by the IRS. Penalties outside the OVDP include as much as a 50% penalty for failure to file the FBAR (Report of Foreign Bank and Financial Accounts), penalties for failure to file IRS Form 8938, penalties for substantial understatement of tax, civil and criminal tax fraud, as well as criminal prosecution.
- Taxpayers who avoid the OVDP and its 27.5% penalty and merely file amended tax returns (known as a “quiet disclosure”) will be specifically targeted by the IRS for additional penalties.
Reporting Foreign AssetsIf you owned or had signatory authority over a foreign financial account (including a bank account, securities account, brokerage account, virtual currency account, etc.) at any time during 2017, you must “check the box” on your income tax return to disclose that ownership, specifically on IRS Form 1040, Schedule B, Part III, Line 7.
You must also complete IRS Form 8938, Statement of Specified Foreign Financial Assets, to report foreign bank, brokerage accounts and other foreign financial assets, including interests in offshore trusts and corporations, bonds, foreign mutual funds, foreign annuity and insurance policies.
You must electronically file the FBAR (FinCEN Form 114), if you had beneficial ownership of, or signature or other authority over, any foreign financial account, if the aggregate value of such account(s) exceeded $10,000 at any time during 2017. The FBAR is due on the same day as your income tax return. The FBAR also applies to foreign insurance policies, annuity policies, retirement plans and other financial products. A recent change extends the FBAR to online gambling/gaming accounts. The FBAR must be filed electronically on FinCEN’s website.
If you had an interest in a foreign entity such as a foreign trust or foreign foundation, or if during 2017 you received assets from a foreign entity, then you may also be required to file additional IRS forms, including IRS Forms 3520 and 3520A. If you had an interest in a foreign corporation, and the foreign corporation is a “Controlled Foreign Corporation” (which generally means that more than 50%of the voting power was owned by U.S. shareholders), then you must file an additional form, IRS Form 5471.
Reporting Foreign IncomeYou must report all foreign income (including overseas wages, interests, capital gains, dividends, pension distributions, rent and royalties.) If you held investments in foreign mutual funds or hedge funds, you may be required to file additional tax forms applicable to Passive Foreign Investment Companies, such as IRS Form 8621.
Please contact us to discuss US reporting options for offshore assets.