Shaw’s admonition is applicable to the recently announced Streamlined Process and Transitional as alternatives for resolving offshore noncompliance exposure of U.S. citizens and residents. Calls I’ve received from several accountants and taxpayers demonstrate that many are aware of these new alternatives but are ignorant of the nuances, complexities and risks of attempting to utilize them, or, of what other alternatives remain. Deciding how to proceed in offshore cases depends entirely on the specific facts of each taxpayer and requires both knowledge of the law and sound judgment in applying it. Given that, one can still state some obvious and general advantages and disadvantages of these alternatives to the OVDP as related to U.S. citizens or residents. I’ll discuss expats in a later blog entry.
Must be U.S. Citizen, Green Card holder or tax resident by virtue of having spent too much time in the U.S. over 3 year a testing period (Substantial Presence Test) not residing overseas.
Submitting names for clearance or even receiving clearance letter is not participation.
One is participating upon having mailed the OVDP Letter and required attachments and until signing of the Form 906, Closing Agreement or, if opted-out, until a letter initiating an examination has been received together with a Notice 609.
Must have previously filed a US. return for each of the most recent 3 years for which the return due date has passed.
Like the OVDP, must have unreported income from a foreign financial asset. There may also be delinquent FBARS.
Taxpayers who are in the OVDP as of July 1, 2014 may qualify for special transitional rules that allow them to elect the Streamlined Process but with certain modifications.
Three year income tax filing period in lieu of 8 year OVDP period.
Six year FBAR filing period in lieu of the * year OVDP period.
In lieu of the OVDP penalty of 27.5%, an offshore penalty of 5% will apply to the aggregate highest ending balance over the three-year period.
Lower tax and interest due to fewer returns amended.
Lower legal and accounting fees due to less work required.
No 20% accuracy related penalty on the income tax reported in the disclosure unless an examination shows fraud or willfulness.
My worry: clients often have a fuzzy, or worse inaccurate recollection of details pertaining to opening their account or accounts, what was discussed and what was written in emails or other communications. IRS or DOJ may obtain information from banks that differs from what the client remembers.
Another worry: the willful versus non-willful characterization is a partly subjective analysis that depends to a large extent on the “eyes of the beholder.” Thus, IRS may view as willful that which the taxpayer and even the best counsel may have perceived as non-willful.
Certification is a confession or at least an admission of all of the facts regarding opening and operation of the offshore account.
If willful other penalties may apply, e.g., civil fraud penalty.
Cannot enter OVDP if apply but found ineligible for Streamlined Process. Hence, no criminal immunity if IRS determines non-compliance was crime.
Not available for delinquent returns.
File amended returns with a reasonable cause and non-willful explanation.
Use the new option for filing delinquent FBARS if all income has been reported but FBARS not filed (Replaces old FAQ 17).
Use the new option for filing delinquent information returns such as Forms 3520 or 5471 if all income was reported but information returns not filed (replaces old FAQ 18)..
Those with facts clearly indicating willfulness, are probably tax criminals and should normally enter the OVDP.
Those in the middle of the Bell Curve have a difficult decision.
In most instances, safer to go OVDP and deal with the 8 years filings.
The income tax owed and 20% accuracy penalty are often modest and not game changers.
Or, can just opt-out and face audit for all open years, subject to all penalties and mitigation of the FBAR penalty under the Internal Revenue Manual Guidelines, if IRS determines the omissions or non-filing to be willful.
For: opportunity to keep the OVDP criminal protection and benefit from the lower 5% penalty in the Streamlined Process.
For: Opt-out from OVDP not required under Transitional Rules but it appears that you may opt-out and seek Streamlined Treatment as well outside of the transitional rules.
For: The special OVDP PFIC modified rules still may be elected.
Against: 20% accuracy related penalty still applies.
For and Against: Form 906, Closing Agreement must be executed.
Against: Must submit all documents required by OVDP.
Against: Must sign Non-willful Certification under penalties of perjury (see above for concerns).
Against: IRS must approve and will review each request to determine eligibility and whether certification of non-willfulness is complete and the available information is consistent with the certification.
Against: an IRS Central Review Committee may also review the facts to ascertain if the examiner’s determination and rationale are consistent with other determinations made across the IRS.
For and Against: Less risky than the naked Streamlined Process but still requires Certification of non-willfulness under penalties of perjury.
Conclusion: The addition of Streamlined Procedures and the Transition Rules to the offshore pot offers some alternative routes for resolving offshore cases, albeit of questionable value to U.S. citizens and residents, but has also complicated considerably the consideration of these cases. The discussion in this blog post should not be used by lay taxpayers as a basis for taking actions on their own. Only an experienced tax lawyer who has reviewed all of the facts and circumstances, can help them reach a sound judgment about how to proceed in any particular case.
This entry was posted in 2012 OVDP, 214 OVDP, NEW OVDP, OFFSHORE BANK ACCOUNTS, TAX, TAX CRIMES and tagged BANK SECRECY ACT, FBAR, FBAR PENALTIES, FOREIGN BANK ACCOUNTS, NEW STREAMLINED PROCESS FOR OFFSHORE ACCOUNTS, NEW TRANSITIONAL RULES FOR OFFSHORE ACCOUNTS, OFFSHORE ACCOUNTS, OFFSHORE TAX FRAUD, OVDP, OVDP BENEFITS, OVDP OPT OUT, QUIET DISCLOSURES, Robert S. Steinberg, VOLUNTARY DISCLOSURE. Bookmark the permalink.