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Avoiding OVDI – Pitfalls Of Other Forms Of Disclosures

A taxpayer who has not disclosed foreign bank accounts to the IRS and to cure this delinquency and avoid criminal repercussions applies to the Offshore Voluntary Disclosure Initiative (“OVDI”), generally must pay a miscellaneous Title 26 offshore penalty, in lieu of traditional penalties that would apply to foreign assets or entities outside of OVDI.  The most significant penalty that the offshore penalty replaces is the penalty for failure to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”).  The civil penalty for willful failure to file an FBAR equals the greater of $100,000 or 50% of the total balance of the foreign account per violation.  Non-willful violations that are not due to reasonable cause incur a penalty of $10,000 per violation.

Individuals with previously undisclosed foreign assets and/or income have come to understand the need to be come compliant with the IRS and with all the confusion out there on how best to become compliant. The avenues to be compliant that are most widely discussed are (1) the Offshore Voluntary Disclosure Initiative (“OVDI”), (2) making a Quiet Disclosure, or (3) making a Present Tax Year Only Disclosure.

Offshore Voluntary Disclosure Initiative (“OVDI”)

This program was first created in 2009 as the Offshore Voluntary Disclosure Program (“OVDP”) but in 2011 was renamed to OVDI. Generally, the miscellaneous offshore penalty under the OVDI program (the “OVDI penalty”) equals 27.5% of the highest aggregate balance in the foreign assets or entities during the years covered by the OVDI program, but may be reduced in limited cases to 12.5% or 5%. Certain taxpayers may qualify for even greater savings through a reduction of the offshore penalty. 

Taxpayers participating in the ongoing 2012 OVDI generally agree to file amended returns and file FBARs for eight tax years, and in addition to paying pay the OVDI penalty (which is assessed in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) taxpayers would pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20% of any income tax deficiency

Taxpayers whose highest aggregate foreign account balance is less than $75,000 for each of the years in the OVDI disclosure period may qualify for a reduced 12.5% OVDI penalty.

Taxpayers who fall into one of three specific categories may qualify for a reduced 5% OVDI penalty.  The first category includes taxpayers who inherited the undisclosed foreign accounts or assets.  Second, taxpayers who are foreign residents and who were unaware that they were U.S. citizens may qualify for a reduced 5% OVDI penalty.  Finally, U.S. taxpayers who are foreign residents may also qualify for the reduced 5% OVDI penalty in certain circumstances. 

Making A Quiet Disclosure

While promoted under different names such as “Explained Disclosure”, “Qualified Quiet Disclosure” or “Silent Disclosure”, they all mean the same as Quiet Disclosure.

There are strong indications that going forward, the IRS will be cracking down more stringently on the practice of “quiet disclosures”.  Under a quiet disclosure, a taxpayer through normal IRS filing channels files new or amends past tax returns and FBAR’s to report previously unreported offshore accounts and foreign income in an attempt to avoid potential civil penalties and fines.

The danger in doing this, however, is that if the IRS discovers a quiet disclosure, the taxpayer will be exposed to higher civil penalties than he would have if he voluntarily came forward under OVDI.  Where a taxpayer has been discovered by IRS in this process, that taxpayer who made the quiet disclosure will not be eligible for the 27.5% OVDI penalty.  Instead the traditional penalties of 50% would apply.  Also, if appropriate, the IRS may recommend criminal prosecution to the Department of Justice. 

The IRS does encourage those who have already quietly disclosed to come forward under the OVDI to avail themselves of the lower penalty rates and avoid potential harsher consequences but you must act quickly because OVDI is not available to you if the IRS has already selected you as a target.

Making A Present Tax Year Only Disclosure

Some tax advisors are recommending that taxpayers merely get into compliance on a go forward basis and do nothing to address the past non-compliance gambling that the IRS does not have the resources to detect the foreign account. I call this “Present Tax Year Only Disclosure”. This could be the worst advice ever.  In my opinion this option is also not viable because of the ease with which the U.S. government can flag Foreign Bank Account Reports (FinCEN 114 formerly TDF 90-22.1) commonly known as “FBAR′s”. Furthermore, the IRS Criminal Investigation Division (“CID”) has created a group of special agents to monitor for just this occurrence.

The IRS has clearly indicated its disdain for those who make quiet disclosures instead of participating in OVDI and to discourage taxpayers from pursuing this route, the IRS has implemented procedures at the Service Centers to intercept those filings reporting foreign income for further review and investigation by the IRS.  Where a taxpayer has been discovered by IRS in this process, that taxpayer who made the quiet disclosure will not be eligible for the 27.5% OVDI penalty.  Instead the traditional penalties of 50% would apply.  Also, if appropriate, the IRS may recommend criminal prosecution to the Department of Justice. 

What Should You Do?

If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed, you should seriously consider participating in the IRS’s 2012 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.

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDI.

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