U.S. taxpayers with previously undisclosed interests in foreign financial accounts and assets continue to analyze and seek advice regarding the most appropriate methods of coming into compliance with their U.S. filing and reporting obligations. Many are pursuing participation in the current IRS Offshore Voluntary Disclosure Initiative known as OVDI (the current version began in 2012 and is modeled after similar programs in 2009 and 2011 which initially were called the Offshore Voluntary Disclosure Program or OVDP). But what all the confusion and misinformation out there – what should you do? In this blog I attempt to clear some misconceptions.
Myth #1: An individual will be better off “explaining” the undisclosed foreign bank accounts through amended tax returns, rather than opting into OVDI.
Even outside of OVDI, any disclosure to the IRS requires that the taxpayer file amended tax returns and be prepared to provide the foreign bank information and statements to support the new income being reported. Such returns are signed by the taxpayer that they are true and complete. Being outside of OVDI the government can develop a case supporting severe penalties and even criminal prosecution using the combination of original filed tax returns which omitted the foreign income and amended tax returns reporting the foreign income as admissions of intent to evade U.S. income tax.
Myth #2: Once an individual enters into OVDI, you cannot dispute the amount of penalties imposed by the program.
Just because the penalty rate structure is set in OVDI does not mean the amount of penalty can never be disputed. Agents assigned to OVDI cases do make mistakes and do misinterpret foreign bank income and transaction activity including those accounts, assets and transactions that should not be part of any penalty calculation. These disputes or differences can still be contested and challenged through different means and channels while still remaining in OVDI.
Myth #3: An individual who enters into OVDI opens up all years for examination since becoming a U.S. person for tax purposes with undisclosed foreign bank accounts and unreported foreign income.
While the normal Statute Of Limitations to examine a tax return is three years, it can be extended to six years where there is a substantial omission of income and where the government can show fraud, the government has no limitation on how far back it can go. Furthermore, the government has a six-year Statute Of Limitations to pursue criminal prosecution. A person who is in OVDI avoids criminal exposure and any income tax return amendments are limited to the last eight years or if shorter, from the time the individual becomes a U.S. person for tax purposes.
Myth #4: An individual who enters in OVDI is forfeiting assets, including entire lifetime savings and more to the government so that any income, inheritances, or gifts these people may receive in the future will belong to the IRS.
Outside of OVDI, the MINIMUM penalty is 50% of the value of your foreign assets. But for taxpayers participating in OVDI, the MAXIMUM penalty is 27.5%. That means for taxpayers who are in OVDI, they will still get to keep at least 72.5% of their foreign assets.
Myth #5: Once the IRS learns of an individual entering into OVDI, the IRS will remove or prevent the individual from the program and the IRS will prosecute that person using the very information provided by the taxpayer as part of the OVDI process.
To encourage taxpayers to come forward into OVDI, the government will respect the transactional or use immunity it offers to taxpayers participating in the program. At this time the government would prefer cases to be dispensed in OVDI even though the government gives up criminal prosecution and takes a “hair-cut” on the penalties that can be imposed.
Myth #6: The IRS Criminal Investigation Division (“CID”) in evaluating your OVDI application will characterize your offshore transactions to involve the crimes of money laundering, wire fraud, mail fraud or tax evasion to prevent you from qualifying for the program.
Unless you are involved in drug trafficking, weapons trafficking or some other illegal activity that another government agency would have you on a watch list, the government would rather see a taxpayer come forward in OVDI and as a result for those that do the government will not pursue criminal prosecution and will apply the reduced penalties outlined in the OVDI structure.
Myth #7: Since there is no public follow-through by the IRS of its threats to individuals who have not entered the OVDI, it is a safe bet to avoid OVDI and instead pursue a Quiet Disclosure.
Whenever a taxpayer files an original or amended income tax return, the government will have at least three years from the due date of the return or date the return was filed (whichever is later) to examine that return. This is still the case even if the return that was filed showed an overpayment that was refunded to you. But with OVDI, you do not have this cloud of uncertainty hanging over you. At the conclusion of your OVDI case, the government will issue a closing agreement that when signed off by the taxpayer closes the case.
Myth #8: Those taxpayers outside of OVDI are assessed far less in taxes and penalties than individuals who have elected to make a disclosure through OVDI.
With the government encouraging taxpayers to come forward in OVDI, why would the government undermine the integrity of the program by offering a better deal to people who do not come forward and look to avoid detection by the IRS? If a taxpayer did not disclose his foreign bank accounts AND did not report foreign income, you will fare worse than entering into OVDI and end up loosing the entire value of your foreign accounts.
Myth #9: By entering into OVDI, you fully waive all constitutional rights.
Some people have stated that participants entering into the OVDP must waive Constitutional Protections against: self-incrimination (5th amendment), unreasonable search and seizure (4th amendment), and excessive fines (8th amendment). What they fail to recognize is that the same constitutional protections apply to OVDI participants as to people who file original or amended income tax returns with the IRS.
Myth #10: The IRS favors a Qualified Quiet Disclosure over a Quiet Disclosure.
Some people have stated that a “Qualified Quiet Disclosure” is different from a “quiet disclosure” for which the latter the IRS has promised a detection and punishment campaign. Truth is that unless you enter into OVDI, any other form of disclosure is a “Quiet Disclosure” that can subject you to the full wrath of the IRS and with the IRS then looking to impose the maximum in penalties you can likely end up loosing all of your foreign account funds and perhaps be subject to criminal prosecution.
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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