Tags: OVDP | Bad | Choice | Foreign | Accounts | Compliance

OVDP Often a Bad Choice in Foreign Accounts Compliance

OVDP Often a Bad Choice in Foreign Accounts Compliance
Mast3r/Dreamstime

By
Monday, 26 June 2017 07:34 AM Current | Bio | Archive

The Internal Revenue Service’s Offshore Voluntary Disclosure Program (“OVDP”) is the most costly and administratively burdensome means of complying with U.S. laws concerning foreign financial accounts.

Very few people are a candidate for the OVDP.

It applies only to people whose noncompliance with U.S. laws concerning foreign financial accounts was willful.

Most people do not meet the willfulness standard, and can become compliant with U.S. laws regarding foreign financial accounts by means far less costly and onerous than the OVDP.

A recent case involved a man with a high school education who had been an airline pilot in his native Venezuela. Due to instability of the Venezuelan Bolivar, the man had opened an account at the Caracas branch of Credit Suisse, and began funding it. The man retired in 1985. In 2000, the man and his wife sold their home in Venezuela, and immigrated to the U.S., never returning to Venezuela. They bought a home in Florida with the proceeds of their Venezuelan home.

The man receives no pension or Social Security benefits. The man’s wife worked in the U.S., but the man did not. The man’s wife filed U.S. income tax returns as married filing separately. The man did not file U.S. income tax returns. The man received no account statements concerning his Credit Suisse account, and apparently forgot about it.

In any event, the man did not know that he was required to report the account and income generated by it on U.S. income tax returns. Nor was he aware that he was required to file FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, (“FBARs”), with the IRS reporting the account.

After years of cognitive decline the man was diagnosed with Alzheimer’s in 2012. In 2014, when the man’s wife was terminally ill, one of the man’s children discovered the Credit Suisse account, and brought the man to a Florida law firm which holds itself out as expert in international taxation. The firm immediately filed an application for the man to the OVDP.

I find that lawyers who do not know the foreign accounts compliance area well tend to put people into the OVDP as a reaction, unaware that far less costly and burdensome means are available for the people to come into compliance with U.S. laws concerning foreign financial accounts.

The OVDP would require the man to:

  1. Sign and submit documents waiving the statute of limitations on assessment of income tax and the statute of limitations on assessment of the FBAR penalty for the eight years of the OVDP disclosure period, in this case 2006-2013.
  2. File U.S. income tax returns for the eight years of the OVDP disclosure period, 2006-2013.
  3. Pay income tax owing on the income tax returns, interest on the tax, and an accuracy-related penalty equal to 20% of the tax.
  4. File FBARS due for the eight-year disclosure period.
  5. Pay an FBAR penalty equal to 27.5% of the high aggregate balance in the man’s foreign financial accounts over the eight-year voluntary disclosure period. The man would have incurred an FBAR of $553,000 under the OVDP. This is in lieu of the statutory penalty, which is the greater of 50% of the high aggregate balance of foreign financial accounts over the eight-year voluntary disclosure period.

The man could have come into compliance with U.S. laws concerning foreign financial accounts by means of the IRS’ far less costly and burdensome Streamlined Offshore Voluntary Compliance Procedures. The Streamlined Procedures would require the man to:

  1. File U.S. income tax returns for the last three years for which the filing deadline has passed, in this case 2013, 2012, and 2011.
  2. Pay income tax owing on the income tax returns, and interest on the tax, but no accuracy-related penalty.
  3. File FBARs due for the last six years, 2008-2013.
  4. Pay an FBAR penalty equal to 5% of the aggregate high balance of the man’s foreign financial accounts over the six-year voluntary disclosure period.

The 5% FBAR penalty would have obtained only because the man resides in the U.S. There is no FBAR penalty for a Streamlined Procedures applicant who does not reside in the U.S.

The man’s case was referred to me. It was readily apparent that the man was not willful, primarily due to three facts:

  1. The man had opened the Credit Suisse account and funded it due to instability of the Venezuelan currency, before he had immigrated to the U.S. He had not transferred funds from the U.S. to a Swiss bank for the purpose of evading U.S. income tax on income produced by the funds.
  2. The man was suffering from Alzheimer’s, and was incapable of forming the specific intent needed to evade U.S. income tax.
  3. The only withdrawal ever made from the Credit Suisse account was when the account was closed in 2014. People who are using a foreign financial account to evade U.S. income tax often make withdrawals from the account. Some foreign financial institutions facilitate such withdrawals by providing accountholders debit or credit cards attached to such accounts.

I withdrew the man from the OVDP. True to its announced policy, the IRS audited the man’s income tax returns for the eight years of the OVDP disclosure period. After interviewing the man over the telephone, and reviewing an affidavit from the doctor who diagnosed the man with Alzheimer’s, the revenue agent agreed that the man did not meet the willfulness standard.

As a result, the man must:

  1. File U.S. income tax returns for the 2006-2013 voluntary disclosure period, and
  2. Pay income tax owing on the income tax returns, interest on the tax, and an accuracy-related penalty equal to 20% of the tax.
  3. File FBARs for the 2006-2013 voluntary disclosure period.
  4. Pay a non-willfulness FBAR penalty for one year--$10,000.

A person does not waive the statute of limitations on assessment of income tax or the statute of limitations on assessment of the FBAR penalty under the Streamlined Procedures.

That’s right, the man saved $543,000 in FBAR penalty by withdrawing from the OVDP.

Better yet had the man never applied to the OVDP, and proceeded directly into the Streamlined Procedures in the first place. But the IRS will not allow an OVDP applicant to switch to the Streamlined Procedures. For one thing, once a person has applied to the OVDP, any further disclosures about the person’s foreign financial accounts are not “voluntary.”

I have counseled many people away from the OVDP. They have complied U.S. laws concerning foreign financial accounts by alternative, less costly and burdensome means, without any consequences.

Stephen J. Dunn is a leading authority on compliance with U.S. laws concerning foreign financial assets. He has handled hundreds of foreign accounts cases for taxpayers located throughout the United States and beyond.

© 2019 Newsmax Finance. All rights reserved.

   
1Like our page
2Share
StephenJDunn
I have counseled many people away from the OVDP. They have complied U.S. laws concerning foreign financial accounts by alternative, less costly and burdensome means, without any consequences.
OVDP, Bad, Choice, Foreign, Accounts, Compliance
1115
2017-34-26
Monday, 26 June 2017 07:34 AM
Newsmax Media, Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved