IRS OFFSHORE VOLUNTARY DISCLOSURE PROGRAM STUART D. LYONS BAKER NEWMAN NOYES INTERNATIONAL TAX PRACTICE LEADER November 2015 19th Annual Maine Tax Forum 1
TOPICS TO COVER 1. US International Information Reporting Obligations 2. Penalties For Failure to Timely File 3. Statute of Limitations Implications 4. Mitigation Procedures Available 1. Offshore Voluntary Disclosure Program (OVDP) 2. Streamlined Filing Compliance Procedures 3. Delinquent FBAR Submission Procedures 4. Delinquent International Information Return Submission Procedures November 2015 19th Annual Maine Tax Forum 2
US International Information Reporting • Form 114 (FBAR)-Foreign Bank Account Reports • Form 8938 - Statement of Specified Foreign Financial Assets • Form 3520 - Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts • Form 3520-A -Annual Information Return of Foreign Trust With a US Owner • Form 5471 - Information Return of US Persons With Respect to Certain Foreign Corporations November 2015 19th Annual Maine Tax Forum 3
US International Information Reporting (continued) • Form 5472 - Information Return of a 25% Foreign- Owned US Corporation Engaged in a US Trade or Business • Form 926 – Return by a US Transferor of Property to a Foreign Corporation • Form 8865 - Return of US Persons With Respect to Certain Foreign Partnerships • Form 8858 - Information Return of US Persons With respect To Foreign Disregarded Entities • Form 8891 - US Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans (Discontinued – see IR-2014-91 issued October 7, 2014) November 2015 19th Annual Maine Tax Forum 4
PENALTIES • FBAR- IRS issued new internal policy guidance in 2015 – Willful : in most cases should not exceed 50% of maximum account balance. In no event not greater than 100%. – Non-willful : in most cases will be limited to $10,000 per year for all unreported accounts in that year. • Previously the IRS asserted that it would assess a penalty of $10,000 per year, per account. November 2015 19th Annual Maine Tax Forum 5
PENALTIES (continued) • IRS FORMS – failure to timely file. – 5471: $10,000 per year, per foreign corporation. – 5472: $10,000 per year. – 8865: $10,000 per year, per foreign partnership. – 8858: No specific penalty provisions, but…. – 926: 10% of the fair market value of the property contributed. – Form 8621- no direct penalty, but loss of timely QEF election or MTM election with respect to that PFIC investment. November 2015 19th Annual Maine Tax Forum 6
PENALTIES (continued) • IRS FORMS- failure to timely file: – 3520: • Foreign gifts or inheritances over $100,000- 5% per month with max penalty of 25% of the value. • Contribution to a foreign trust- 35% of the value of assets contributed. • US person treated as owner of foreign trust- 5% of gross value. November 2015 19th Annual Maine Tax Forum 7
STATUTE IMPLICATIONS Failure to file these International Information Returns extend the Statute of Limitations to assess tax. – IRC section 6501(c)(8). Exceptions: - International Information Return subsequently filed on an amended income tax return. SOL closed three years from such filing. - Taxpayer has Reasonable Cause. November 2015 19th Annual Maine Tax Forum 8
MITIGATION PROCEDURES • Offshore Voluntary Disclosure Program (OVDP) – Designed for taxpayers with exposure to criminal, large civil and unreported income due to willful failure. • Streamlined Filing Procedures – Designed for taxpayers with non-willful filing deficiencies. • Delinquent FBAR Submission Procedures • Delinquent International Information Return Submission Procedures November 2015 19th Annual Maine Tax Forum 9
Unreported Foreign Accounts & Income - Options • What to Do? Four Options 1. Do Nothing-Illegal and Risky A. Summons or subpoena to foreign bank B. Whistleblowers C. Audit D. Death E. FATCA 2. Get compliant Going Forward- Risky 3. File Amended Returns and FBAR’s – Risky (A/K/A “Quiet Disclosure”) 4. Voluntary Disclosure Program A. Streamlined Submission B. Regular Overseas Voluntary Disclosure Program (OVDP) November 2015 19th Annual Maine Tax Forum 10
KEY FACT-Willfulness ? • Willfulness is the key • This is a purely subjective test . Willfulness is defined as an “intentional violation of a known legal duty.” The IRS states that non- willful conduct is “due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law”. • A taxpayer’s subjective state of mind Ignorance of the law is a defense! Cheek v. United States, 498 U.S. 192 (1991) • Don’t forget willful blindness! November 2015 19th Annual Maine Tax Forum 11
INDICA of WILLFULNESS • Source of funds • Motivation was to hide from spouse or partner • Bank secrecy jurisdiction • Numbered account • Entities or structures • Use of credit or debit card with foreign account • Failure to tell tax advisors • Untaxed corpus • Failure to check the box November 2015 19th Annual Maine Tax Forum 12
VOLUNTARY DISCLOSURE • Voluntary Disclosure Programs – First program ended October 15, 2009 – Second program ended August 31, 2011 – Third program announced January 9, 2012 (Modified late June of 2014) • Modification introduced the Streamlined Procedure for foreign as opposed to domestic persons November 2015 19th Annual Maine Tax Forum 13
VOLUNTARY DISCLOSURE • Third OVDP Program (A/K/A “The January 2012 program”) – Still Open- no deadline – 27.5% penalty on foreign accounts and other foreign assets related to non-compliance – Penalty increases to 50% for certain listed foreign banks beginning August 2014 (current list over 50) – Eight year look-back November 2015 19th Annual Maine Tax Forum 14
Benefits of Voluntary Disclosure • Effectively take criminal off the table • Limit the look-back period • Limit the civil penalties that will be imposed • Use of the off-shore funds without guilt or risk November 2015 19th Annual Maine Tax Forum 15
Procedure for a OVDP • Procedure for making a voluntary disclosure – Pre-clearance – Voluntary disclosure letter – Submit amended returns – Finish with a Form 906 closing letter – Submit payment of all penalties, interest and tax – Agree to cooperate November 2015 19th Annual Maine Tax Forum 16
STREAMLINED OVDP FILING • New Streamlined Submission – Streamlined procedure for filing amended and delinquent returns and terms for resolving penalty issues . • Individual taxpayers only • Different rules for taxpayers residing inside and outside the U.S. Streamlined Foreign Offshore Procedures Streamlined Domestic Procedures • Must certify non-willfulness under penalties of perjury • Must be timely, before the IRS has name or opens an examination • No automatic audit or review, but once selected will be reviewed closely November 2015 19th Annual Maine Tax Forum 17
Streamlined Foreign Offshore Procedures • Non-resident • Non-resident means: – For U.S. citizens or green card holders In any one or more of the most recent three years for which the tax return due date ( as extended) has passed, the individual did not have a U.S. abode and the individual was physically outside the U.S. for at least 330 full days – For non-citizens or non-green card holders In any one or more of the most recent three years for which the tax return due date (as extended) has passed, the individual must fail the substantial presence test November 2015 19th Annual Maine Tax Forum 18
Streamlined Foreign Offshore Procedure (continued) • File amended or delinquent original returns for past three years with schedules • Pay the full amount of tax and interest due with the filings • No penalties November 2015 19th Annual Maine Tax Forum 19
Streamlined Domestic Offshore Procedures • Resident of the U.S. • Filed U.S. tax returns for each of the past three years Procedure not available to U.S. resident non-filers • File amended tax return for past three years with schedules • File delinquent FBARs • Pay tax, interest and 5% penalty Penalty is based on the highest balance of accounts and assets that should have been reported on the FBAR or Form 8938 • If the asset was reported but the income from the asset was not reported, then the asset goes into the penalty base November 2015 19th Annual Maine Tax Forum 20
Delinquent FBAR Submission Procedures • Taxpayers who do not need the OVDP or streamlined procedures to file delinquent or amended returns to report and pay additional tax but Have not filed FBARs Are not under audit or examination Have not been contacted by the IRS • Should file the FBARs and include a statement explaining why the FBARs are delinquent • No penalty if all income is reported and tax paid on the foreign accounts November 2015 19th Annual Maine Tax Forum 21
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