IRS OFFSHORE VOLUNTARY DISCLOSURE PROGRAM STUART D. LYONS BAKER - - PowerPoint PPT Presentation

IRS OFFSHORE VOLUNTARY DISCLOSURE PROGRAM

STUART D. LYONS BAKER NEWMAN NOYES

INTERNATIONAL TAX PRACTICE LEADER

November 2015 1 19th Annual Maine Tax Forum

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

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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

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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)

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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.

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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.

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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.

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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.

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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

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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)

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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!

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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

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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

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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

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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

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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

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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

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• 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

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Streamlined Foreign Offshore Procedures

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

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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

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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

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Delinquent International Information Return Submission Procedures

• Taxpayers who do not need the OVDP or Streamlined

procedure but who Have not filed one or more required information returns (forms 3520, 5471, 8865, etc.) Have reasonable cause for failure to file Are not under examination or investigation Have not been contacted by the IRS

• Should file delinquent returns with a statement of facts

that establish reasonable cause and a certification that any entity for which the delinquent returns are being filed was not engaged in tax evasion

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Contact Information

Stuart D. Lyons – Tax Principal

International Tax Practice Leader Baker Newman Noyes Direct Dial: 207-791-7140 Email: slyons@bnncpa.com

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