2012 OVPD – Calculating the Offshore Penality

Penalty Computation Worksheet

When determining the highest amount in each undisclosed foreign account for each year or the highest asset balance of all undisclosed foreign entities for each year, what exchange rate should be used?

Convert foreign currency by using the foreign currency exchange rate at the end of the year regardless of when during the year the highest account balance was reached. In valuing currency of a country that uses multiple exchange rates, use the rate that would apply if the currency in the account were converted into United States dollars at the close of the calendar year. Each account is to be valued separately.

If a taxpayer’s violation includes unreported foreign individual accounts and business accounts (for an active business), does the 27.5 percent offshore penalty include the business accounts?

Yes. Assuming that there is unreported income with respect to all the accounts, they all will be included in the penalty base. No distinction is drawn based on whether the account is a business account or a savings or investment account.

Is there a de minimis unreported income exception to the 27.5 percent penalty?

No. No amount of unreported income is considered de minimis for purposes of determining whether there has been tax non-compliance with respect to an account or asset and whether the account or asset should be included in the base for the 27.5 percent penalty.

If the look back period is eight years, what does the taxpayer do if the taxpayer held foreign real estate, sold it before the voluntary disclosure period, and did not report the gain on his return for the year of sale? Does the taxpayer compute the 27.5 percent on the highest aggregate balance in the voluntary disclosure period? What, if anything, does IRS expect the taxpayer to do with respect to the prior year of sale?

Gain realized on a foreign transaction occurring before the voluntary disclosure period does not need to be included as part of the voluntary disclosure. If the proceeds of the transaction were repatriated and were not offshore during the voluntary disclosure period, they will not be included in the base for the 27.5 percent offshore penalty. On the other hand, if the proceeds remained offshore during any part of the voluntary disclosure period, they will be included in the base for the penalty.

What kinds of assets does the 27.5 percent offshore penalty apply to?

The offshore penalty is intended to apply to all of the taxpayer’s offshore holdings that are related in any way to tax non-compliance, regardless of the form of the taxpayer’s ownership or the character of the asset. The penalty applies to all assets directly owned by the taxpayer, including financial accounts holding cash, securities or other custodial assets; tangible assets such as real estate or art; and intangible assets such as patents or stock or other interests in a U.S. or foreign business. If such assets are indirectly held or controlled by the taxpayer through an entity, the penalty may be applied to the taxpayer’s interest in the entity or, if the Service determines that the entity is an alter ego or nominee of the taxpayer, to the taxpayer’s interest in the underlying assets. Tax noncompliance includes failure to report income from the assets, as well as failure to pay U.S. tax that was due with respect to the funds used to acquire the asset. See FAQ 52, category 3, for a limited exception to this rule.

A taxpayer owns valuable land and artwork located in a foreign jurisdiction. This property produces no income and there were no reporting requirements regarding this property. Must the taxpayer report the land and artwork and pay a 27.5 percent penalty? What if the property produced income that the taxpayer did not report?

The answer to the first question depends on whether the non-income producing assets were acquired with funds improperly non-taxed. The offshore penalty is intended to apply to offshore assets that are related to tax non-compliance. Thus, if offshore assets were acquired with funds that were subject to U.S. tax but on which no such tax was paid, the offshore penalty would apply regardless of whether the assets are producing current income. Assuming that the assets were acquired with after tax funds or from funds that were not subject to U.S. taxation, if the assets have not yet produced any income, there has been no U.S. taxable event and no reporting obligation to disclose. The taxpayer will be required to report any current income from the property or gain from its sale or other disposition at such time in the future as the income is realized. Because there has not been tax noncompliance, the 27.5 percent offshore penalty would not apply to those assets.

In answer to the second question, if the assets produced income subject to U.S. tax during the voluntary disclosure period which was not reported, the assets will be included in the penalty computation regardless of the source of the funds used to acquire the assets. If the foreign assets were held in the name of an entity such as a trust or corporation, there would also have been an information return filing obligation that may need to be disclosed. See FAQ 5.

If a taxpayer transferred funds from one unreported foreign account to another during the voluntary disclosure period, will he have to pay a 27.5 percent offshore penalty on both accounts?

No. If the taxpayer can establish that funds were transferred from one account to another, any duplication will be removed before calculating the 27.5 percent penalty. However, the burden will be on the taxpayer to establish the extent of the duplication.

If, in addition to other noncompliance, a taxpayer has failed to file an FBAR to report an account over which the taxpayer has signature authority but no beneficial interest (e.g., an account owned by his employer), will that foreign account be included in the base for calculating the taxpayer’s 27.5 percent offshore penalty?

No. The account the taxpayer has mere signature authority over will be treated as unrelated to the tax noncompliance the taxpayer is voluntarily disclosing. The taxpayer may cure the FBAR delinquency for the account the taxpayer does not own by filing the FBAR with an explanatory statement before being contacted regarding an income tax examination or a request for delinquent returns. The answer might be different if: (1) the account over which the taxpayer has signature authority is held in the name of a related person, such as a family member or a corporation controlled by the taxpayer; (2) the account is held in the name of a foreign corporation or trust for which the taxpayer had a Title 26 reporting obligation; or (3) the account was related in some other way to the taxpayer’s tax noncompliance. In these cases, if the taxpayer is determined to have a direct or indirect beneficial interest in the account(s), the taxpayer will be liable for the 27.5 percent offshore penalty if there is unreported income on the account. On the other hand, if there is no unreported income with respect to the account, no penalty will be imposed.

If parents have a jointly owned foreign account on which they have made their children signatories, the children have an FBAR filing requirement but no income. Should the children just file delinquent FBARs and have the parents submit a voluntary disclosure? Will both parents be penalized 27.5 percent each? Will each parent have a 27.5 percent penalty on 50 percent of the balance?

For those signatories with no ownership interest in the account, such as the children in these facts, they should file delinquent FBARs as previously described in FAQ 17. As for the parents, only one 27.5 percent offshore penalty will be applied with respect to voluntary disclosures relating to the same account. In the example, the parents will be jointly required to pay a single 27.5 percent penalty on the account. This can be through one parent paying the total penalty or through each paying a portion, at the taxpayers’ option. However, any joint account owner who does not make a voluntary disclosure may be examined and subject to all appropriate penalties.

If multiple taxpayers are co-owners of an offshore account, who will be liable for the offshore penalty?

In the case of co-owners, each taxpayer who makes a voluntary disclosure will be liable for the penalty on his percentage of the highest aggregate balance in the account. The burden will be on the disclosing taxpayer claiming ownership of less than 100 percent of the account to establish the extent of his ownership. His voluntary disclosure is effective as to his tax liability only. It does not cover the other co-owners. The IRS may examine any co-owner who does not make a voluntary disclosure. Co-owners examined by the IRS will be subject to all appropriate penalties.

If there are multiple individuals with signature authority over a trust account, does everyone involved need to file delinquent FBARs? If so, could everyone be subject to a 27.5 percent offshore penalty?

Only one 27.5 percent offshore penalty will be applied with respect to voluntary disclosures relating to the same account. The penalty may be allocated among the taxpayers with beneficial ownership making the voluntary disclosures in any way they choose. The reporting requirements for filing an FBAR, however, do not change. Therefore, every individual who is required to file an FBAR must file one.

 

More on IRS website

New Filing Compliance Procedures for Non-Resident U.S. Taxpayers (FBAR, Form TD F, Tax Return)

The Service is announcing a new procedure for current non-residents including, but not limited to, dual citizens who have not filed U.S. income tax and information returns to file their delinquent returns. This procedure will go into effect on Sept. 1, 2012.

Taxpayers wishing to use the new procedure will be required to submit: (1) delinquent tax returns, with appropriate related information returns, for the past three years, (2) delinquent FBARs for the past six years, and (3) any additional information regarding compliance risk factors required by future instructions. Payment of any federal tax and interest due must accompany the submission. More information about the application process including where submissions should be sent, will be provided prior to the effective date.

Any taxpayer claiming reasonable cause for failure to file tax returns, information returns, or FBARs will be required to submit a dated statement, signed under penalties of perjury, explaining why there is reasonable cause for previous failures to file.  See IRS Fact Sheet FS-2011-13 (December 2011) for examples of reasonable cause. Any taxpayer seeking relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty will be required to submit:

  • a statement requesting an extension of time to make an election to defer income tax and identifying the pertinent treaty position;
  • for relevant Canadian plans, a Form 8891 for each tax year and description of the type of plan covered by the submission; and
  • a statement describing:
    • the events that led to the failure to make the election,
    • the events that led to the discovery of the failure, and
    • if the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities.

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2012 Offshore Voluntary Disclosure Program

2012 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers

Forms

Offshore Voluntary Disclosure Program Submission Requirements

As a condition to being accepted into the Offshore Voluntary Disclosure Program (OVDP), applicants must provide the IRS the following for the eight year voluntary disclosure period.

1. All applicants: Copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure.
2. All applicants: Complete and accurate amended federal income tax returns (for individuals, Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts, and, for years after 2010, Form 8938, Statement of Specified Foreign Financial Assets). For taxpayers who began filing timely, original, compliant returns that fully reported previously undisclosed offshore accounts or assets before making the voluntary disclosure for certain years of the offshore disclosure period, copies of the previously filed returns for the corresponding years.
3. All applicants: Copy of your completed and signed Offshore Voluntary Disclosures letter and attachment.
4. All applicants:  A check made out to the U.S. Treasury.  The check must include the amount of tax, interest, and accuracy-related penalty under IRC § 6662(a), and, if applicable, the failure to file and failure to pay penalties under IRC § 6651(a) (the suspension of interest provisions of IRC § 6404(g) do not apply to interest due in this initiative).  If you cannot pay the total amount of tax, interest, and penalties as described above, submit your proposed payment arrangement and a completed Collection Information Statement ( Form 433-A, Collection Information Statement for Wage Earners and Self-employed Individuals, or Form 433-B, Collection Information Statement for Businesses, as appropriate).
5. All applicants:  Completed Foreign Account or Asset Statement for each previously undisclosed foreign account or asset during the voluntary disclosure period if the information requested in that statement was not already provided in your initial Offshore Voluntary Disclosures Letter.
6. All applicants:  Completed penalty computation worksheet showing the applicant’s determination of the aggregate highest account balance of his/her undisclosed offshore accounts, fair market value of foreign assets, and penalty computation signed by the applicant and the applicant’s representative if the applicant is represented.
7. All applicants:  Properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties.
8. All applicants disclosing offshore financial accounts:  Complete and accurate Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts, for foreign accounts maintained during calendar years covered by the voluntary disclosure and/or copies of previously filed FBARs.
9. All applicants disclosing offshore financial accounts:  For those applicants disclosing offshore financial accounts with an aggregate highest account balance in any year of $500,000 or more, copies of offshore financial account statements reflecting all account activity for each of the tax years covered by your voluntary disclosure.  Explain any differences between the amounts reported on the account statements and the tax returns. For those applicants disclosing offshore financial accounts with an aggregate highest account balance of less than $500,000, copies of offshore financial account statements reflecting all account activity for each of the tax years covered by your voluntary disclosure must be available upon request.
10. All applicants disclosing offshore entities:  A statement identifying all offshore entities for the tax years covered by the voluntary disclosure, whether held directly or indirectly, and your ownership or control share of such entities.
11. All applicants disclosing offshore entities:  When accounts or assets were held in the name of a foreign entity, complete and accurate amended (or original, if delinquent) information returns required to be filed, including, but not limited to, Forms 3520, 3520-A, 5471, 5472, 926 and 8865 for all tax years covered by the voluntary disclosure.  If the applicant is requesting that the Service waive the information reporting requirement, the applicant should submit a completed and signed Statement on Dissolved Entities. (See FAQ 29.)
12. Estates and certain executors or advisors.  If the applicant is a decedent’s estate, or is an individual who participated in the failure to report the foreign account, foreign asset, or foreign entity in a required gift or estate tax return, either as executor or advisor, provide complete and accurate amended estate or gift tax returns (original estate or gift tax returns, if not previously filed) for tax years covered by the voluntary disclosure necessary to correct the underreporting of assets held in or transferred through undisclosed foreign accounts or foreign entities.
13. Returns involving Passive Foreign Investment Company (PFIC) issues.  A statement whether the amended returns involve PFIC issues during the tax years covered by the OVDP period, and if so, whether the applicant chooses to elect the alternative to the statutory PFIC computation that resolves PFIC issues on a basis that is consistent with the mark to market (MTM) methodology authorized in IRC § 1296 but does not require complete reconstruction of historical data.  A description of this alternative method is included in FAQ 10.
14. Applicants with Canadian registered retirement savings plans (RRSP) or registered retirement income funds (RRIF) who wish to make late elections to defer U.S. tax on RRSP or RRIF earnings: 

  • A statement requesting an extension of time to make an election
  • Forms 8891 for all tax years and type of plan covered under the voluntary disclosure
  • A dated statement signed by the taxpayer under penalties of perjury describing:
    • Events that led to the failure to make the election
    • Events that led to the discovery of the failure
    • If the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities

 

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2011 Offshore Voluntary Disclosure Initiative – Submission Requirements

  1. Copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure.
  2. Complete and accurate amended federal income tax returns (for individuals, Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts).
  3. Copy of your completed and signed Offshore Voluntary Disclosures Letter.

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OVDI – 2011 Offshore Voluntary Disclosure Initiative – Frequently Asked Questions and Answers

What are some of the civil penalties that might apply if I don’t come in under voluntary disclosure and the IRS examines me? How do they work?

Depending on a taxpayer’s particular facts and circumstances, the following penalties could apply:

  • A penalty for failing to file the Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”). United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000 at any time during the year. Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
  • A penalty for failing to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048.This return also reports the receipt of gifts from foreign entities under section 6039F.The penalty for failing to file each one of these information returns, or for filing an incomplete return, is 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
  • A penalty for failing to file Form 3520-A, Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b).The penalty for failing to file each one of these information returns or for filing an incomplete return, is five percent of the gross value of trust assets determined to be owned by the United States person.
  • A penalty for failing to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046.The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
  • A penalty for failing to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
  • A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
  • A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
  • Fraud penalties imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
  • A penalty for failing to file a tax return imposed under IRC § 6651(a)(1). Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
  • A penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2). If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
  • An accuracy-related penalty on underpayments imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.

 

What are some of the criminal charges I might face if I don’t come in under voluntary disclosure and the IRS examines me?

Possible criminal charges related to tax returns include tax evasion (26 U.S.C. § 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income tax return (26 U.S.C. § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.

A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

 

More FAQ on OVDI 2011

2011 OVDI letter – How to make a Voluntary Disclosure?

The 2011 Offshore Voluntary Disclosure Initiative (OVDI) is offered to those taxpayers with offshore accounts or assets. Please follow the new process outlined below.

Pre-Clearance:

Taxpayers or representatives may fax to the IRS Criminal Investigation Lead Development Center.
IRS Criminal Investigation will then notify taxpayers or their representatives via fax whether or not they have been cleared to make a voluntary disclosure using the Offshore Voluntary Disclosures Letter.

Pre-clearance does not guarantee a taxpayer acceptance into the 2011 OVDI.  Taxpayers must truthfully, timely, and completely comply with all provisions of the 2011 Offshore Voluntary Disclosures Initiative.

Offshore Voluntary Disclosure Letter

If the taxpayer chooses to submit a pre-clearance request, after the taxpayer receives a pre-clearance notification, the taxpayer will have 30 days from receipt of the fax notification to complete the Offshore Voluntary Disclosures Letter. If the taxpayer chooses to bypass the pre-clearance process, the taxpayer must mail the Offshore Voluntary Disclosures Letter.

The IRS will review the offshore Voluntary Disclosures Letters and notify the taxpayer or representative by mail whether the voluntary disclosure has been preliminarily accepted or declined.

Complete Voluntary Disclosure Package

Once the voluntary disclosure has been preliminarily accepted, the taxpayer should send the full voluntary disclosure package no later than August 31, 2011.

Taxpayers wishing to make a voluntary disclosure that is not covered under this offshore initiative should contact their local IRS Criminal Investigation (CI) office to speak with a criminal investigator.

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