On December 17th at the George Washington University Law conference on international taxation, the Commissioner of the IRS John Koskinen said, “At some point, we will have assumed that people have had enough notice that they should have become voluntarily compliant,” “At that point—after some period of time and you’re not compliant—it will be assumed that logically you are purposely not compliant”. This announcement reminds us that amnesty programs do not last forever. Furthermore, with the advent of the sharing of financial information with Treasury under FATCA, it appears that it may be only a limited time for delinquent filers not to be discovered.
The IRS began an open-ended offshore voluntary disclosure program (OVDP) in January 2012 on the heels of strong interest in the 2011 and 2009 programs. Unlike the 2009 OVDP and the 2011 OVDI, there was no set deadline for taxpayers to apply. The IRS is offering people with undisclosed income from offshore accounts another opportunity to get current with their tax returns. The 2012 OVDP has a higher penalty rate than the previous program but offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution.
As part of the process of determining whether one has tax liability and if so, if one owes a large enough amount (whether in tax or penalties) that would make OVDP the better choice, we will need to consider among other items, one’s delinquent Form 5471 filings to disclose ownership of a Canadian entity (10k penalty) and required non-US trust filings, if any (such as Form 3520 & 3520A required for family trusts, RESP and TFSA accounts). As well, these same items need be considered for the actual tax return preparation itself.
If you go the streamlined route, which is often the better overall solution, when it’s the best fit, you’ll self-prepare 6 yrs FBARs FBAR frequently asked questions page while we would prepare 3 years of 1040s at regular cost (cost varies on how much work is required, a return requiring little each year will be in the $600 range, but if you have a 5471 (i.e. own a Cdn corporation, it will be more). Our preparation will not include family trust reporting, if required. If you qualify for the $1,000 per child refund, your refund could easily exceed your prep costs.
You can decide to proceed with the streamlined route, either via engaging us to help with such determination or by simply reviewing and concluding such on your own and instructing us to proceed with the compliance for the streamlined route, which as mentioned, is essentially standard return prep cost.
You should submit copies of filed FBARs for the last six years for which an FBAR is due. (You should file delinquent FBARs according to the FBAR instructions on www.irs.gov and IF GOING THE STREAMLINED ROUTE tick the online filing box that indicates that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures Non-Filer U.S. Taxpayers.
Consider the following OVDP downsides if choosing OVDP and not streamlined:
What are the eligibility requirements for OVDI? Officially, anyone can participate in the OVDI program unless they are under audit or criminal investigation, have received notice from the IRS regarding unreported foreign accounts or the IRS has already received their name from a cooperating bank. An OVDI disclosure is made by doing the following:
(1) Filing both the original returns and amended returns for the prior eight years that report all income and disclose the foreign accounts;
(2) Filing all missing FBAR reports;
(3) Cooperating fully in the OVDI process;
(4) Signing agreements to extend the statutes of limitation; and
(5) Paying penalties.
While OVDI might make sense for many taxpayers who have undisclosed foreign bank accounts, it is not right for everyone. What class of taxpayers might it not be right for? Those with defenses or explanations. Why? Because OVDI is a one-size-fits-all “package” deal. Once the taxpayer enters the program, these tax, interest, and penalty assessments are automatically imposed. In other words, OVDI does not include the expectation of a full audit to determine a taxpayer’s correct tax liability and appropriate penalties. Very simply, a taxpayer is barred from offering mitigating evidence in support of a defense.