As FBAR attorneys are aware, the IRS offshore voluntary disclosure program may be of a interest to your if you own foreign assets, because you have certain US income tax filing rules that you must follow if the account balance in the account exceeds $10,000 (for instance the FinCen Form 114). The IRS filing requirement for foreign assets require that you disclose substantial foreign assets, and almost always include the income from the foreign asset in your US tax return. Once the account balance is over $10,000 USD, than you also need to review the rules and see if you need to file any other tax forms, such as the Form 8938 as part of your Form 1040 series tax return.
IRS Offshore Voluntary Disclosure Program
These rules are complex, so there are many taxpayer’s that never knew about these tax filing requirements, since they were not informed by the banks that held the asset, or their accountants and need the assistance of a FBAR attorney. For these people, the IRS has a program that is helpful since it allows you to get back into compliance, avoid the penalties for late filing, and pay the correct taxes owed. The program is generally known as the IRS Streamlined Offshore Voluntary Disclosure Program (OVDP). It has one set of rules if you are a US resident, and another set of rules if you are not a tax resident of the United States. Filing under theses program has many complexities, so your submission has to be well thought out to get the maximum benefit. To complete the submission under this program, you need to disclose the last six years of balances of assets you owed overseas, and the last three years of income earned by filing a Form 1040X and FinCen 114. In general, the reduced penalty under this program is 5% of the asset balance, plus the taxes owed plus interest, for US residents, and a lessor penalty if you are a nonresident taxpayer.
The penalties you avoid by filing under these programs are very substantial, so it is worth investigating if these programs are a good fit for your circumstances. In certain cases, the failure to file certain foreign asset or income tax forms (such as Forms 8938, 5471, 5472, 3520, 3520-A) can result in a $10,000 civil penalty, up to 50% of the account balance per year for not filing the correct form. The IRS tends to be very harsh with penalties for foreign asset issues, so paying the 5% penalty (in most US resident cases) is often the wise choice for the relative certainty that it provides. The criminal penalties related to tax evasion, and filing a false return, typically would not be avoid by filing under the streamlined voluntary disclosure program since this program is for taxpayers who made an honest mistake, and not taxpayers who motive tax evasion.
The goal of filing under the program is simple. For the average person who owns foreign assets and filed all the forms correctly, you have no problem. If you have failed to file the correct tax returns, and the reason was in essence a mistake (by you or your accountant), then filing under the streamlined voluntary disclosure program would likely be a good choice for you with the help of a FBAR lawyer.
Practical Considerations
The benefits of disclosing under the IRS streamlined voluntary disclosure program are often thought of the solution for a client who has 1) not filed their FBAR reports, 2) have undisclosed foreign income, and 3) whose conduct was not intentional (non tax fraud cases). However, the limits of the streamlined disclosure program do not require that you must have all three factors in play to be eligible. If you simply have under-reported foreign income , but you filed all your FBAR reports, and disclosed the assets in your tax return, then you are still eligible to file under the program and get the benefits of the program if you just made a mistake in calculating your income. The main benefit of the program is that the outcome is much more certain than a quiet disclosure (where you just mail in the amended income tax returns). The penalty is five percent of the asset balance, plus tax and interest on the under-reported income. Under a quiet disclosure, you could be charged with higher penalties, or even criminal conduct if the IRS disagrees that your conduct was unintentional. Therefore, while no solution is risk free, the streamlined disclosure may be useful tool in many cases and a FBAR attorney can assist you to do the disclosure correctly.
