When Should Your Client Consider Making an Offshore Disclosure?

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Offshore Disclosure Attorney – International Tax Lawyer, Sean M. Golding (Board-Certified Tax Law Specialist) When Should Your Client Consider Making an Offshore Disclosure? (Golding & Golding)

When Should Your Client Consider Making an Offshore Disclosure?

With OVDP having ended on 9.28.2018, if a person is willful (or otherwise does not want to submit to Streamlined or Reasonable Cause), they have limited options for disclosure.

IRS Disclosure Lawyer (Board-Certified Tax Law Specialist)

We understand that IRS Voluntary/offshore Disclosure law can be daunting, overwhelming, and downright confusing.

Mr, Golding is a Board-Certified Tax Law Specialist and the only Certified Tax Attorney Specialist who specializes exclusively in IRS Disclosure (Reporting) of Income, Assets, Accounts and Investments.

Offshore/Voluntary Disclosure (U.S. & Foreign Income)

The IRM (Internal Revenue Manual) disclosure practice has been around for many years. While people with either unreported offshore/foreign money (either with or without unreported domestic income) usually opted for OVDP, the IRM program is still an effective program for disclosure (and better than getting caught in a compromised situation by the DOJ or IRS Special Agents)

The following are some common examples of voluntary disclosures:

Common Scenario 1 – Peter from HONG KONG 

Peter is from Hong Kong. He is a Legal Permanent Resident in the United States and has resided in the U.S. for many years.  He was unaware of reporting, and has four main issues:

  • He has unreported foreign accounts in Hong Kong
  • He has unreported foreign income in Hong Kong (Tax-Free in Hong Kong)
  • He as unreported rental income in Hong Kong
  • Unreported 1099 interest he forgot to include.

Result: Peter can disclose all of his U.S. and Foreign income, assets, investments, and accounts – and may qualify for Streamlined or Reasonable Cause.

Common Scenario 2 – David From INDIA

David is From India. He is a Legal Permanent Resident in the United States and has resided in the U.S. for many years.  He was unaware of reporting, and has four main issues:

  • Undisclosed Indian mutual funds (Kotak, ICICI, L&T, HDFC), with some funds linked to an SBI account — Dividends were issued
  • Fixed Deposits (FD) that have not matured but are accruing income
  • A Tax Refund issued in India, since his earnings were below the tax threshold.
  • U.S. consulting income that was received, in which no 1099 was issued (he forgot about. the income)

Since David has mutual funds, and there are distributions going out into a linked ICICI, SBI or other account, an excess distribution analysis must be completed (even if it is thereafter reinvested, since it left the fund).

In addition, David is required to pay tax on the interest income accruing in his FD (even if they only pay out at the end).

Finally, since he received a tax refund in India, presumably he would not be entitled to a foreign tax credit on those taxes paid (or it would have to be repaid and claimed as income in the U.S.)

Result: David qualifies for the Streamlined Program (and possibly Reasonable Cause) if he was non-willful, but is ineligible for a Mark-to-Market election using the Streamlined Program (although he may be able to make the election using Reasonable Cause).

Common Scenario 3 – Michelle from the U.K.

Michelle is from the UK. She is a U.S. Citizen and relocated to the United States a bit later in life. She was aware of reporting but chose not to report. She has the following issues:

  • Pension earned in the U.K. from a private employer
  • U.K. rental income not reported anywhere
  • Foreign investment accounts
  • Taxable U.S. State Refund

Result: Since Michelle was willful, she can disclose all of the unreported income and account information to the IRS using the (IRM) IRS Voluntary Disclosure Program.

Common Scenario 4 – Dani from AUSTRALIA

Dani is from Australia. She is a mid-career U.S. Citizen who relocated to the United States a few years ago. She received incorrect advice from a foreign expat service, and she has the following issues:

  • Australian Superannuation Fund (x 3)
  • Stocks
  • Bank Interest
  • U.S. investment income that she reinvested.

Result: Since Dani received bad advice, she may qualify for either the Streamlined Domestic Offshore Procedures – and possibly Reasonable Cause where she can try to seek a penalty waiver.

The Superannuation(s) are usually reported on the FBAR and 8938. Typically, if there are no distributions (other factors pending) – she may qualify to avoid income tax on the growth and a 3520-A/8621 is also usually not required.

Even though the income was re-invested, the funds were distributed  (even though they were reinvested) which means she may be subject to tax on the non-superannuation, non-retirement income.

What Can You Do?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs (or Reasonable Cause if you qualify).

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, Board-Certified Tax Law Specialist

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

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 financial 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 8938

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 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 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

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 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

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

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

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

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

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 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.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

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.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point you discover that you should have been reporting your foreign income, accounts, assets or investments, the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure programs.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

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