Offshore Accounts, FATCA & the Offshore Voluntary Disclosure Program
As implimentation of the Foreign Account Tax Compliance Act ("FATCA") continues, U.S. persons with offshore financial accounts are beginning to take notice. Passed as part the 2010 HIRE Act, FATCA's goal is to increase offhsore account compliance. (see FATCA, New Reporting Requirement for U.S. Taxpayers Holding Foreign Financial Assets). FATCA provides a two prong attack on offshore accounts. First, FATCA creates a new IRS filing requirement (see Form 8938).
Second, FATCA requires foreign institutions to report account information of U.S. customers to the U.S. government. FATCA encourages foreign financial institutions to comply with the reporting requirements by imposing significant withholding taxes on U.S. source income earned by such banks if they do not comply. Information reporting by foreign financial institutions is set to begin on January 1, 2014.
Offshore Voluntary Disclosure Program ("OVDP")
The IRS began its current offshore voluntary disclosure program in January of 2012. This is the third rendition of the program, following successful programs that closed in 2009 and 2011 (formerly known as the offshore voluntary disclosure initiative). The IRS was able to raise an additional $5.5 billion between the first two programs.
The current program is open-ended, which means that it may be closed (or its terms changed) at any time. The main potential benefits of entering the OVDP program are two-fold: 1) the IRS will not refer the case of a taxpayer who successfully completes the OVDP submission requirements to the Criminal Investigations department, and 2) an alternative penalty structure applies in lieu of other penalties for failure to file. In addition, special provisions apply to taxpayers who have properly reported all tax liabilities, but have failed to file one or more information returns. Taxpayers in such situations may be able to become current on their filings without paying any penalties at all.
The standard alternative penalty rate in the current OVDP program is based upon the highest aggregate balance in unreported foreign accounts over the eight preceding tax years for which the due date has already passed. The standard rate is 27.5% of the highest balance. Note that this penalty is in addition to paying the actual tax due on unreported income during the voluntary disclosure period, plus a 20% accuracy related penalty on such deficiency. Note that unreported domestic income must also be disclosed as part of the filing.
FATCA & the Offshore Voluntary Disclosure Program
Critically, the ability to use the offshore voluntary disclsoure program extends only so long as the taxpayer is not already under civil or criminal investigation. Typcially, if the IRS has knowledge of a previously unreported foreign account, the IRS will not allow the taxpayer benifit from the provisions of the OVDP.
As discussed above, FATCA requires foreign financial institutions to report to the U.S. goverment accounts held by U.S. persons. This reporting requirement significantly increases the liklihood of detection of foreign financial accounts held by U.S. persons at foreign financial institutions. Therefore, FATCA's reporting regime may limit a taxpayer's ability to benifit from the offshore voluntary disclosure program.
How can Offshore Voluntary Disclosure attorneys help?
Offshore Voluntary Disclosure attorneys at Harlowe & Falk can help determine your rights and obligations, and determine whether the offshore voluntary disclosure program is right for you.
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Mehrdad is a partner at the law firm of Harlowe & Falk LLP. Based in the greater Seattle area, but with clients internationally, Mehrdad's practice includes international tax consulting. This includes consulting with clients on inbound transactions, outbound transactions, mergers & acquisitions, and IC-DISC....