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2012 Offshore Voluntary Disclosure Program

IRS's 2012 Offshore Voluntary Disclosure Program ("2012 OVDP")
Eliminate the Risk of Criminal Prosecution for Undisclosed Foreign Accounts and /or Foreign Entities

By Gerard J. Levins, Esq.
www.levinstaxlaw.com
gerard@levinstaxlaw.com

Taxpayers should be aware to the fact that if you or your entity have neither reported nor paid taxes on undisclosed foreign accounts and assets, you still may be eligible to participate in a limited IRS voluntary disclosure program to avoid criminal prosecution and resolve all outstanding issues on a much more favorable basis than that afforded by the IRS on audit. Under the IRS's 2012 Offshore Voluntary Disclosure Program (2012 OVDP), you may, in addition to generally eliminating the risk of criminal prosecution, make a voluntary disclosure now that will allow you to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. The 2012 OVDP covers the most recent eight tax years for which the due date has already passed. Thus, for taxpayers who submit a voluntary disclosure prior to April 15, 2014 (or other 2013 due date extensions), the disclosure must include each of the years 2005 through 2012 in which they have undisclosed foreign accounts and/or undisclosed foreign entities. Fiscal year taxpayers must include fiscal years ending in calendar years 2005 through 2012. For taxpayers who disclose after the due date (or extended due date) for 2013, the disclosure must include 2006 through 2013. The 2012 OVDP is available for individuals, and entities such as corporations, partnerships and trusts. Unlike the 2009 OVDP and the 2011 OVDI, there is no set deadline for taxpayers to apply. However, the terms of this program could change at any time going forward.

Under the terms of the 2012 OVDP, you must:

  • Provide copies of previously filed original and amended returns for tax years covered by the voluntary disclosure and/or provide complete and accurate amended federal income tax returns;
  • File complete and accurate original or amended offshore-related information returns and FBARs (Form TD F 90-22.1) for 2005 through 2012;
  • File completed Foreign Account or Asset Statement for each previously undisclosed foreign account or asset during the voluntary disclosure period.
  • File a complete Taxpayer Account Summary with Penalty Calculation.
  • Cooperate in the voluntary disclosure process, provide information on offshore financial accounts, institutions and facilitators, and sign agreements to extend the statute of limitations on assessments for taxes and penalties;
  • Pay 20% accuracy-related penalties on the full amount of tax underpayments for all years (and any other applicable penalties);
  • Pay, in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties, a 27.5% penalty (or a 12.5% or 5% penalty in limited cases) based on the highest aggregate balances in foreign bank accounts/entities or foreign asset values during the period covered by the voluntary disclosure;
  • Submit full payment of all taxes, interest and penalties or make arrangements to pay such amounts; and
  • Execute a Closing Agreement on Final Determination Covering Specific Matters (Form 906).

(Certain alternatives apply to PFIC investments that we should discuss if they apply to your circumstances).

If you have previously made a "quiet disclosure," i.e., simply filed amended returns reporting additional unreported income, and/or filed delinquent FBARs, you still are eligible to take advantage of the penalty framework applicable to the 2012 ODVP by submitting an application and copies of the previously filed returns (original and amended) and FBARs as soon as possible. The IRS encourages taxpayers to come forward under the 2012 OVDP to make timely, accurate, and complete disclosures and cautions that those making "quiet" disclosures risk an examination and criminal prosecution for all applicable years.

Taxpayers who do not participate in the 2012 OVDP risk detection by the IRS and imposition of substantial penalties, including the fraud penalty, foreign information return penalties and an increased risk of criminal prosecution. The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts, and this information has become more readily available to the IRS under various tax treaties, whistleblower rewards and compliance tools given to the Treasury and IRS in the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting requirements.

If you do not come forward and are caught, you face possible criminal penalties as follows: Tax evasion charges which subjects a taxpayer to a prison term of up to five years and a fine of up to $250,000. Filing a false tax return which subjects a taxpayer to a prison term of up to three years and a fine of up to $250,000. Failing to file a tax return which subjects a taxpayer to a prison term of up to one year and a fine of up to $100,000. Failing to file or filing a false Report of Foreign Bank and Financial Accounts, commonly known as an "FBAR" which subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.

There are also a variety of significant civil tax penalties that may apply as follows: For failing to file a tax return, the penalty is 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues not to exceed 25 percent. For failing to pay the amount of tax shown on the return, the penalty is .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each month or fraction thereof that the amount remains unpaid, not to exceed 25 percent. An accuracy penalty of 20 percent or 40 percent. A civil tax fraud penalty of 75 percent of unpaid tax due to fraud. An FBAR penalty for non-willful violations of up to $10,000 per violation, or an FBAR penalty for willful violations of the greater of $100,000 or 50 percent of the total balance of the foreign account per violation.

If you have any concerns about undisclosed foreign accounts and assets or have previously filed amended returns with respect to offshore accounts and assets, please contact my office at your earliest convenience via telephone at 508-435-0118 (or toll free at 888-333-9501) or via email me at gerard@levinstaxlaw.com for a free no-obligation consultation so that we may review your situation and determine whether you qualify for the 2012 OVDP.