IRS Form 8938 tax attorney

Application of Offshore Penalty to Business Ownership Interests

In another essay, I previously discussed the possible inclusion of the business ownership interests in the calculation of the OVDP (2012 Offshore Voluntary Disclosure Program) Offshore Penalty.  In this article, I would like to explore in more depth the application of the Offshore Penalty to ownership of business interests.

OVDP Offshore Penalty

It is a requirement of the OVDP that the taxpayers who enter the program pay the Offshore Penalty. This penalty is imposed in lieu of all other penalties that may apply to the taxpayer’s undisclosed foreign assets and entities, including FBAR and offshore-related information return penalties and tax liabilities for years prior to the voluntary disclosure period. The default penalty rate is 27.5% (in limited cases, the penalty is reduced to 12.5% or 5%) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure.

The Offshore Penalty calculation includes business ownership interests related to tax noncompliance. Tax noncompliance includes failure to report income from the assets, as well as failure to pay U.S. tax that was due with respect to the funds used to acquire the asset.

Business Ownership Interests Are Included in the Offshore Penalty; Limited Exceptions

As I previously discussed, the Offshore Penalty is much broader than simply the FBAR penalty. Among other items, the Offshore Penalty encompasses ownership interest in businesses related to income tax non-compliance or acquired by tainted funds (i.e. funds that were subject to U.S. tax but on which no such tax was paid; the definition also includes funds derived from illegal sources such as criminal and terrorist activities).

There are exceptions to this rule, however. Two most prominent exceptions deserve to be emphasized here. First, where a business interest was not obtained by tainted funds and there are no under-reported U.S. tax liabilities, the taxpayer is likely to be able to exclude the business interest from the Offshore Penalty.

Second, the OVDP rules carve out a limited exception for U.S. taxpayers who are foreign residents and quality for the third category of 5% penalty rate. For these taxpayers only, the IRS stated that the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence. This exception only applies if the income tax returns filed with the foreign tax authority included the offshore-related taxable income that was not reported on the U.S. tax return.

Obviously, the determination of whether either of these two exceptions (or any other exception) applies in your individual case should only be determined by an international tax attorney experienced in the area of offshore voluntary disclosures.

Major Types of Business Ownership Interests Covered by the Offshore Penalty

The biggest category of business ownership interests covered by the Offshore Penalty includes ownership of foreign entities for which information returns, such as Forms 5471, 8865, 8858, 926 and so on, should have been filed by the non-compliant taxpayer. Most often, this category includes ownership of closely-held foreign corporation, interest in the controlled foreign partnership and contribution of property to a foreign corporation.

Notice that, even if the business entity controlled by the taxpayer is not itself tax non-compliant, but it holds the assets which are non-compliant (usually because they were purchased by using tainted funds), the entire ownership interest in the business entity may be exposed to the Offshore Penalty.

Another type of business interest that is often subject to Offshore Penalty involves business entities that are virtually indistinguishable from its owners. In situations where a business entity is an alter ego or nominee of the taxpayer, the IRS may determine that the Offshore Penalty should be applied to the underlying assets of the entity.

The most spectacular reach of the OVDP, however, is the possibility of involving domestic entities. In spite of having “Offshore” in its name, the Offshore Penalty can actually apply to ownership of U.S. businesses acquired with tainted funds. This is a critically-important consideration for non-compliant U.S. taxpayers who repatriated tainted funds back to the United States and invested them into U.S. businesses.

Contact Sherayzen Law Office for Help With Your Voluntary Disclosure of Offshore and Domestic Business Ownership Interests

Sherayzen Law Office can help you with the disclosure of any of your foreign assets, including Offshore and Domestic business ownership interests. Our international tax law firm is highly experienced in conducting offshore voluntary disclosures of business interests. We will thoroughly analyze your case, assess your tax liability as well as the liability that you would face under the OVDP, determine the available disclosure options and implement the disclosure strategy (including preparation of all legal and tax documents as well as IRS representation).

Contact Sherayzen Law Office to schedule your consultation!

IRS Form 8938 and Revised Form 8621 Filing Requirements Under Notice 2011-55

The IRS recently released Notice 2011-55, partially suspending certain Foreign Account Tax Compliance Act (“FATCA”) information reporting requirements until Form 8938, (Statement of Specified Foreign Financial Assets), and a revised Form 8621, (Return by a Shareholder of a Passive Foreign Investment Company or a Qualified Electing Fund) are released.

It is important to note that while the reporting requirements of Forms 8938 and revised Form 8621 have been partially suspended, they have not been excused for taxpayers. Thus, taxpayers should be aware that until the new forms are issued, tax preparation may be necessary in order to be in compliance and avoid severe penalties.

FATCA Reporting Requirements

Congress enacted FATCA as part of the Hiring Incentives to Restore Employment Act (“HIRE” Act). Included in FATCA is the additional information reporting requirements of IRC Sections 6038(D) and 1298(f).

Under 6038(D), taxpayers who hold more than $50,000 in the aggregate in any financial account maintained by a foreign financial institution, or in any foreign stock, interest in a foreign entity (including a foreign trust, or financial instrument with a foreign counterpart that is not held in a custodial account of a financial institution) are subject to file a Form 8938 with their annual return.

IRC Code Section 1298(f) requires a U.S. person who is a shareholder in a passive foreign investment company (“PFIC”) to file an annual report, Form 8621. Notice 2011-55 states that the IRS will be issuing a revised Form 8621. Once the revised form is issued, individuals must retroactively file the revised Form 8621 for tax years beginning after the date of the HIRE Act (March 18, 2010).

The IRS is planning on also issuing further regulations regarding these reporting requirements.

Notice 2011-55

IRS Notice 2011-55 provides that the IRC 6038D Form 8938 reporting requirements are suspended until the form is released. Additionally, as noted above, for U.S. shareholders of PFIC’s who were not previously required to file Form 8621 under the current requirements before the enactment of Section 1298(f), reporting requirements are suspended (but not excused) until the revised Form 8621 is released. Taxpayers who are already required to file Form 8621 under the current instructions must continue to file the form.

When the IRS issues the revised forms, taxpayers who must file will be required to attach the appropriate forms to their next information return or tax return, completed for the suspended tax year. Failure to file (or to properly file) Form 8938 and/or Form 8621 for the suspended tax year may result in the extension of the statute of limitations under section 6501(c)(8), and penalties may also be applied.

A Form 8938 or revised Form 8621 filed for a suspended tax year with a timely filed information or tax return will generally be treated as having been filed in the date that the income tax or information return for the suspended tax year was filed.

Subject to certain exceptions, the statute of limitations for assessment of tax will not expire until three years after Form 8938 and/or revised Form 8621 is received by the IRS.

FBAR Requirements Not Affected

The IRS stated in Notice 2011-55 that the filing requirements of FinCEN Form 114 formerly Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts; “FBAR”) are not suspended under the notice.

Contact Sherayzen Law Office For Experienced Legal Help

This article is intended to give a brief summary of these issues, and should not be construed as legal or tax advice. Tax planning and reporting often necessitates an experienced understanding of complex regulations, statutes, and case law, and penalties for failure to comply can be substantial. If you have further questions regarding your own tax circumstances, Sherayzen Law Office offers professional advice for all of your Federal, international, cross-border, and state tax needs. Call or email for a consultation today.