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SDOP Real Estate Penalty | Offshore Voluntary Disclosure Law Firm

One of the most important considerations in an offshore voluntary disclosure is the type of assets that form the Penalty Base for the imposition of the Miscellaneous Offshore Penalty. In this article, I would like to explore the issue of whether there is such a thing as SDOP Real Estate Penalty.

SDOP Real Estate Penalty: Streamlined Domestic Offshore Procedures Background

Streamlined Domestic Offshore Procedures or SDOP is an offshore voluntary disclosure option that was announced by the IRS in June of 2014. With the recent termination of the OVDP (Offshore Voluntary Disclosure Program), SDOP has become the main voluntary disclosure vehicle for eligible taxpayers.

Under the terms of the SDOP, a taxpayer voluntarily discloses his prior noncompliance with US international tax laws, files FBARs for the past six years, amends tax returns for the past three years and certifies under the penalty of perjury that his prior noncompliance with US tax laws was non-willful. Moreover, the taxpayer must pay a 5% Miscellaneous Offshore Penalty that supplants all other penalty structures associated with FBAR and other US international information returns (such Form 5471, 8865, et cetera).

SDOP Real Estate Penalty: SDOP Penalty Base

The 5% Miscellaneous Offshore Penalty is imposed on the entire SDOP Penalty Base. The SDOP Penalty Base is formed by the inclusion all foreign financial assets undisclosed on US international information returns as well as income-noncompliant foreign financial assets. This includes without limitation all assets listed on FBARs and Forms 8938, 5471, 8858, 8865, 3520 (the foreign trust portion), 3520-A, et cetera.

Is there A SDOP Real Estate Penalty?

Now, armed with this understanding of the structure of the SDOP Penalty Base, we can answer the question of whether there is such a thing as SDOP Real Estate Penalty. Since the SDOP Penalty Base is formed by the inclusion of all foreign financial assets and real estate is not a foreign financial asset, we can conclude that there is no SDOP Real Estate Penalty on the real estate owned directly by a US taxpayer.

What about real property owned through a foreign business entity or a foreign trust? Unfortunately, it is here where we encounter the hidden SDOP Real Estate Penalty. If the foreign entity (or income from this foreign entity) was not properly disclosed on Form 8938 or any other relevant information return which is used to avoid the duplication of reporting of foreign business ownership (i.e. Form 5471, 8865, 8858, 3520 and 3520-A), then the SDOP Penalty Base will include the fair market value of the undisclosed foreign entity. In other words, the SDOP Real Estate Penalty may be imposed on the value of the entity that is holding the real estate, not real estate per se.

This is very worrying news to taxpayers who hold real estate through foreign entities. In virtually all Latin American countries, US taxpayers usually own real estate through a corporation. This means that they are exposed to the imposition of SDOP Miscellaneous Offshore Penalty on their personal real estate that is held through a foreign entity simply because it is a local custom to do so.

Contact Sherayzen Law Office for Professional Help With Your Offshore Voluntary Disclosure

If you have undisclosed foreign assets and/or foreign income, you need to contact Sherayzen Law Office for professional help. Our legal team, led by an international tax attorney Eugene Sherayzen, is highly experienced in offshore voluntary disclosures of unreported offshore assets and income. Whether it is Indian mutual funds, Swiss Structured Products, a French Assurance Vie account, Polish lokatas, Australian Superannuation accounts, Canadian RRSPs, a Malaysian health insurance investment policy, a Singapore Central Provident Fund (CPF), an Italian Corporation, a British Limited Company, a Spanish rental property, a Panamanian Sociedad Anonima, a Kazakh foreign branch, a Jersey trust and many, many other varieties of foreign assets – we have done it all and successfully brought our clients in full compliance with the US international tax laws. We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!

3 Main Streamlined Domestic Compliance Disadvantages | SDOP Lawyer

In a previous article, I described the three main advantages of doing an offshore voluntary disclosure through Streamlined Domestic Offshore Procedures (“Streamlined Domestic Compliance”). Today, I would like to discuss three main Streamlined Domestic Compliance disadvantages.

Streamlined Domestic Compliance Disadvantages: Audit Risks

The first main disadvantage of Streamlined Domestic Compliance is the potential IRS audit within three years after the voluntary disclosure is completed. The audit is likely to include everything: FBARs, amended tax returns, Miscellaneous Offshore Penalty calculation and, most importantly, the determination of non-willfulness.

The potential IRS audit stands in a shark contrast to the IRS flagship Offshore Voluntary Disclosure Program (“OVDP”) which closed in September of 2018. At the end of a voluntary disclosure through OVDP, the taxpayer and the IRS sign the Closing Agreement, which (absent fraud or material mis-statements) effectively closes prior tax noncompliance issues forever.

The audit risks may be particularly important to taxpayers who are in the process of obtaining their US citizenship or US permanent residence.

Streamlined Domestic Compliance Disadvantages: Penalty Base Not Limited to Income Noncompliance

One of the main Streamlined Domestic Compliance disadvantages is the fact that the calculation of the penalty base (i.e. what assets are subject to the 5% penalty) includes assets that never produced any foreign income. Moreover, the penalty base includes a foreign asset even if the foreign income from this asset was timely disclosed on the taxpayer’s original tax return, but the asset itself was not reported on FBAR or any other international information return.

In other words, a taxpayer who participates in the Streamlined Domestic Compliance should be prepared to pay a 5% penalty even on assets that are compliant with the US income tax laws.

Again, this is contrary to the rules of the OVDP. In the OVDP, only assets that are tied to income tax noncompliance are included in the penalty base.

Streamlined Domestic Compliance Disadvantages: Danger of Superficial Analysis

Finally, the danger of superficial analysis concerning non-willfulness constitutes the third main disadvantage of the Streamlined Domestic Compliance. In reality, there are two dangers which should be placed at the opposite ends of the voluntary disclosure continuum.

The first danger is the natural bias in the self-assessment of non-willfulness. Oftentimes, a taxpayer may exaggerate the facts in his favor while selectively ignoring the facts that may establish willful noncompliance. This is very natural. It is difficult to find a person who will state outright that he was willful in his prior tax noncompliance.

Usually, this problem can be (and should be) fixed by retaining an international tax attorney to do an independent assessment of the taxpayer’s non-willfulness.

At the opposite end is the danger of concentrating on non-willfulness and ignoring the possibility of doing a Reasonable Cause disclosure. In most cases, this is not a problem because Streamlined Domestic Compliance would be a superior choice despite the 5% penalty. This, however, is not true in all cases and real opportunities are often lost by failure to explore this route.

I should state that the biggest problem that I found in my practice is the fact that some taxpayers do not consult an international tax attorney on this issue. Instead, they try to do everything themselves even though they have no specialized knowledge in this field. I strongly discourage this practice.

I believe that the involvement of an international tax attorney is essential to doing a proper offshore voluntary disclosure.

Contact Sherayzen Law Office for Professional Help with Your Offshore Voluntary Disclosure

Choosing the correct offshore voluntary disclosure path is the most important decision for a taxpayer who wishes to remedy his past noncompliance with US tax laws. Every voluntary disclosure option has its advantages and disadvantages. All essential factors must be considered.

The failure to do proper legal analysis may have highly negative legal and tax consequences. It may even put a taxpayer in a position worse than what he was prior to his attempt to do a voluntary disclosure.

This is why you need the professional help of Sherayzen Law Office. Our experienced legal team has helped hundreds of US taxpayers to do their offshore voluntary disclosures properly. We Can Help You! Contact Us Today to Schedule Your Confidential Consultation!