2014 OVDP Lawyers identified August 4, 2014, as an important filing deadline to any U.S. taxpayers who intend to enter into the IRS Offshore Voluntary Disclosure Program (“OVDP”). This new deadline stems directly from the recent 2014 update to the OVDP. In this article, I want to briefly describe the deadline and its background, and why so many 2014 OVDP Lawyers are concerned about it.
2014 OVDP Lawyers: 2014 OVDP Background
The 2014 OVDP (really just an update to 2012 OVDP), like its predecessors, is a voluntary disclosure program created by the IRS to allow U.S. taxpayers with undisclosed foreign accounts to come forward under specific terms. The biggest advantage to participating in the OVDP is the reduction of civil penalties (especially in a willful situation) and avoidance of criminal liability.
Over the years, the offshore voluntary disclosure programs have gotten tougher and tougher, which, in the context of the 2012 OVDP, was considered by many 2014 OVDP Lawyers as unfair to taxpayers who were non-willful in their inability to comply with the U.S. tax requirements, especially FBARs (the Report of Foreign Bank and Financial Accounts).
2014 OVDP Lawyers: The Resurrection of Willfulness vs. Non-Willfulness
One the biggest changes to the OVDP program is the resurrection of the distinction between willful and non-willful failure to comply with U.S .tax laws – a distinction that has always existed in the statutory framework of U.S. tax laws, but has been ignored by the designers of the OVDP until June 18, 2014.
As a result of this new approach to OVDP, many 2014 OVDP Lawyers now argue that 2014 OVDP is strictly reserved to U.S. taxpayers who were willful in their non-compliance with the FBAR deadlines and other U.S. international tax reporting requirements. The non-willful U.S. taxpayers now have the option of entering a Streamlined Procedure to do their voluntary disclosure.
2014 OVDP Lawyers: August 4 Increase in Offshore Penalty to 50%
Due to this re-discovered distinction between willful and non-willful conduct, the IRS now appears to have assumed that anyone entering OVDP has willfully violated U.S. tax laws. Hence, as of August 4, 2014, the IRS intends to toughen the OVDP penalties.
Under the prior 2012 OVDP, the 2014 OVDP Lawyers were familiar with a three-tier penalty structure with the penalty rates of 5%, 12.5% and 27.5%. The 2014 OVDP completely replaced this structure with a new two-tier penalty structure. Until August 4, 2014, everyone in the OVDP or submitting the preclearance letter to the IRS Criminal Investigation Unit will be subject to a 27.5% penalty.
However, beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50% Offshore Penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation, an event has already occurred that constitutes a “public disclosure”.
2014 OVDP Lawyers: Definition of “Public Disclosure”
Many 2014 OVDP Lawyers are now becoming familiar with a new definition of what constitutes a “public disclosure” under the new 2014 OVDP rules. There are three events specifically listed by the IRS as constituting “public disclosure”.
First, there is a public disclosure of a foreign account if “the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person.” FAQ 7.2 for 2014 OVDP. In other words, if the your foreign bank is under the investigation from the IRS or the Department of Justice, your account is deemed to have been publicly disclosed by the IRS.
In essence, this means that U.S.-held accounts in any banks designated as Category One banks (contact 2014 OVDP Lawyers for further clarification of this definition) by the DOJ Program for Swiss Banks are deemed to have been publicly disclosed. Moreover, other banks can be easily added by the IRS to the list and any accounts held in these banks will also be subject to the 50% penalty.
Second, there is a public disclosure of a foreign account if “the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person.” Id.
Finally, there is a public disclosure of a foreign account if “the foreign financial institution or other facilitator has been identified in a court- approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a ‘John Doe summons’) at the foreign financial institution or have accounts established or maintained by the facilitator.” Id. The IRS further states that examples of a public disclosure include, among others, a public filing in a judicial proceeding by any party or judicial officer, or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.
2014 OVDP Lawyers: June 18, 2014 List of Banks Included in the Definition of “Public Disclosure”
Here is the IRS list of these financial institutions current as of June 18, 2014 (as stated above, the IRS can expand this list at any moment):
1. UBS AG
2. Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
3. Wegelin & Co.
4. Liechtensteinische Landesbank AG
5. Zurcher Kantonalbank
6. swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
7. CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
8. Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
9. The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
10. The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates
2014 OVDP lawyers should be aware of this list when talking with their clients.
2014 OVDP Lawyers: Scope of 50% Penalty
Understanding the scope of the 50% penalty is very important for the 2014 OVDP lawyers and their clients. The crucial feature of the 50% penalty is that, once it is applied to one account or asset, the IRS will apply it to all of the taxpayer’s assets subject to the Offshore Penalty. This even includes accounts which are held at another bank and which have not been “publicly disclosed”.
Contact Sherayzen Law Office for Help With YourVoluntary Disclosure of Foreign Accounts
If you have undisclosed foreign accounts and any other foreign assets, you should contact Sherayzen Law Office for professional legal help with your offshore voluntary disclosure. The new 2014 OVDP contains many crucial deadlines and new options. Our experienced international tax law firm has helped hundreds of U.S. taxpayers throughout the world and we can help you.