12.5% OVDP Offshore Penalty Category

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In an earlier article, I introduced the structure of the OVDP (Offshore Voluntary Disclosure Program) Offshore Penalty. In this essay, I would like to explore one aspect of that structure – the possibility of reducing the Offshore Penalty to 12.5%.

Offshore Penalty

The taxpayers who enter the OVDP must 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 rate of the Offshore Penalty under the OVDP is 27.5%, but, in limited circumstances, it is possible to reduce the penalty to only 12.5% (assuming that the taxpayer does not otherwise qualifies to a lesser penalty rate).

Eligibility Requirements for 12.5% Penalty Rate

The taxpayers may be qualified to a reduced Offshore Penalty rate of 12.5% under the following circumstances. During each of the years covered by the OVDP, the taxpayer’s penalty base (i.e. the highest aggregate balance in foreign bank accounts and the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) must be less than $75,000.

Therefore, there are two basic requirements. First, the highest penalty base must be less than $75,000. Second, this must be the case in each of the years.

Strict compliance is required by the IRS. For example, in a situation where the taxpayer made one deposit in some early year covered by the OVDP and that deposit briefly brought the account balance above $75,000, the taxpayer will not be eligible to the reduced 12.5% Offshore Penalty.

Contact Sherayzen Law Office for Help With Your Offshore Voluntary Disclosure

Whether the 12.5% Offshore Penalty rate applies in your particular situation is a question that can only be answered by an international tax attorney who has thoroughly examined your case.

This is why you should contact Sherayzen Law Office for help NOW.

Our international tax firm is highly experienced in conducting offshore voluntary disclosures. We will thoroughly analyze your case, assess your current FBAR liability as well as the liability that you would face under the OVDP, determine the available disclosure options and implement the appropriate disclosure strategy (including preparation of all legal and tax documents as well as IRS representation).

Types of Assets Covered by OVDP Offshore Penalty

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Before one enters into the 2012 Offshore Voluntary Disclosure Program (“OVDP”), it is highly important to understand what kind of assets are covered by the OVDP Offshore Penalty. In this essay, I intend to broadly outline some of the major types of assets covered by the OVDP Offshore Penalty.

From the outset, it is important to emphasize that this article does not set forth the exclusive list of assets; rather, only some of the types of assets are covered. Also, this article does not represent a legal advice; rather, it is meant only for educational purposes. I strongly recommend retaining an international tax attorney before entering into the OVDP; only your attorney experienced in voluntary disclosures can assess what type of assets are covered by the OVDP Offshore Penalty.

OVDP Offshore Penalty is Broader Than the FBAR Penalty

It comes as a surprise to many of my clients that the OVDP Offshore Penalty is not equivalent to the FBAR penalties in terms of the types of assets covered. The Offshore Penalty is much broader than the FBAR penalty.

The general rule is that the offshore penalty is intended to apply to all of the taxpayer’s offshore holdings that are related in any way to tax non-compliance, regardless of the form of the taxpayer’s ownership or the character of the asset.

This is an extremely broad definition; in fact, it is so broad that it practically incorporates the assumption of willfulness and fraud on the part of the taxpayer who enters the OVDP. This is why it is important for your attorney to advise you on the possibility of other of your foreign assets to be covered in the calculation of the Offshore Penalty.

While there are many types of assets that fall under the general rule above, I would like to concentrate on the fivemajor types of assets that the OVDP Offshore Penalty covers: (1) FBAR assets not otherwise excluded; (2) real estate; (3) art and collectibles; (4) intangible assets; and (5) interest(s) in a U.S. or foreign business.

FBAR Assets Covered by Offshore Penalty

The Offshore Penalty covers all of the financial accounts listed on the FBAR, including bank accounts, securities accounts, precious metals custodial accounts and other assets that should be reported on the FBAR. Unless any of these assets are otherwise excluded under the OVDP rules, they will be used in calculation of your Offshore Penalty.

Real Estate Covered by Offshore Penalty

This type of asset constitutes a major deviation from the FBAR penalties. Under the OVDP rules, the real estate assets related to tax non-compliance are included in the calculation of the Offshore Penalty. It is important to understand that if the real estate was acquired with funds that were subject to U.S. tax but on which no such tax was paid, the offshore penalty would apply regardless of whether the real estate produced any income. Obviously, the rental real estate is also likely to be included in the calculation of the Offshore Penalty if this real estate produced income that should have been disclosed on U.S. tax return and on which U.S. taxes were not paid.

Artwork and Other Similar Assets Covered by Offshore Penalty

The same principal applies to artwork and other similar assets. As long as the artwork was related to income tax non-compliance or was acquired with funds that were subject to U.S. tax but on which no such tax was paid (so-called “tainted funds”), the offshore penalty is likely to be applied to these assets.

Intangible Assets

Intangible Assets constitute another major deviation from the FBAR penalties. The Offshore Penalty is likely to apply where intangible assets, like patents and trademarks, were acquired by tainted funds and/or are related to income tax non-compliance.

Interest in a U.S. or Foreign Business

It is important to remember that the Offshore Penalty applies in lieu of the FBAR penalty as well as other penalties that would be applicable to information returns such as Forms 5471, 8865, 8858, 926 and so on. This is why the Offshore Penalty also applies to ownership of foreign businesses.

What is unique to the OVDP is the application of the Offshore Penalty to the ownership of U.S. businesses acquired with tainted funds. The only justification for such a broad coverage of the Offshore Penalty is that it most likely comes from the aforementioned assumption that the non-compliant taxpayer engaged in fraudulent behavior.

In another article, I will explore how the Offshore Penalty applies to ownership of business interests including possible exceptions to the general rule. For the purposes of this essay, it is important to understand that the Offshore Penalty may be applied to such ownership interests.

Other Assets Maybe Covered Under the General Rule

It is important to emphasize that other assets may be included in the calculation of the Offshore Penalty pursuant to the general rule above (i.e. offshore penalty is intended to apply to all of the taxpayer’s offshore holdings that are related in any way to tax non-compliance, regardless of the form of the taxpayer’s ownership or the character of the asset). It will be up to your attorney to assess which of your assets are subject to the Offshore Penalty.

Broad Coverage of Offshore Penalty Complicates the Entrance of Non-Compliant Taxpayers into the OVDP

Such a broad application of the Offshore Penalty greatly complicates the decision to enter into the OVDP. In some situations (particularly, where the IRS cannot establish willfulness), the taxpayer may be better off taking his chances under the existing FBAR penalty structure and face the individual information return penalties rather than subject themselves to a 27.5% penalty on the highest value of all of his assets (the so-called Modified Voluntary Disclosure or Noisy Disclosure).

Again, this is the decision that can only be taken only after your attorney examines your particular situation and makes the recommendation of not entering into the OVDP.

Contact Sherayzen Law Office for Help With Your Voluntary Disclosure of Offshore Assets

Sherayzen Law Office can help you with the disclosure of any of your foreign assets. Our international tax firm is highly experienced in conducting offshore voluntary disclosures. We will thoroughly analyze your case, assess your current FBAR liability as well as the liablity 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 NOW to schedule your consultation!

FBAR Disclosure: Fighting the Small Accounts Myth

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A Minneapolis attorney recently said to me that he has a client who has not filed the FBARs but that client has a number of small accounts and no large accounts; the attorney wanted my opinion on whether it is worth it for smaller clients to go through the trouble of disclosing the accounts to the IRS. My answer was an emphatic YES!

This is exactly the type of myths that I have to battle when I get calls from all around the world from potential clients with smaller accounts. The general impression among these clients is that the IRS will only enforce the FBAR requirement against the “big fish” and there is no need to trouble themselves with voluntary disclosure of FBARs.

Unfortunately, this impression cannot be further from the truth. Tax experts around the country agree that the IRS enforcement of the FBAR requirements has risen to an unprecedented level. The risk of detection, especially once FATCA is fully implemented by the end of the year 2013, has been steadily growing since the 2008 UBS case, fed further by the information disclosed by the participants in the IRS voluntary disclosure programs. As a result, the number of the FBAR prosecutions by the IRS has also risen dramatically.

Given the draconian penalties associated with willful failure to file the FBAR and the high risk of detection, it is imperative for the small accountholders to go through the voluntary disclosure process (either through the 2012 OVDP or its alternatives) before the IRS finds them.

Moreover, for the smaller taxpayers who just found out about the FBAR and who may have a reasonable cause argument, there is an incentive to disclose the FBARs as soon as possible because, with an able attorney experienced in FBAR disclosures, they may be able to dramatically reduce and even eliminate the FBAR penalties.

However, the original non-willfulness can easily grow into willfulness where the taxpayers learn about the existence of the FBAR requirement, consciously disregard it and fail to file the FBARs. At that point, the original innocence of non-willful ignorance is gone, and the taxpayer is likely to face the imposition of much heavier penalties by the IRS.

It is worth noting, moreover, that in these willful cases, the imperative to do voluntary disclosure should be even higher precisely because the IRS is likely to impose unbearably high penalties otherwise. This is why the IRS created the 2012 Offshore Voluntary Disclosure Program so that these taxpayers can bring themselves back into tax compliance without fear of criminal prosecution.

It should be clear to all non-compliant US taxpayers – voluntary disclosure of offshore accounts is almost always better than the IRS finding your non-disclosed account. In my practice, the practice of FBAR voluntary disclosure has always been more beneficial to my clients whether they were located in Minneapolis, New York, San Francisco, Tampa, Canada, Australia, Mexico, Germany, Switzerland or any other country.

Contact Sherayzen Law Office for Help with Delinquent FBARs

If you have undisclosed foreign accounts and have not filed your FBARs, contact Sherayzen Law Office for help. Our experienced FBAR tax firm will thoroughly analyze your case, assess your current FBAR liability, examine your voluntary disclosure options and implement a comprehensive voluntary disclosure strategy striving to achieve the best result for you.

American Taxpayer Relief Act of 2012: Individual Income Tax Rates for 2013

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The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. The Act contains numerous important tax provisions aimed at stabilizing the tax environment and averting the so-called “fiscal cliff.” One of the most important effects of the Act is its impact on the marginal individual income tax rates.

The Act permanently extends the 10%, 25%, 28%, 33%, and 35% individual income tax rates in effect in 2012 except for taxpayers with taxable income above a certain threshold amount. For the taxpayers with taxable income above the threshold amount the marginal tax rate will be 39.6%.

As adjusted for inflation, the following marginal income tax rates will apply to individuals in the tax year 2013:

Filing Single

10% $0 – $8,925
15% $8,925 – $36,250
25% $36,250 – $87,850
28% $87,850 – $183,250
33% $183,250 – $398,350
35% $398,350 – $400,000
39.6% $400,000 and greater

Notice the minuscule range of the 35% tax bracket.

Filing Married Filings Jointly

10% $0 – $17,850
15% $17,850 – $72,500
25% $72,500 – $146,400
28% $146,400 – $223,050
33% $223,050 – $398,350
35% $398,350 – $450,000
39.6% $450,000 and greater

Filing Married Filings Separately

10% $0 – $8,925
15% $8,925 – $36,250
25% $36,250 – $73,200
28% $73,200 – $111,525
33% $111,525 – $199,175
35% $199,175 – $225,000
39.6% $225,000 and greater

Filing Head of Household

10% $0 – $12,750
15% $12,750 – $48,600
25% $48,600 – $125,450
28% $125,450 – $203,150
33% $203,150 – $398,350
35% $398,350 – $425,000
39.6% $425,000 and greater