Offshore Voluntary Disclosure Program

Accountants Beware: FBAR Disclosure is a Legal Matter

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Paradoxically, one of the obstacles currently facing U.S. taxpayers who wish to file their delinquent FBARs and conduct a voluntary disclosure of their foreign assets are their own accountants – more precisely, the inability of many accountants to understand that FBAR disclosure is a legal matter to a much greater extent than an accounting matter.

Special Nature of the FBAR

FBAR is unlike any other information return issued by the IRS. While there are many reasons for it, I just want to point out the four most important considerations that make FBAR disclosures so radically different from other disclosures. First of all, FBAR is issued under the auspices of the Department of the Treasury, but only in the early 2000s was the enforcement of FBARs transferred to the IRS. This is why FBAR does not constitute a part of a taxpayer’s tax return and should be filed separately to a different address by June 30 of each calendar year. The importance of this distinction is that the FBAR is not a regular tax form involving tax calculations, but a legal disclosure form which the taxpayer uses to report his or her foreign financial accounts.

Second, failure to file the FBAR timely is likely to have tremendous consequences for the taxpayer. The civil penalties can be overwhelming, and there are significant criminal penalties associated with the FBAR.

Third, the FBAR penalty structure is complex and allows for many instances of mitigation and exceptions, depending on the taxpayer’s particular situation and ability of the taxpayer’s representative to recognize this situation. There are very important strategies that may be employed during FBAR disclosures to the benefit of the taxpayers.

Finally, the mode of the offshore assets disclosure (i.e. the official IRS voluntary disclosure program and its alternatives) is closely tied to other international tax issues that must be recognized by the taxpayer’s representative. It is rare for the FBAR issue to come alone; usually, the taxpayer would have other international tax issues such as foreign rental income, PFICs, foreign tax credit, foreign earned income exclusion, ownership of foreign business entities, foreign trusts, foreign gifts, foreign inheritance, et cetera. All of these factors must be carefully considered in assessing the existing FBAR penalties (see point three above) and what penalties the taxpayer is likely to face depending on the mode of the offshore assets disclosure.

Accountants Mistakenly Treat FBAR Disclosure as an Accounting Matter

Unfortunately, most accountants have not learned to distinguish the special nature of the FBARs and the enormous complications associated with offshore assets disclosure. There are many reasons for it. First, the great majority of the accountants are not trained to recognize the international tax issues and has very little, if any, familiarity with international tax issues. Therefore, they fail to understand the very special nature of the FBAR and they treat it as simply another form to fill-out, ignoring the legal nature of the disclosure.

Second, even the accountants who are more familiar with international tax obligations of US taxpayers still fail to recognize the fact that FBARs carry criminal penalties and the taxpayers must be adequately protected while discussing the FBAR matters with their representatives.

Third, many accountants are unaware or simply ignore the complexity of the offshore disclosure involving FBARs. This results in taking the simplest approach of herding their clients into the official IRS offshore voluntary disclosure program, often without adequate explanation of the consequences of such a move to their clients.

Fourth, the accountants are not trained for advocacy. Therefore, instead of analyzing their clients’ particular facts and coming up with solutions for their clients, they simply calculate the penalties and present these calculations to their clients as a fact.

Finally, many taxpayers are used to dealing with tax accountants a lot more than with tax attorneys. Similarly, the accountants are aware of these expectations and they attempt to meet these expectations even at the cost of taking on the tasks about which they have little understand and virtually no training.

FBAR is a Legal Matter and Should Be Resolved By Tax Attorneys

Yet, it is highly important to understand that, by undertaking the task of advising their clients on FBAR disclosures, the accountants may be committing malpractice because FBAR is first and foremost a legal matter, not an accounting one. This is why all FBAR disclosures should be handled by tax attorneys who have the right tools and privileges to help their clients.

Let’s emphasize some of the advantages of legal profession that make attorneys so well-fit for FBAR disclosures.

First, the taxpayers with delinquent FBARs need to be able to relate the facts of their particular situations freely to their tax advisors. Since your accountant can be forced to testify against you by the IRS, the best and only protection is the Attorney-Client Privilege.

Second, FBAR is a legal disclosure document, not a tax document. International tax attorneys should use their experience and judgment in advising their clients on how the FBARs should be completed.

Third – and this is a critical factor – attorneys are experienced advocates who are trained to recognize problems and develop comprehensive ethical solutions aimed to minimize the risk of adverse legal exposure of their clients. This means that an experienced international tax attorney will analyze the facts of the particular case in front of him, identify all non-compliance issues, estimate the potential penalties and look for solutions to the problems of a particular case.

Contact Sherayzen Law Office for Legal Help with Your FBAR Disclosure

If you have undisclosed offshore assets, contact Sherayzen Law Office . Our experienced international tax firm will thoroughly analyze your case, estimate your potential FBAR penalties, identify all non-compliance issues, and develop a comprehensive approach to your offshore voluntary disclosure.

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).

2012 OVDP and Domestic Voluntary Disclosure

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Sometimes a taxpayer who enters 2012 OVDP also has undisclosed domestic tax liability and the question arises with respect to how to handle this additional liability.

As was the case with the 2009 OVDP and the 2011 OVDI, the 2012 OVDP is available to taxpayers who have both offshore and domestic issues to disclose. The Voluntary Disclosure Practice requires an accurate and complete disclosure. Consequently, if there are undisclosed income tax liabilities from domestic sources in addition to those related to offshore accounts and assets, they must also be disclosed in the 2012 OVDP.

Therefore, when applying for the 2012 OVDP, the taxpayer should indicate on the Offshore Voluntary Disclosure Letter that he is also making a domestic voluntary disclosure.

However, these domestic tax liabilities are not going to be covered by the same IRS agent who will be in charge of your 2012 OVDP. Rather, such voluntary disclosures will go through the traditional IRS voluntary disclosure program and another agent will be assigned to the case to deal specifically with domestic issues. This further means that there is a separate application process for acceptance into the traditional IRS voluntary disclosure program in addition to applying to the 2012 OVDP.

Contact Sherayzen Law Office for Legal Help with Domestic and Offshore Voluntary Disclosures

If you have undisclosed offshore accounts and foreign income in addition to undisclosed U.S.-source income, contact Sherayzen Law Office for help. Our experienced international tax firm will thoroughly review your case, determine your options with respect to foreign and domestic voluntary disclosures, prepare all of the necessary legal documents and tax forms, and vigorously represent your interests during your negotiations with the IRS.

Domestic and Offshore Voluntary Disclosure Ineligibility Examples

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In an earlier article, I discussed the general Offshore Voluntary Disclosure Program eligibility requirements now closed, particularly those spelled out in the Internal Revenue Manual (IRM). In this essay, I would like to provide certain examples of when a taxpayer’s disclosure fails to meet IRM 9.5.11.9 requirements. Note, these examples are not specific to offshore disclosure, but are also relevant to domestic voluntary disclosure. Finally, it is important to point out that the examples below are not taking into account other OVDP application requirements; rather, they merely describe general compliance situations.

It should be noted that these examples are for illustrative purposes only and cannot be relied upon to determine the voluntary disclosure eligibility in your specific circumstances. Whether you are eligible to participate in the OVDP is a question that must be analyzed by an international tax attorney who is experienced in this area of law.

1. A letter from an attorney stating his client, who wishes to remain anonymous, wants to resolve his tax liability. This is not a voluntary disclosure until the identity of the taxpayer is disclosed and all of the elements of IRM 9.5.11.9 have been met.

2. A disclosure made by a taxpayer who is under grand jury investigation. This is not a voluntary disclosure because the taxpayer is already under criminal investigation. The conclusion would be the same whether or not the taxpayer knew of the grand jury investigation.

3. A disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted gross receipts from a partnership, whose partner is already under investigation for omitted income that was skimmed from the partnership. This is not a voluntary disclosure because the IRS has already initiated an investigation which is directly related to the specific liability of this taxpayer. The conclusion would be the same whether or not the taxpayer knew of the ongoing investigation.

4. A disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted constructive dividends received from a corporation which is currently under examination. This is not a voluntary disclosure because the IRS has already initiated an examination which is directly related to the specific liability of this taxpayer. The conclusion would be the same whether or not the taxpayer knew of the ongoing examination.

5. A disclosure made by a taxpayer after an employee has contacted the IRS regarding the taxpayer’s double set of books. This is not a voluntary disclosure even if no examination or investigation has commenced because the IRS has already been informed by the third party of the specific taxpayer’s noncompliance. The conclusion would be the same whether or not the taxpayer knew of the informant’s contact with the IRS.

Contact Sherayzen Law Office for Legal Help With Your Domestic and Offshore Voluntary Disclosure

If you have undisclosed income and/or offshore accounts, contact Sherayzen Law Office for legal help. Our experienced tax firm will analyze your case, determine your current tax liability (including potential FBAR penalties), identify available voluntary disclosure options, prepare all of the necessary legal and tax documents, and rigorously represent your interests during your negotiations with the IRS.

Offshore Accounts Disclosure and John Doe Summons

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If a taxpayer is about to conduct a voluntary disclosure of his offshore accounts, a question arises about his eligibility to do so in a situation where the IRS already served a “John Doe” summons or made a treaty request seeking information that may identify a taxpayer as holding an undisclosed foreign account or undisclosed foreign entity. The answer is that it depends on the timing of the disclosure.

Background Information

In an earlier article, I discussed the Offshore Voluntary Disclosure Program (OVDP) now closed eligibility requirements. Specifically, I discussed the timeliness eligibility requirement of IRM 9.5.11.9 and how a failure to satisfy this requirement will prevent the taxpayer from conducting a voluntary disclosure.

Under IRM 9.5.11.9, a voluntary disclosure is timely if it is received by the IRS before either of the following events occurs:

(a) the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation. Notice, it is not relevant whether the IRS has initiated a civil examination which is not related to undisclosed foreign accounts or undisclosed foreign entities – either of the two, civil examination and criminal investigation, will prevent OVDP participation;

(b) the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance;

(c) the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or

(d) the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena).

General Analysis

For the purposes of this essay, John Doe summons and treaty requests most likely fit the situation described in paragraph (b). Hence, the main criteria regarding the taxpayer’s eligibility to conduct voluntary disclosure of his offshore accounts in such situations would be whether the IRS already received information under the John Doe summons, treaty request or other similar action and whether the information is sufficiently specific.

For example, the mere fact that the IRS served a John Doe summons, made a treaty request or has taken similar action does not make every member of the John Doe class or group identified in the treaty request or other action ineligible to participate.

On the other hand, if the IRS or the U.S. Department of Justice already obtained information under a John Doe summons, treaty request or other similar action that provides evidence of a specific taxpayer’s noncompliance with the tax laws or FBAR reporting requirements, that particular taxpayer will become ineligible for OVDP and Criminal Investigation’s Voluntary Disclosure Practice.

Contact Sherayzen Law Office for Help With Offshore Voluntary Disclosure

Based on the analysis above, it is evident that a taxpayer concerned that a party subject to a John Doe summons, treaty request or similar action will provide information about him to the IRS should apply to make a voluntary disclosure as soon as possible.

This is why you should contact Sherayzen Law Office. Our experienced international tax law firm can help you with the entire voluntary disclosure process, including initial assessment of your FBAR liability, determination of available voluntary disclosure options, preparation of all of the required legal and tax documents, and rigorous representation of your interests during your negotiations with the IRS.