international tax lawyer st paul

Reducing Your FBAR Penalties

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FBAR (FinCEN Form 114 formerly Form TD F 90-22.1) penalties can be absolutely draconian. However, with a help of an experienced international tax attorney, they do not have to be so brutal.

Unfortunately, the IRS, accountants and even many lawyers present an overly simplistic view of the FBAR penalty structure. They start out with the potential criminal penalties and absolutely outrageous willful penalties and they usually end there by arguing that a non-compliant taxpayer should enter into the OVDP program.

What many tax professionals do not discuss is the immense complexity of the FBAR penalty structure that offers various chances to reduce and, sometimes, even eliminate your FBAR penalties through establishing non-willfulness and various mitigation guidelines.

This is a discussion that a tax professional must have with his client; otherwise, the client will not get the full picture of his case and cannot make an informed decision with respect to his voluntary disclosure options.

Notice that the potential for reduction of the FBAR penalties that exists under the current law is not the same as chimerical schemes that abound the internet. On the contrary, this is a serious discussion of what your potential FBAR penalties may be and what is the likelihood of success.

In some case, mitigation of penalties is a real possibility while, in others, entering the OVDP program may constitute a better choice. The important argument at the core of this essay is that the taxpayer should know about all of the options before the decision to the OVDP is made – i.e. the taxpayer has a chance to make a fully-informed decision, not a fear-driven one.

Contact Sherayzen Law Office to Discuss the FBAR Penalty Structure and Possibilities for Reducing Your FBAR Penalties

If you have undisclosed foreign assets, contact Sherayzen Law Office for legal help with your voluntary disclosure. Our experienced tax law firm will thoroughly review your case, estimate your FBAR penalties, analyze the potential for reduction of these penalties vis-a-vis entrance into the OVDP and present to you the available voluntary disclosure options so that you can make an informed decision.

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!

OVDP Offshore Penalty Structure: Introduction

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The official IRS Offshore Voluntary Disclosure Program (OVDP) constitutes a viable voluntary disclosure option for many taxpayers. However, whether this is the best voluntary disclosure option will, in large part, depend on whether the OVDP penalties are lower than the penalties that a taxpayer would be facing under alternative voluntary disclosure options.

The answer to this critical question depends on your attorney’s ability to properly estimate potential OVDP penalties. In this article, I will focus on introducing the general structure of the Offshore Penalty (note that the income-tax related penalties are not discussed in this article).

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.

General Structure of the Offshore Penalty

The Offshore Penalty incorporates a penalty structure which contains three different penalty rates. The default penalty rate is 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure (the “penalty base”).

The default penalty rate applies to all cases except the cases where the two alternative rates apply: 12.5% and 5%. Each of these exceptions has its own set of strict requirements; the 5% penalty rate structure is much more diverse and complex that the 12.5% one, but the IRS will expect strict compliance with all of the terms of these exceptions. In my practice, I often find that the IRS will be pressuring hard to disqualify a taxpayer from alternative penalty rates.

Whether your particular case satisfies the requirements of either or both of the alternative penalty rates is the question that only your attorney can answer. The qualification is highly fact-dependent and will require a very detailed analysis of your situation.

Calculation of the Offshore Penalty

The Offshore Penalty calculation consists of three steps. First, your attorney should determine what assets should be included in the calculation of the Offshore Penalty (i.e. determine the penalty base). Second, your attorney should determine what penalty rate should apply to your assets (i.e. determine what penalty category applies). Finally, after the determinations under the first and second step are made, you attorney should determine the highest account balance (if the asset is a financial account) and the fair market value of other assets, convert the values to US dollars and apply the appropriate penalty rate (i.e. calculation of penalty base and application of the penalty rate).

Contact Sherayzen Law Office for Help With Your Offshore Voluntary Disclosure

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 tax 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).

Contact Sherayzen Law Office NOW to schedule your consultation!

FBAR Version That Should Be Used in the OVDP

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The Voluntary Disclosure Period for the taxpayers who entered into the IRS Offshore Voluntary Disclosure Program (“OVDP”) encompasses an eight-year period during which the FBAR form may have been modified more than once. The question arises about what version of the FBAR form should be used in the OVDP.

FBAR Background

Pursuant to the Bank Secrecy Act, 31 U.S.C. §5311 et seq., the Department of Treasury (the “DOT”) has established certain recordkeeping and filing requirements for the United States persons with financial interests in or signature authority (and other comparable authority) over financial accounts maintained with financial institutions in foreign countries. If the aggregate balances of such foreign accounts exceed $10,000 at any time during the relevant year, FinCEN Form 114 formerly Form TD F 90-22.1 (also known as the “FBAR”) must be filed with the DOT.

OVDP Guidance on the FBAR Version

The IRS unequivocally stated that, during the OVDP process, the taxpayers should use the most current version Form 114, for filing delinquent FBARs to report foreign accounts maintained in prior years. However, the taxpayers may rely on the FBAR guidance that was applicable for the calendar year that is being reported.

As of February of 2013, the most current version was the one that was revised in January 2012.

Contact Sherayzen Law Office for Help With Your Offshore Voluntary Disclosure

If you have undisclosed foreign accounts and you have not filed the applicable FBARs, 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).