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Request for Extension to Submit Your Voluntary Disclosure Package

In an earlier article, I already described the general process of the Offshore Voluntary Disclosure Program. In that article, I mentioned that you must make a complete submission of your Voluntary Disclosure Package within 90 days of the date of the preliminary acceptance letter from the IRS Criminal Investigation.

What if you cannot make a complete submission by the date specified in this preliminary acceptance letter?

In this case, you or your attorney may request an extension of the deadline to complete your voluntary disclosure submission. With the request for extension, you must submit your name, address, date of birth, and social security number and as much of the Voluntary Disclosure Package documentation as possible. At the very minimum, with the Request for Extension, your attorney should include properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties.

Requests for up to a 90 day extension must include a statement of those items that are missing, the reasons why they are not included, and the steps taken to secure them.

As of February of 2013, Requests for Extensions must be made in writing and sent to the Austin Campus on or before the date specified in the letter from Criminal Investigation for completing the voluntary disclosure:

Internal Revenue Service
3651 S. I H 35 Stop 4301 AUSC
Austin, TX 78741
ATTN: Offshore Voluntary Disclosure Program

Contact Sherayzen Law Office for Professional Help with OVDP

If you are already in the OVDP or you are only considering the option of doing so, contact Sherayzen Law Office as soon as possible. Our experienced international tax firm will thoroughly review your case, identify the available options, implement the agreed-upon legal strategy, guide your case through the entire process of the OVDP and rigorously represent your interests during your negotiations with the IRS.

Switzerland Signs FATCA Implementation Agreement

On February 14, 2013, the U.S. Department of the Treasury announced that it has signed a bilateral agreement with Switzerland to implement the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA).

Enacted by Congress in 2010, FATCA targets non-compliance by U.S. taxpayers using foreign accounts. The bilateral agreement signed today is the first based on the model published in November of 2012 – the second of two model agreements – and marks another important step in establishing a common approach to combating tax evasion.

Switzerland is one of eight countries that have already signed or initialed an intergovernmental agreement (IGA) which helps to facilitate the effective and efficient implementation of FATCA. In addition to the previously announced countries, Treasury initialed an IGA with Italy on January 24. Treasury is engaged with more than 50 countries and jurisdictions to curtail offshore tax evasion, and more signed agreements are expected to follow in the near future.

The IRS was very pleased: “today’s announcement marks a significant step forward in our efforts to work collaboratively to combat offshore tax evasion,” said Acting Secretary of the Treasury Neal S. Wolin. “We are pleased that Switzerland has signed a bilateral agreement with us, and we look forward to quickly concluding agreements based on this model with other jurisdictions.”

It should be remembered that on January 17, 2013, the Treasury Department and the IRS finalized the regulations implementing FATCA. Therefore, it is expected that FATCA world-wide compliance will begin in earnest by the end of the year.

Implementation of FATCA means an immensely higher chance fo detection of the non-compliant U.S. taxpayers with undisclosed foreign accounts. It is highly important to conduct voluntary disclosure prior to IRS detection, because an IRS investigation will preclude the possibility of entering in the 2012 Offshore Voluntary Disclosure Program and seriously endanger other disclosure options.

Contact Sherayzen Law Office for Help With Voluntary Disclosure of Foreign Accounts

If you have undisclosed offshore accounts, contact Sherayzen Law Office NOW to discuss your voluntary disclosure options. Our experienced international tax law firm will thoroughly analyze your case, assess your current FBAR and Form 8938 liability, identify the voluntary disclosure options available to you and implement the desired disclosure option, including preparation of all legal and tax documents.

IRS Offshore Voluntary Disclosure Program Process

In an earlier article, I discussed the key requirements of the Offshore Voluntary Disclosure Program (OVDP). In this essay, I would like to outline the general OVDP administrative process from initial pre-clearance through the execution of the Closing Agreement.

General Description

In order to participate in the OVDP, the taxpayer must first be accepted into the program. The acceptance process consists of the basic pre-clearance and the submission of the Offshore Voluntary Disclosure Letter with Attachments. Once the IRS approves the preliminary acceptance into the OVDP, the next step is to prepare and timely submit the voluntary disclosure package that includes all of the required documentation covering the entire voluntary disclosure period. Then, the IRS will assign an Agent to complete the certification of your tax returns and assess your Offshore penalty. Assuming that the taxpayer agrees to the Offshore penalty and the results of the Agent’s certification, the taxpayer should execute the Closing Agreement with the IRS.

This is a very simplified description of the process; there are numerous other considerations and requirements that must be taken into account. It will be up to your attorney to determine the precise process of your voluntary disclosure.

The following discussion of the process assumes that you retained an attorney to help you with the OVDP process; I also strongly recommend securing an international tax attorney’s help with the OVDP in order to improve the chance of success of your voluntary disclosure.

Pre-Clearance

The OVDP acceptance process begins with securing the pre-clearance from the IRS Criminal Investigation Lead Development Center (CILDC). It is usually secured by your attorney who sends a fax to CILDC with the identifying information (name, date of birth, social security number and address) and executed power of attorney. If each spouse intends to apply for OVDP, the attorney should make a separate request for each spouse.

Generally, CILCD will notify your attorney by fax within thirty days whether or not you are cleared to make an offshore voluntary disclosure. If you are not cleared, this most likely means that the IRS has already launched an investigation of your tax affairs. If you are cleared, you can proceed to the next OVDP step.

Note, pre-clearance does not guarantee your acceptance into the OVDP. You must truthfully, timely, and completely comply with all OVDP process and requirement provisions.

Offshore Voluntary Disclosure Letter and Preliminary Acceptance

If you are deemed cleared for the OVDP, the next step is to prepare and file the Offshore Voluntary Disclosure Letter with all of the required attachments (the “Letter”) within 45 days from receipt of the pre-clearance fax notification.

As of February of 2013, the Letter with attachments should be submitted to the following address:

Internal Revenue Service
Voluntary Disclosure Coordinator
1-D04-100
2970 Market Street
Philadelphia, PA 19104

The IRS Criminal Investigation will review the Letter and notify your attorney by mail or fax whether your offshore voluntary disclosure have been preliminarily accepted or declined. It is intended this process should be completed within 45 days of receipt of a complete Letter, but there is no guarantee that this will occur. In general, however, the IRS is able to render its decision within this time period.

Note that preliminary acceptance into the OVDP is conditioned upon the information provided by the taxpayer being, and remaining, truthful, timely, and complete. Further note that there is a different process for domestic disclosures contemporaneous with the OVDP.

Voluntary Disclosure Package

If the preliminary acceptance is secured, the letter from the IRS Criminal Investigation will instruct your attorney to submit the full voluntary disclosure package to the Austin Campus within 90 days of the date of the letter.

The Voluntary Disclosure Package is the most intense part of your voluntary disclosure in terms of the time it will take to produce the package. The voluntary disclosure submission must be sent in two separate, yet simultaneous, parts.

The first part is to submit a check payable to the Department of Treasury in the total amount of tax, interest, accuracy-related penalty, and, if applicable, the failure to file and failure to pay penalties, for the voluntary disclosure period. The check should be sent along with information identifying the taxpayer name, taxpayer identification number, and years to which the payment relates to the following address. If you cannot pay the total amount of tax, interest, and penalties as described above, submit your attorney should submit a proposed payment arrangement and a completed Collection Information Statement (Form 433-A, Collection Information Statement for Wage Earners and Self-employed Individuals, or Form 433-B, Collection Information Statement for Businesses, as appropriate).

As of February of 2013, the address to which the check must be sent is as follows:

Internal Revenue Service
3651 S. I H 35 Stop 1919 AUSC
Austin, TX 78741
ATTN: Offshore Voluntary Disclosure Program

The second part of the voluntary disclosure submission is the rest of the Voluntary Disclosure Package which should include among other requirements:

1. Copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure;

2. For taxpayers who began filing timely, original, compliant returns that fully reported previously undisclosed offshore accounts or assets before making the voluntary disclosure for certain years of the offshore disclosure period, copies of the previously filed returns for the compliant years;

3. Complete and accurate amended federal income tax returns (for individuals, Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the offshore account or entity or domestic source (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts and, for years after 2010, Form 8938, Statement of Specified Foreign Financial Assets);

4. A completed Foreign Account or Asset Statement for each previously undisclosed foreign account or asset during the voluntary disclosure period;

5. Properly completed and signed Taxpayer Account Summary With Penalty Calculation;

6. For those applicants disclosing offshore financial accounts with an aggregate highest account balance in any year of $500,000 or more, copies of offshore financial account statements reflecting all account activity for each of the tax years covered by your voluntary disclosure. For those applicants disclosing offshore financial accounts with an aggregate highest account balance of less than $500,000, copies of offshore financial account statements reflecting all account activity for each of the tax years covered by your voluntary disclosure must be readily available upon request; and

7. Properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess FBAR penalties.

The above seven items is not a complete list; other forms and statements may also be required to be submitted.

As of February of 2013, the second part of the Voluntary Disclosure Package should be submitted to the following address:

Internal Revenue Service
3651 S. I H 35 Stop 4301 AUSC
Austin, TX 78741
ATTN: Offshore Voluntary Disclosure Program

Remember, a full and complete submission is required for acceptance into the program.

Assignment of Agent, Additional Requests, Certification

After your attorneys submits both parts of the Voluntary Disclosure Package, your case will be assigned to a civil examiner to complete the certification of your tax returns for accuracy, completeness and correctness. However, do not expect this to be a fast process despite the IRS efforts to expedite the process; depending on how busy the IRS is, it make take months before an agent is assigned to your case. The OVDP operates on a first-come, first-served basis.

During the certification process, it is likely that the examiner will request additional information as needed to process your voluntary disclosure, especially if your disclosure involves PFIC calculations or complex returns. This may delay the process further.

Offshore Penalty Negotiations, Opt-Out and Closing Agreement

After the certification process is completed, your Offshore Penalty will be calculated by the IRS (as approved by a technical specialist) and presented to your attorney.

At this point you will have three options. First, if you disagree, your attorney may attempt to re-negotiate the Offshore Penalty by pointing out any mistakes in the agent’s calculations. Second, if option number one does not work, you should discuss the opt-out option with your attorney. In this article, I will not be discussing this very important and complex subject. Finally, the third option to agree with the Offshore Penalty calculations, pay the Offshore Penalty and sign the Closing Agreement on Final Determination Covering Specific Matters.

Contact Sherayzen Law Office for Help with Your Offshore Voluntary Disclosure

Offshore Voluntary Disclosure Program comes with a very long and complex process. It is too easy to get lost within the process or submit to the calculation of the IRS agents without proper consideration of your alternatives. This is why you need to make sure that you are represented by a tax attorney experienced in this area of law.

If you are already in the OVDP or you are only considering the option of doing so, contact Sherayzen Law Office as soon as possible. Our experienced international tax law firm will thoroughly review your case, identify the available options, implement the agreed-upon legal strategy, guide your case through the entire process of the OVDP and rigorously represent your interests during your negotiations with the IRS.

No FBAR Penalties – Q&A 17 of the OVDP

There are some taxpayers who should not be using the official IRS Offshore Voluntary Disclosure Program (OVDP). The IRS expressly singled out one category of such taxpayers in its Q&A 17 of the OVDP Rules.

Q&A 17 only applies to the taxpayers who reported and paid tax on all their taxable income for prior years but did not file FBARs. The key to the application of Q&A 17 is that there should be no underreported tax liabilities by the taxpayer and the taxpayer was not previously contacted regarding an income tax examination or a request for delinquent returns. In such a situation, the IRS is not likely to impose a penalty for the failure to file the delinquent FBARs.

Whether your situation falls within the scope of Q&A 17 should be determined by a tax attorney experienced in the area of voluntary disclosures. If your attorney determines that Q&A 17 applies to your case, you do not need to use the OVDP. Rather, your attorney should file the delinquent FBAR reports according to the FBAR instructions and attach a statement explaining why the reports are filed late.

While Q&A 17 appears to have a clear application, there are plenty of gray-area cases that almost reach the scope of this OVDP provision but still fall short of meeting all of the requirements. In such case, it will be up to the taxpayer’s attorney to determine the proper course of his client’s voluntary disclosure.

Contact Sherayzen Law Office for Voluntary Disclosure Help with Undisclosed Offshore Accounts

If you have unreported offshore accounts, contact Sherayzen Law Office for help with your voluntary disclosure options. Our experienced international tax firm will thoroughly review your case, assess your FBAR liability, identify the available voluntary disclosure options and implement the agreed-upon strategy (including preparation of all legal and tax documents).

No Form 5471 and Form 3520 Penalties – Q&A 18 of the OVDP

In my practice I have encountered situations where a taxpayer has delinquent Form 5471 or Form 3520, but there is no additional tax liability associated with the delinquent forms. In these situations, a natural questions arises on how to best deal with this situation.

One of the options is to follow Q&A 18 of the Offshore Voluntary Disclosure Program (OVDP) Rules. In very limited circumstances, Q&A 18 allows a small number of eligible taxpayers escape Form 5471 and Form 3520 penalties.

Background Information

Form 5471 is used by the IRS to satisfy the informational reporting requirements of 26 U.S.C. § 6038 (“Information reporting with respect to certain foreign corporations and partnerships”) and 26 U.S.C. § 6046 (“Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock”). It must be filed by certain U.S. citizens and residents who are officers, directors, or shareholders in specified foreign corporations, if various requirements are met. Failure to file Form 5471 may result in the imposition of steep penalties (see this article for more details).

Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) is used by U.S. persons (and executors of estates of U.S. decedents) to report certain transactions with foreign trusts, ownership of foreign trusts under the rules of IRC §§ 671 through 679, and receipt of certain large gifts or bequests from certain foreign persons. Failure to file Form 3520 may result in very heavy penalties.

Q&A 18

Q&A 18 of the OVDP Rules provides a potentially zero-penalty option for non-compliant taxpayers who failed to file tax information returns, such as Form 5471 and Form 3520.

From the outset, it is important to understand that Q&A 18 has a very limited application. It is only relevant in the situation where the taxpayer failed to file Forms 5471 or Forms 3520, but he reported and paid tax on all their taxable income with respect to all transactions related to the foreign corporations or foreign trusts. The IRS is not likely to impose a penalty for the failure to file the delinquent Forms 5471 and 3520 if there are no underreported tax liabilities and the taxpayer has not previously been contacted regarding an income tax examination or a request for delinquent returns.

Whether Q&A 18 applies to your particular situation is a question that should be determined by an international tax attorney experienced in the area of voluntary disclosures. If your attorney determines that this OVDP provision is applicable in your situation, the attorney should file delinquent information returns with the appropriate service center according to the instructions for the form and attach a statement explaining why the information returns are filed late. Note that the Form 5471 should be submitted with an amended return showing no change to income or tax liability. The attorney should further include at the top of the first page of each information return “OVDI – FAQ #18” to indicate that the returns are being submitted under this procedure.

Amended Return Shows Additional Income Unrelated to Form 5471

An interesting question arises in situations where amended tax returns do show additional income, but the income is not in any way related to Form 5471. While your attorney should carefully review the nature and source of the income, it is possible that Q&A 18 will still apply assuming all other requirement of Q&A 18 are met.

Contact Sherayzen Law Office for Voluntary Disclosure Help with Tax Information Returns

It must be remembered that this article is produced for educational purposes only and does not constitute legal advice; only your tax attorney can determine whether Q&A 18 applies to your situation and how to best comply with its requirements.

If you have undisclosed foreign business entities or foreign trusts, contact Sherayzen Law Office for help. Our experienced international tax team will thoroughly review your case, assess your information tax return (Form 5471, 8865, 3520, et cetera) liability, identify the available voluntary disclosure options and implement the agreed-upon strategy (including preparation of all legal and tax documents).