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2012 OVDP vs. 2011 OVDI: Five Key Differences

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On June 26, 2012, the IRS published the instructions for the 2012 Offshore Voluntary Disclosure Program (“OVDP”). The program was originally announced on January 9, 2012, but there were no instructions with respect to the program aside from modifications in the 2011 penalty structure and general references to the 2011 OVDI.

The new 2012 OVDP shares many similarities with 2011 OVDI, but there are specific differences with further implications that go far beyond its appearances.

There are five key differences between the programs that I would like to emphasize here:

1. The highest penalty is increased from 25% under the OVDI to 27.5% under the OVDP;

2. Unlike 2011 OVDI and every other previous voluntary disclosure program, 2012 OVDP is open for an indefinite period of time. This means that it can potentially be closed next week or it may be open far beyond 2012 and other years – the IRS has complete control over the exact expiration time of the OVDP.

3. The IRS may change the terms of the OVDP at any time. While the IRS did amend the 2011 OVDI instructions several times, these amendments (with the exception of June regulations) usually were for the purposes of clarification of the existing terms. It appears that, under 2012 OVDP, the fundamental rules of the program maybe changed at any time (it is debatable whether such changes would have any retroactive impact with respect to persons who already entered the program).

4. The eligibility terms have been modified for certain types of taxpayers. Two changes in particular must be highlighted under FAQ 21 of the 2012 OVDP instructions. First, a taxpayer in ineligible to participate in the 2012 OVDP if the taxpayer (i) appeals a foreign tax administrator’s decision authorizing the supply of account information to the IRS, (ii) does not serve the notice of account information to the IRS and (iii) fails to properly serve (as required under 18 U.S.C. 3506 ) on the Attorney General of the United States the notice of any such appeal and/or other documents relating to the appeal at the time such notice of appeal or other document is submitted.

The second eligibility modification concerns certain groups of taxpayer singled out by the IRS. In essence, a taxpayer is ineligible to participate in the 2012 OVDP if he has or had accounts at specified foreign financial institutions which were subject to U.S. government actions. The IRS may announce such taxpayer groups ineligible at any time; such announcements will be posted on the 2012 OVDP page.

This provision should be of special importance to taxpayers who maintain accounts with high-risk institutions.

5. In conjunction with the OVDP instructions, the IRS also published a new procedure for certain non-resident taxpayers (including dual citizens) seeking to establish a de minimis, low-risk exception to FBAR penalties. While seemingly benign, the new procedure does pose dilemmas for the taxpayers who are not eligible to take advantage of the new procedure and seek to do a modified voluntary disclosure (also known as “noisy voluntary disclosure”). I will explore this subject later in a separate article.

There are other differences between the 2012 OVDP and 2011 OVDI, but they are less pronounced. In order to find out exactly how these differences may affect your case, contact Sherayzen Law Office direct.

Contact Sherayzen Law Office for Professional Help with 2012 OVDP

If you have undisclosed offshore accounts and/or income, contact Sherayzen Law Office immediately. Our experienced voluntary disclosure tax firm will conduct a thorough analysis of your case, explore all options available to you, help you draft all of the required tax documents, amend your tax returns, and offer rigorous professional representation of your interests in IRS negotiations.

Form 8938 Threshold Requirements

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Starting tax year 2011, the IRS imposed a new tax reporting requirement on individual taxpayers who hold specified foreign financial assets with an aggregate value exceeding a relevant threshold. In its instructions to Form 8938, the IRS lists five main categories of taxpayers and assigns distinct reportable threshold to each category. Let’s explore each category.

1. Unmarried Taxpayers Living in the United States

If the taxpayer is not married and lives in the United States, then the applicable reporting threshold is satisfied if the total value of his specified foreign financial assets is more than $50,000 on the last day of the tax year, or more than $75,000 at any time during that tax year.

2. Married Taxpayers Filing a Joint Income Tax Return and Living in the United States

If the taxpayer is married and files joint income tax return with his spouse, then the reporting threshold is satisfied if the value of his specified foreign financial assets is either more than $100,000 on the last day of the tax year, or more than $150,000 at any time during the tax year.

3. Married Taxpayers Filing Separate Income Tax Returns and Living in the United States

If the taxpayer is married and lives in the United States, but files a separate income tax return from his spouse, then the reporting threshold is satisfied if the total value of his specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. Therefore, this category is very similar to that of the unmarried taxpayer who resides in the United States.

4. Married Taxpayers Living Abroad and Filing a Joint Income Tax return

If the taxpayer has a tax home is abroad (a special test applies to determine whether this is the case), satisfies the presence abroad test, and files a joint tax return with his spouse, then the reporting threshold is satisfied if the value of all specified foreign financial assets that you or your spouse owns is either more than $400,000 on the last day of the tax year, or more than $600,000 at any time during the tax year.

5. Married Taxpayers Living Abroad and Filing Any Return Other Than Joint Tax Return

If the taxpayer has a tax home is abroad, satisfies the presence abroad test, and does not file a joint income tax return (instead he files a different type of tax return such as married filing separately or unmarried), then the reporting threshold is satisfied if the value of all specified foreign financial assets is either more than $200,000 on the last day of the tax year, or more than $300,000 at any time during the tax year.

Presence Abroad Tests

There are two “presence abroad” tests for the purposes of categories 4 and 5 above.

First, the presence abroad test is satisfied if the taxpayer is a U.S. citizen who has been a bona fide resident of a foreign country or countries for an uninterrupted period of an entire tax year.

Second, the presence abroad test is satisfied if the taxpayer is a U.S. citizen or residence who is present in a foreign country or countries at least 330 full days during any period of twelve consecutive months that needs in the tax year being reported.

Contact Sherayzen Law Office For Help With IRS Form 8938

The reporting requirements under Form 8938 can be very complex. Moreover, in case of prior non-compliance with the FBAR or other reporting requirements (Form 5471, 8865, 8891, et cetera), filing of Form 8938 should often be done in conjunction with a voluntary disclosure process in order to reduce or avoid additional tax penalties.

For legal advice with respect to Form 8938, determination whether its requirements apply to you, help with completing the form properly, and coordination of the Form 8938 filing with other U.S. tax compliance as part of the voluntary disclosure process, contact Sherayzen Law Office. Our experienced tax compliance firm will help you resolve any issues related to Form 8938 and guide you toward proper compliance with its requirements.

Foreign Qualified Dividend Income

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In U.S. tax law, classification of income plays a very important role in determining your tax liability. One of the most important classifications is whether you have qualified dividend income eligible reduced tax rates applicable to certain capital gains – in most case, this means 15% tax rate.

As with almost every issue in U.S. law, the qualified dividend classification is complicated if you receive foreign dividends. In this article, I will discuss the IRS rules on determining whether your foreign dividends may be considered “qualified dividend income”.

Qualified Dividend Income

The concept of “qualified dividend income” comes from the Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27, 117 Stat. 752), which was enacted on May 28, 2003.

Prior to the Act, section 1(h)(1) of the Internal Revenue Code (the “IRC”) generally provided that a taxpayer’s “net capital gain” for any taxable year will be subject to a maximum tax rate of 15 percent (or 5 percent in the case of certain taxpayers). The new 2003 Act added section 1(h)(11), which provides that net capital gain for purposes of section 1(h) means net capital gain (determined without regard to section 1(h)(11)) increased by “qualified dividend income.”

The law clearly defines this concept of qualified dividend income in Section 1(h)(11)(B)(I). Qualified dividend income means dividends received during the taxable year from domestic corporations and “qualified foreign corporations.”.

Qualified Foreign Corporation

IRC Section 1(h)(11)(C)(i) defines the concept of qualified foreign corporation as (subject to certain exceptions) any foreign corporation that is either (i) incorporated in a possession of the United States, or (ii) eligible for benefits of a comprehensive income tax treaty with the United States that the Secretary determines is satisfactory for purposes of this provision and that includes an exchange of information program (the so-called “treaty test”).

A foreign corporation that does not satisfy either of these two tests is treated as a qualified foreign corporation with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States. Section 1(h)(11)(C)(ii) (see Notice 2003-71, 2003-2 C.B. 922, for the definition, for taxable years beginning on or after January 1, 2003, of “readily tradable on an established securities market in the United States”).

It is important to remember that a dividend from a qualified foreign corporation is also subject to the various limitations in section 1(h)(11). For example, a shareholder receiving a dividend from a qualified foreign corporation must satisfy the holding period requirements of section 1(h)(11)(B)(iii).

Interaction Between PFICs and Section 1(h)(11)

The current law is clear that a qualified foreign corporation does not include any foreign corporation that for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a passive foreign investment company (“PFIC”) as defined in section 1297. See IRC section 1(h)(11)(C)(iii).

Thus, PFIC dividends are not eligible for IRC Section 1(h)(11) favorable treatment. Rather, they will be treated according to the complex PFIC rules described elsewhere in the IRC.

The Treaty Test – Key Threshold

As stated above, subject to certain limitations and exceptions, foreign dividends are likely to be treated as qualified dividend income if a foreign corporation is eligible under the “treaty test”.

A treaty test is passed if the treaty is on the list of the U.S. income tax treaties that met the IRC requirements. The IRS published the first list of such treaties on October 20, 2003 (IRS Notice 2003-69, 2003-2 C.B. 851). Since then, the list has been periodically.

The most recent notice is IRS Notice 2011-64. The new additions since 2006 have been the treaty with Bulgaria (which entered into force on December 15, 2008) and the treaty with Malta (which entered into force on November 23, 2010).

Three U.S. income tax treaties do not meet the requirements of section 1(h)(11)(C)(i)(II). They are the U.S.-U.S.S.R. income tax treaty (which was signed on June 20, 1973, and currently applies to certain former Soviet Republics), and the tax treaties with Bermuda and the Netherlands Antilles.

There are also other requirements under the treaty test. As stated above, in order to be treated as a qualified foreign corporation under the treaty test, a foreign corporation must be eligible for benefits of one of the approved U.S. income tax treaties. Accordingly, the foreign corporation must be a resident within the meaning of such term under the relevant treaty and must satisfy any other requirements of that treaty, including the requirements under any applicable limitation on benefits provision. For purposes of determining whether it satisfies these requirements, a foreign corporation is treated as though it were claiming treaty benefits, even if it does not derive income from sources within the United States. See H.R. Conf. Rep. No. 108-126, at 42 (2003) (stating that a company will be treated as eligible for treaty benefits if it “would qualify” for benefits under the treaty).

Effective Date

It is always important to check the effective dates for each of the treaty for determining when the eligibility for the preferential IRC Section 1(h)(11) arises.

As of the time of this article, IRS Notice 2011-64 is effective with respect to Bulgaria for dividends paid on or after December 15, 2008; Malta – on or after November 23, 2010; Bangladesh – August 7, 2006; Barbados – December 20, 2004; Sri Lanka – July 12, 2004; all other US income tax treaties listed in the Notice – after December 31, 2002.

List of Eligible Treaties

For the reader’s convenience, I listed below all of the U.S. Income Tax Treaties that satisfied the requirements of the IRC Section 1(h)(11)(C)(i)(II) as described in the Appendix to the IRS Notice 2011-64.

Australia
Austria
Bangladesh
Barbados
Belgium
Bulgaria
Canada
China
Cyprus
Czech Republic
Denmark
Egypt
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
India
Indonesia
Ireland
Israel
Italy
Jamaica
Japan
Kazakhstan
Korea
Latvia
Lithuania
Luxembourg
Malta
Mexico
Morocco
Netherlands
New Zealand
Norway
Pakistan
Philippines
Poland
Portugal
Romania
Russian Federation
Slovak Republic
Slovenia
South Africa
Spain
Sri Lanka
Sweden
Switzerland
Thailand
Trinidad and Tobago
Tunisia
Turkey
Ukraine
United Kingdom
Venezuela

Contact Sherayzen Law Office for International Tax Planning

If you have any questions regarding international tax planning, contact Sherayzen Law Office.
Our experienced international tax firm will thoroughly analyze the facts of your case and create an ethical efficient tax plan applicable to your fact situation under the Internal Revenue Code.

IRS Form W-9, FATCA and FBAR Compliance

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The Foreign Account Tax Compliance Act (“FATCA”) produced a major catalyst for the usage of Form W-9 by the banks in order to identify whether their clients are U.S. taxpayers. This article explores the connection between the IRS Form W-9, FATCA and FBAR compliance.

IRS Form W-9

The essence of the IRS Form W-9 is to allow a person, who is required to file an information return with the IRS, to obtain a U.S. taxpayer’s correct taxpayer identification number (TIN) in order to report the required transactions (for example, income paid to the taxpayer).

The taxpayer should use Form W-9 to provide his correct TIN to the person requesting it (the “requester”) and, where applicable, to certify that the taxpayer’s TIN is correct, that the taxpayer is not subject to backup withholding, and so on.

Form W-9 should be used only by U.S. persons.

FATCA and Form W-9

The recent developments in U.S. tax compliance laws and regulations, especially the enactment of FATCA, forced many overseas banks to identify which of their customers are U.S. taxpayers and report certain information about these taxpayers to the IRS.

This is why there has been a huge surge of Forms W-9 sent out by foreign banks to U.S. persons. In some countries, the foreign banks’ usage of Forms W-9 has been especially widespread. Among these countries are Switzerland, France, Germany and even India.

Where a U.S. taxpayer fails to supply Forms W-9, the foreign banks usually force the closure of a foreign bank account with all of its potentially negative consequences. Moreover, intentional failure by a U.S. taxpayer to supply Forms W-9 may be used by the IRS against such taxpayer as circumstantial evidence of willful failure to file the FBARs.

FBAR Compliance and Form W-9

It is important to recognize the direct link between Form W-9 and FBAR compliance. The exposure of non-compliance with Report of Foreign Bank and Financial Accounts (“FBAR”) is the true reason behind the IRS strategies to force foreign banks to send out Forms W-9 to their U.S. customers.

Receipt of Forms W-9 from a foreign bank by U.S. taxpayers who are not in compliance with the FBAR filings is a watershed event for such taxpayers (many of whom may not have even heard of the FBARs in the past). This is when the U.S. taxpayers should immediately contact an international tax attorney in order to conduct a voluntary disclosure of their foreign accounts (obviously, it is even better to do it independently of the receipt of Form W-9, but the form adds special urgency to such a disclosure).

Form W-9 and Offshore Voluntary Disclosure Program 2012

It should be recognized that receipt of Form W-9 by itself (i.e. without any IRS investigation or examination) does not prevent the eligibility to enter into a voluntary disclosure program.

In most situations, the 2012 Offshore Voluntary Disclosure Program (“OVDP”) now closed, which was announced by the IRS on January 9, 2012, would still be available even after a taxpayer receives Form W-9. On the other hand, if the taxpayer provides the required information on Form W-9 to a foreign bank and the IRS begins an investigation of this taxpayer (after receiving the relevant information from the bank), then the taxpayer is likely to be precluded from participating in the OVDP.

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

If you received Form W-9 and you have not been in compliance with the FBAR requirements, you should contact Sherayzen Law Office immediately for professional legal assistance. Our experienced voluntary disclosure firm will analyze the facts of your case, determine the extent of your FBAR (and any other U.S. tax compliance) liability, advise you on the available options, implement the best option of your choice (including filing of all necessary tax forms and amending prior tax returns), and provide rigorous IRS representation.