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Failure to Conduct Voluntary Disclosure: Possible Penalties

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The IRS just instituted a new voluntary disclosure program for taxpayers who have offshore accounts or assets and who failed to properly report them to the IRS and pay appropriate U.S. taxes. It is called 2011 Offshore Voluntary Disclosure Initiative (“2011 OVDI”). While 2011 OVDI is not available for everyone and some particular circumstances of a case may determine whether it is advisable to go through this program, this new voluntary disclosure program offers a great chance for taxpayers to bring their tax affairs in order and virtually eliminate the possibility of criminal prosecution.

However, what may happen if a taxpayer who should have voluntarily disclosed his offshore income and assets, but fails to do so through 2011 OVDI and the IRS discovers the noncompliance through later examination? This article addresses the common types of penalties that a taxpayer may be subject to in cases where IRS identifies noncompliance with U.S. tax laws before the taxpayer goes through the voluntary disclosure process.

Penalties in General

In general, if the IRS finds out that a taxpayer is not in compliance with U.S. tax laws and fails to voluntarily disclose his offshore assets and foreign bank accounts, the taxpayer may be subject to severe civil and criminal penalties. In additional to accuracy related penalties, the fraud-related penalties, FBAR penalties, and foreign asset reporting penalties (with interest) may be imposed. Combined, all of these penalties and interest may exceed the actual value of nondisclosed assets and foreign bank accounts. In the worst-case scenario, a criminal prosecution may be launched against the noncompliant taxpayers.

Finally, the voluntary disclosure process – which would otherwise be a far less painful way to deal with this problem – is automatically unavailable for taxpayers as soon as they are under civil examination of the IRS.

Let’s discuss the penalties in detail.

Accuracy-Related and Failure to File and Pay Penalties

An accuracy-related penalty on underpayments is imposed under IRC § 6662. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.

If a taxpayer fails to file the required income tax return, a failure to file (“FTF”) penalty may be imposed pursuant to IRC § 6651(a)(1). The penalty is generally five percent of the balance due, plus an additional five percent for each month or fraction thereof during which the failure continues may be imposed. The total penalty will not exceed 25 percent of the balance due.

If a taxpayer fails to pay the amount of tax shown on the return, a failure to pay (“FTP”) penalty may be imposed pursuant to IRC § 6651(a)(2). The penalty may be half of a percent of the amount of tax shown on the return, plus an additional half of a percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding the total of 25 percent of the balance due.

Fraud Penalties

Fraud penalties may imposed under IRC §§ 6651(f) or 6663. Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that may essentially amount to 75 percent of the unpaid tax.

FBAR Penalties

Read this article discussing the penalties that may be imposed as a result of a taxpayers failure to file the FinCEN Form 114 formerly Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”).

Other Penalties

Depending on a particular fact pattern, additional penalties may be imposed for failure to file Form 926, 3520, 3520-A, 5471, 5472, and 8865.

Criminal Prosecution

In the worst-case scenario, a criminal prosecution may be launched by the IRS. Huge penalties and potential jail time are the possible in case of tax evasion.

Contact Us to Let Us Help You

Sherayzen Law Office can help. We are a tax firm based in Minnesota who has helped taxpayers throughout the United States to disclose offshore assets, foreign bank accounts and unreported foreign income to the IRS, avoiding the nightmare scenarios for our clients.

For many taxpayers, 2011 OVDI is a chance to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. A voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.

If you believe that you may not be in full compliance with U.S. tax laws, the worst course of action is to do nothing and wait for the IRS to discover your noncompliance. Once this happens, your options are likely to be severely limited and the penalties a lot higher. Therefore, call or e-mail us NOW to let us help you with your tax problems. Remember, all calls and e-mails are confidential and attorney-client privileged.

2011 Offshore Voluntary Disclosure Initiative

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On February 8, 2011, the Internal Revenue Service announced that a new special voluntary disclosure initiative, designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes, will be available through August 31, 2011.

The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. The first special voluntary disclosure program closed with 15,000 voluntary disclosures on October 15, 2009. Since that time, more than 3,000 taxpayers have come forward to the IRS with bank accounts from around the world. These taxpayers will also be eligible to take advantage of the special provisions of the new initiative.

The new initiative is called the 2011 Offshore Voluntary Disclosure Initiative (OVDI) and includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 initiative does add new features.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 5 or 12.5 percent penalties. Participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

The IRS is also making other modifications to the 2011 disclosure initiative.

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the August 31, 2011, deadline.

For the eligible taxpayers, the 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.

Contact Sherayzen Law Office at (952) 500-8159!

Sherayzen Law Office can help you.  Our experienced voluntary disclosure tax firm will guide you through the voluntary disclosure process and vigorously advocate your position, vying for the best outcome possible in your case.  E-mail or call us NOW!

Taxable vs. Non-Taxable Income

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Generally, most income you receive is considered taxable. However, the tax code is riddled with various exceptions where certain types of income are partially taxed or not taxed at all.

For instance, here is a non-exclusive list of common examples of types of income usually excluded from taxable income:

  • Adoption Expense Reimbursements for qualifying expenses
  • Child support payments
  • Gifts, bequests and inheritances
  • Workers’ compensation benefits
  • Meals and Lodging for the convenience of your employer
  • Compensatory Damages awarded for physical injury or physical sickness
  • Welfare Benefits
  • Cash Rebates from a dealer or manufacturer

The most complicated situations arise where may or may not be included in your taxable income are, depending on your situation. Life insurance is a good example. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. On the other hand, life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.

Scholarships and Fellowship Grants also possess this dual nature. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship; but, the money used for room and board do not qualify.

Remember, even a non-cash income usually should be included in the taxable income. The most common example of this is bartering. Bartering is basically an exchange of property or services between the parties. The fair market value of goods and services exchanged is fully taxable and must be included as income of both parties.

Usually, the rest of the common types of income – such as wages, salaries, tips and unemployment compensation – are fully taxable and must be included in your income unless it is specifically excluded by law.

Contact Us

Determining what types of income should be included in or excluded from your taxable income can be a complicated, highly fact-dependent process. Sherayzen Law Office can help you determine whether your income is taxable. Contact us NOW to discuss your case with an experienced Minneapolis tax attorney.

Medical and Dental Expenses Deduction

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It may be possible for you to be able to deduct medical and dental care expenses incurred in the tax year 2010. This deduction, however, is available only if you itemize your deductions on Schedule A (Form 1040).

This deduction is allowed only for expenses primarily paid for the prevention or alleviation of a physical or mental defect or illness. Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or treatment affecting any structure or function of the body. The cost of drugs is deductible only for drugs that require a prescription (except insulin).

The deduction is allowed only by the amount by which your total medical care expenses for the year exceed 7.5 percent of your adjusted gross income. You can do this calculation on Form 1040, Schedule A in computing the amount deductible. The deduction is further reduced by any reimbursement (from the employer or insurance company). It makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.

The good news is that you may include qualified medical expenses you pay for yourself, your spouse, and your dependents, including a person you claim as a dependent under a multiple support agreement. If either parent claims a child as a dependent under the rules for divorced or separated parents, each parent may deduct the medical expenses he or she actually pays for the child. Furthermore, you can also deduct medical expenses you paid for someone who would have qualified as your dependent except that the person didn’t meet the gross income or joint return test.

You may also deduct transportation costs primarily for and essential to medical care that qualify as medical expenses. The actual fare for a taxi, bus, train, or ambulance may be deducted. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses. With either method you may include tolls and parking fees.

Finally, distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if you pay qualified medical expenses.

If you have any questions with respect to your tax return, contact Sherayzen Law Office NOW and discuss your case with an experienced Minneapolis tax attorney!

What is Closing Agreement

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Closing agreements constitute an important part of tax representation and tax planning. A “closing agreement” is a final agreement between the IRS and the taxpayer on a specific issue or liability. Closing agreements are entered into pursuant to IRC Section 7121.

Usually, closing agreements may be entered into when it is beneficial to permanently and conclusively close a pending matter. However, a taxpayer may use other good reasons for this type of an agreement to convince the IRS. In both cases, however, it should be demonstrated that the agreement will not prejudice the government’s interests.

If a transaction is eligible for a letter ruling, the taxpayer may request a closing agreement with or in lieu of a letter ruling. Sometimes, it is the IRS that may impose closing agreement as a condition for the issuance of a letter ruling.

Sherayzen Law Office offers full IRS representation, including handling your case through a private letter ruling request and entering into a closing agreement, where appropriate.

If you have a case pending before the IRS or you are unsure about the tax consequences of a business transaction, call NOW to discuss your case with an experienced Minneapolis tax lawyer!