taxation law services

2012 OVDP: The Voluntary Disclosure Period

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One of the most critical aspects of the 2012 Offshore Voluntary Disclosure Program (2012 OVDP) are the rules pertaining to the voluntary disclosure period – i.e. what years are involved in calculating the Offshore Penalty and for how many years back should the tax returns be amended (with the corresponding consequences for the additional tax due with interest and penalties). These rules have been greatly expanded and elaborated since 2011 OVDI.

The general rule is that the voluntary disclosure period for the applicants to the 2012 OVDP involve the most recent eight tax years for which the due date has already passed. Critically important is to realize that the eight year period does not include current years for which there has not yet been non-compliance. For example, for taxpayers who submit a voluntary disclosure prior to April 15, 2012 (or other 2011 due date under extension), the disclosure must include each of the years 2003 through 2010 in which they have undisclosed foreign accounts and/or undisclosed foreign entities.

For the fiscal-year taxpayers must include fiscal years ending in calendar years 2003 through 2010. For taxpayers who disclose after the due date (or extended due date) for 2011, the disclosure must include 2004 through 2011.

For disclosures made in successive years, any additional years for which the due date has passed must be included, but a corresponding number of years at the beginning of the period will be excluded, so that each disclosure includes an eight year period.

For taxpayers who establish that they began filing timely, original, compliant returns that fully reported previously undisclosed offshore accounts or assets before making the voluntary disclosure, the voluntary disclosure period will begin with the eighth year preceding the most recent year for which the return filing due date has not yet passed, but will not include the compliant years. For example, in hypothetical where a taxpayer who historically filed income tax returns omitting the income from a foreign investment account, but who began reporting that income on his timely, original tax and information reporting returns for 2009 and 2010 without making a voluntary disclosure, and who filed a voluntary disclosure in January 2012, the voluntary disclosure period will be 2003 through 2008.

Understanding the rules of the voluntary disclosure period allows a taxpayer to plan the time of his disclosure according to his circumstances. Of course, such a benefit is only available in cases where there is sufficient time for such planning.

Contact Sherayzen Law Office for Help with 2012 OVDP

If you have undisclosed foreign account or foreign entities and you plan to enter the 2012 OVDP, you should contact Sherayzen Law Office for help with your voluntary disclosure. Our experienced international tax firm will thoroughly analyze your case, assess your FBAR liability as well as other applicable penalties, identify the options available in your case, and work with you every step of the way until your voluntary disclosure is finished.

Gift and Estate Tax Impact of the American Taxpayer Relief Act of 2012

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One of the most dramatic effects of the American Taxpayer Relief Act of 2012 (ATRA) was felt in the area of gift and estate taxes.

Pre-ATRA Situation

In 2012, the estate and gift tax exemptions, indexed for inflation, were set at $5,120,000 each (up from $5,000,000 in 2011). Moreover, in 2012, the surviving spouse could use the unused exemption of a deceased spouse (this is called “portability”). Finally, the gift tax exemption was the same as the estate tax exemption, so taxpayers could make lifetime gifts that fully utilized their exemptions. In some situations, these gifts would shift the gifted assets’ future appreciation and income out of the donors’ taxable estates. The maximum tax rate for transfers in excess of the exemption was 35 percent.

All of these provisions expired on January 1, 2013. The $5,120,000 exemption was reduced to a $1,000,000 and the maximum tax rate was increased to 55 percent; the portability provision also expired. There was also a problem of the infamous “clawback” with respect to taxpayers who gifted their property using the higher exemption limits in 2012.

ATRA Changes

ATRA corrected the negative impact of the expiration of the 2012 gift and estate tax provisions. It set the permanent exemptions at $5,000,000 with one unexpected surprise – the exemption amount was indexed for inflation. This means that, for 2013, the exemption amount is $5,250,000. The higher exemption amount also renders the clawback provision harmless at this point.

Furthermore, ATRA reinstated the portability provision so that a surviving spouse can still use a deceased spouse’s unused exemption (provided that an estate tax return is filed and the portability election is properly made). However, it should be remembered that the portability is not available for a deceased spouse’s unused generation-skipping transfer tax exemption.

On the more negative side, ATRA raised the maximum tax rate from the 2012 levels to 40 percent. On the other hand, it is still a lot lower than the 55-percent tax that would have been applicable without ATRA.

With respect to charitable contributions, ATRA reinstated the exclusion from gross income for qualified charitable contributions by taxpayers over age 70 ½ of up to $100,000 distributed from an IRA through December 31, 2013. See this article for more details.

Annual Exclusion and Form 3520 Threshold Amount

For the tax year 2013, the gift tax annual exclusion increased from $13,000 to $14,000 per donee and from $139,000 to $143,000 for gifts made to a non-citizen spouse. The threshold at which gifts receivable from foreign partnerships and corporations become reportable to the IRS also increased from $13,258 to $15,102. The threshold amount for Form 3520 (with respect to value of gifts from foreign individuals and estates) remains at $100,000.

Contact Sherayzen Law Office for Help with Your Estate and Tax Planning

If you are in the process of creating your estate and/or tax plan, contact Sherayzen Law Office for help. Our experienced estate planning tax firm will thoroughly review your case, identify available options and prepare all of the required legal and tax documents to implement your plan.

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.

Phaseout of Deduction of Interest on Education Loans: 2013

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In its Revenue Procedure 2013-15, the IRS stated that, for the 2013 taxable year, the $2,500 maximum deduction for interest paid on qualified education loans under IRC § 221 begins to phase out under IRC § 221(b)(2)(B) for taxpayers with modified adjusted gross income in excess of $60,000 ($125,000 for joint returns). It is completely phased out for taxpayers with modified adjusted gross income of $75,000 or more ($155,000 or more for joint returns).

Offshore Voluntary Disclosure Eligibility Criteria

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Generally, unless ineligible under specific rules, U.S. taxpayers who have undisclosed offshore accounts or assets and meet certain requirements are eligible to apply for IRS Criminal Investigation’s Voluntary Disclosure Practice and the OVDP penalty regime. In this article, I will only strive to broadly outline the 2012 OVDP (Offshore Voluntary Disclosure Program) and 2014 OVDP (closed) general eligibility criteria, but the issue of the eligibility should be carefully analyzed in light of your individual circumstances by an international tax attorney experienced in the IRS voluntary disclosure programs.

The Types of Juridical Persons Eligible to Participate in the OVDP

Individual U.S. taxpayers as well as entities (such as corporations, partnerships and trusts) are eligible to make a voluntary disclosure, assuming all other eligibility requirements are met.

Requirements of IRM (Internal Revenue Manual) 9.5.11.9 Must Be Met

In order to participate in the 2012 OVDP, a U.S. taxpayer must meet all requirements of IRM 9.5.11.9. In general, IRM 9.5.11.9 spells out five voluntary disclosure eligibility requirements.

1. Voluntary Disclosure Must Be Truthful

It is the most basic requirement of the voluntary disclosure – an OVDP participant cannot lie to the IRS during the voluntary disclosure. Generally, I try to go over the entire case of my clients in order to make sure that there is not even an appearance of the disclosure being anything less than truthful.

2. Voluntary Disclosure Must Be Complete

You cannot do a partial voluntary disclosure; an OVDP participant must disclosure all of his failings to comply with U.S. tax laws to the IRS. Therefore, the taxpayer who participates in the voluntary disclosure must strive to uncover any past non-compliance committed during the OVDP disclosure period. Unfortunately, such process requires reliance to a certain degree on the memory of the clients about events that may have happened some time ago and such memory may have lost its accuracy. Another major obstacle is the assumption often made by clients that certain facts are not important and they never disclose them, but which later turn out to be critical to the case.

As an attorney, I strive to test every part of my client’s case in order to make sure that there are no hidden issues and the IRS cannot disallow OVDP participation due to incomplete disclosure. Fortunately, the long experience of with numerous clients in this area greatly helps in uncovering the potential problems and allows for a more effective voluntary disclosure process.

3. Voluntary Disclosure Must Be Timely

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).

This is why time is so crucial in voluntary disclosures – it may make all the difference in what type of penalties you will be facing. This is also why it is so important for the taxpayers who found out about their non-compliance with U.S. tax laws to contact Sherayzen Law Office as soon as possible to discuss the voluntary disclosure options.

4. Cooperation During Voluntary Disclosure

The taxpayer must show a willingness to cooperate (and does in fact cooperate) with the IRS in determining his correct tax liability. Failure to do so will render the taxpayer ineligible to conduct voluntary disclosure.

5. Good-Faith Payment Arrangement

The taxpayer must make good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. The OVDP terms require the taxpayer to pay the tax, interest, and accuracy-related penalty, and, if applicable the failure to file and failure to pay penalties with their submission. However, it is possible for a taxpayer who is unable to make full payment of these amounts to request the IRS to consider other payment arrangements.

The burden is on the taxpayer to establish inability to pay, to the satisfaction of the IRS, based on full disclosure of all assets and income sources, domestic and offshore, under the taxpayer’s control. Assuming that the IRS determines that the inability to fully pay is genuine, the taxpayer must work out other financial arrangements, acceptable to the IRS, to resolve all outstanding liabilities, in order to be entitled to the penalty relief under the OVDP.

Per Se Ineligibility

Even if the requirements of of IRM 9.5.11.9 are met, there are certain “per se” ineligibility categories of taxpayers which will prevent such taxpayers from participating in the 2012 OVDP:

First, if a taxpayer appeals a foreign tax administrator’s decision authorizing the providing of account information to the IRS and fails to serve the notice as required under existing law (see 18 U.S.C. 3506) of any such appeal and/or other documents relating to the appeal on the Attorney General of the United States at the time such notice of appeal or other document is submitted, the taxpayer will be ineligible to participate. This OVDP provision closes one of the 2011 OVDI loopholes that allowed some U.S. taxpayers to appeal certain foreign decisions and not to inform the U.S. Department of Justice about it (as required by law), while maintaining their voluntary disclosure eligibility.

Second, the IRS may announce that certain taxpayer groups that have or had accounts at specific financial institutions will be ineligible due to U.S. government actions in connection with the specific financial institution. Such announcements will provide notice of the prospective date upon which eligibility for specific taxpayer groups will be posted to the IRS website. This possibility builds a tremendous pressure on non-compliant U.S. taxpayers, because there is constant fear that their voluntary disclosure eligibility will be taken away by an IRS action irrespective of the IRM 9.5.11.9 compliance.

Third, the IRS voluntary disclosure practice does not apply to taxpayers with illegal-source income.

Contact Sherayzen Law Office for Help With Your Offshore Voluntary Disclosure

The voluntary disclosure eligibility criteria is complex and it is best to consult an attorney experienced in voluntary disclosures with respect to whether you are eligible to conduct voluntary disclosure under your particular circumstances.

This is why your first step should be to schedule a consultation with a Sherayzen Law Office attorney. Our international tax firm is highly experienced in voluntary disclosures and they can help you with an 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.