Offshore Voluntary Disclosure Program: Key Requirements
2012 OVDP (Offshore Voluntary Disclosure Program) (now closed) may present a great opportunity for certain U.S. taxpayers to deal with their current as well prior non-compliance with U.S. tax laws. However, 2012 OVDP is not for everyone; while for certain categories of taxpayers it is the best option, other taxpayers may have additional choices that may make alternative disclosure options more appealing than the entrance into the official voluntary disclosure program – this is the determination that should be made by the taxpayer after a comprehensive overview of his case with an experienced international tax attorney.
In order to make this determination, however, one must understand what are the key requirements of the 2012 OVDP once a taxpayer is accepted into the program (the acceptance requirements are described in another article). In this article, I will strive to provide a broad overview of such requirements, though you will need to consult Sherayzen Law Office for a more detailed explanation of the program and the exact requirements that may apply to your case.
General Understanding of the 2012 OVDP Requirements
The 2012 Offshore Voluntary Disclosure Program is a fairly rigid and invasive program designed to allow certain types of U.S. taxpayers to voluntarily bring themselves back into compliance with U.S. laws in exchange for lower penalties and general avoidance of criminal prosecution. It is important to emphasize the 2012 OVDP is NOT a full-amnesty program; rather, it offers an alternative penalty system in exchange for voluntary compliance with a number of requirements.
The 2012 OVDP requirements can be broadly divided into five categories: statute of limitations, disclosure filings, cooperation, payment and closing agreement.
Statute of Limitations Extensions
As part of the 2012 OVDP requirements, the taxpayer must agree to extension of statute of limitations for the purposes of assessing additional taxes (including tax penalties) and the FBAR penalties. For this purposes, the taxpayer must supply the properly completed and signed Form 872 (Consent to Extend the Time to Assess Tax) and a Consent to Extend the Time to Assess Civil Penalties Provided By 31 U.S.C. § 5321 for FBAR Violations.
The key reason for the Statute of Limitations extensions is the ability of the IRS to extend its power to assess taxes and penalties to eight years instead of usual three years for the tax returns and six years for the FBARs. This is a key requirement of the 2012 OVDP and it must be communicated to the taxpayer before he submits his application to participate in the 2012 OVDP.
This is the biggest part of the OVDP requirements. The taxpayer must provide:
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. 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 account or entity (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). Starting year 2011, this requirement includes Form 8938, Statement of Specified Foreign Financial Assets. Note that, for the 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, these taxpayers must provide copies of the such previously filed returns for all corresponding years;
3. Complete and accurate original or amended offshore-related information returns and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”) for tax years covered by the voluntary disclosure. This requirement includes any forms 5471, 8865, 8858, 3520, 926 and so on;
4. Completed Foreign Account or Asset Statement for each previously undisclosed foreign account or asset during the voluntary disclosure period if the information requested in that statement was not already provided in the initial Offshore Voluntary Disclosures Letter. Also, a copy of the completed and signed Offshore Voluntary Disclosures letter and attachments should be included in the disclosure (I am not discussing this part of the OVDP process here because it is outside of the scope of this article);
5. Completed penalty computation worksheet showing the applicant’s determination of the aggregate highest account balance of his/her undisclosed offshore accounts, fair market value of foreign assets, and penalty computation signed by the applicant and the applicant’s representative if the applicant is represented;
6. Copies of offshore financial account statements reflecting all account activity for each of the tax years covered by your voluntary disclosure (only for the taxpayers who are disclosing offshore financial accounts with an aggregate highest account balance in any year of $500,000 or more). An explanation of any differences between the amounts reported on the account statements and the tax returns should be provided as well. 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 available upon request;
7. PFIC Statement detailing whether the amended returns involve PFIC issues during the tax years covered by the OVDP period, and if so, whether the taxpayert chooses to elect the alternative to the statutory PFIC computation that resolves PFIC issues on a basis that is consistent with the mark to market (MTM) methodology authorized in IRC § 1296 but does not require complete reconstruction of historical data, and
8. If the taxpayer has a Canadian Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) and wishes to make a late election pursuant to Article XVIII(7) of the U.S. – Canada income tax treaty to defer U.S. tax on RRSP or RRIF earnings, then: (a) a statement requesting an extension of time to make an election; (b) Forms 8891 for all tax years and type of plan covered under the voluntary disclosure; (c) a dated statement signed by the taxpayer under penalties of perjury describing (i) events that led to the failure to make the election, (ii) events that led to the discovery of the failure, and (iii) if the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities;
By entering into the 2012 OVDP program, the taxpayer agrees to cooperate in the voluntary disclosure process, including providing information on offshore financial accounts, institutions and facilitators, and signing agreements to extend the period of time for assessing Title 26 liabilities and FBAR penalties. Cooperation does mean that the taxpayer may provide information against his former business partners, bank advisors and accountants.
This is a very important requirement, because the taxpayer agrees to comply with any IRS requests which may subject his business dealings to a very close examination by the IRS. This is why it is important to examine the taxpayer’s tax affairs and business deadlines as much as possible (and usually the taxpayer’s attorney will have a very limited time to do so at the beginning of the case) prior to applying to the 2012 OVDP.
By entering the 2012 OVDP, the taxpayer agrees to pay the following penalties (this is added to the additional tax due as a result of the voluntary disclosure):
1. 20% accuracy-related penalties under IRC § 6662(a) on the full amount of the taxpayer’s offshore-related underpayments of tax for all years (this includes any PFIC tax as well);
2. Failure to file penalties under IRC § 6651(a)(1), if applicable;
3. Failure to pay penalties under IRC § 6651(a)(2), if applicable;
4. Interest on the additional tax due and all applicable penalties (note that the abatement of interest and penalty provisions under IRC § 6404 does not apply under the terms of the 2012 OVDP); and
5. Offshore Penalty – 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, a miscellaneous Title 26 offshore penalty, equal to 27.5% (or in limited cases 12.5% or 5%) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure.
A full payment of all tax due, interest, penalties and the Offshore Penalty must be submitted to the IRS with the voluntary disclosure package. However, it is possible to make good faith arrangements with the IRS to pay in parts if the IRS approves the taxpayer’s eligibility for a special arrangement.
At the end of the 2012 OVDP process, the IRS agent will prepare Form 906 (Final Determination Covering Specific Matters) which will describe all of the final terms of your voluntary disclosure. Upon signing of the Agreement, the taxpayer agrees to these final terms and the voluntary disclosure process is finished.
Contact Sherayzen Law Office for Help With 2012 Offshore Voluntary Disclosure Program
If you have undisclosed offshore accounts and foreign assets, you should contact Sherayzen Law Office to discuss the option of entering into the 2012 OVDP. Our experienced international tax firm will thoroughly analyze your case, identify the available options and help you determine whether entering 2012 OVDP is the best course of action in your specific case. Once the decision is made, our attorneys will prepare all of the necessary documents and tax forms, guide you through your voluntary disclosure and rigorously represent your interests during your negotiations with the IRS.
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