The taxpayers who enter into the IRS Offshore Voluntary Disclosure Program (“OVDP”) often have failed to file an FBAR to report an account over which the taxpayer has signature authority. The question arises about whether such accounts should be included in the calculation of the OVDP Offshore Penalty? The answer to this question is – it depends on the circumstances surrounding the signatory authority accounts.
OVDP Offshore Penalty
It is a requirement of the OVDP that the taxpayers who enter the program pay the Offshore Penalty. This penalty is imposed 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.
The Offshore Penalty is calculated by applying the relevant penalty rate to the penalty base. Penalty Base consists of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure
General Rule for Signatory Authority Accounts
The critical question at the core of this article is whether the signatory authority accounts should be included in the penalty base.
The main factor that is likely to determine the answer to this question is whether the taxpayer has the beneficial interest in the account.
Generally, where a taxpayer has failed to file an FBAR to report an account over which the taxpayer has merely signature authority but no beneficial interest, the IRS is not going to include this account in the calculation of the Offshore Penalty.
If, however, the IRS determines that the taxpayer has a beneficial interest in the account, then the entire account will be included in the calculation of Offshore Penalty (unless the account is otherwise excluded based on another OVDP rule).
Most Common Factors in Determining Direct and Indirect Beneficial Interest
While many factors may influence the determination of the existence of a beneficial interest, the IRS specifically (but not exclusively) emphases three factors. First, whether the account over which the taxpayer has signature authority is held in the name of a related person, such as a family member or a corporation controlled by the taxpayer. Second, whether the account is held in the name of a foreign corporation or trust for which the taxpayer had a Title 26 reporting obligation. Finally, whether the account was related in some other way to the taxpayer’s tax noncompliance.
If the answer is “yes” to any of these questions, the IRS is likely to determine that the taxpayer has a direct or indirect beneficial interest in the account. If such determination is made, the account will be included in the calculation of the Offshore Penalty (unless the account is otherwise excluded based on another OVDP rule).
Contact Sherayzen Law Office for Help With Your Offshore Voluntary Disclosure
Whether you have a beneficial interest in a signatory account is the issue that should be determined by an international tax attorney.
Sherayzen Law Office can help you with this and any other offshore voluntary disclosure issues. Our international tax firm is highly experienced in conducting offshore voluntary disclosures. We will thoroughly analyze your case, assess your current tax liability as well as the liability that you would face under the OVDP, determine the available disclosure options and implement the appropriate disclosure strategy (including preparation of all legal and tax documents as well as IRS representation).
Therefore, contact Sherayzen Law Office NOW to schedule your consultation!