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FATCA, Form 8938 and TD F 90-22.1 Disclosure: Making Informed Decisions

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The past decade brought on a wave of new international tax legislation as well as unprecedented enforcement of older tax laws. From FinCEN Form 114 (formerly Form TD F 90-22.1) (commonly known as “FBAR”) to new FATCA legislation that led to the creation of Form 8938, the current US tax regime with respect to international obligations of US persons has become so complex that it is almost impossible to navigate it for most taxpayers without the professional help of international tax lawyers.

Increasing Complexity of US Tax Laws Requires International Tax Attorney Involvement

With increased complexity of the international tax landscape, the chance of running afoul some US tax rule has become very, very high. Since international tax laws are usually associated with high non-compliance penalties, the taxpayers need to make an informed decision on how to deal with their prior tax non-compliance.

Nowhere is the urgency and necessity of making informed decisions is so high as when it comes to FBARs and Form 8938, primarily because of draconian penalties associated with failure to file these forms Form 114 (formerly TD F 90-22.1). The ability to analyze the fact pattern, spot all the issues and identify available options based on experience are crucial in this esoteric area of law and the international tax attorneys experienced in voluntary disclosures should be handling such cases.

Choosing the Right Attorney is a Challenge

Unfortunately, it is precisely in this area that there is a serious obstacle to getting the necessary information to make an informed decision. The obstacle is that there is a tremendously small number of international tax attorneys who practice in this area of law and these professionals are shielded by a mass of inexperienced and unqualified attorneys and especially accountants.

It is virtually impossible for taxpayers to state with certainty who is the right lawyer for their case. A lot of taxpayers immediately fall into the trap of going to their accountants to do a voluntary disclosure. In a prior article, I already explained why this could be present a huge problem for the taxpayers.

Other taxpayers correctly realized that they need a tax attorney to get help with their voluntary disclosure. However, some of these taxpayers often make a mistake of hiring a tax lawyer who is not practicing international tax law.

Some taxpayers fall into the “local” trap where they choose an attorney because he or she is in their state or town, not because the attorney is an international tax attorney or experienced in the area of voluntary disclosures.

You Should Choose an International Tax Lawyer Experienced in Form 8938 (FATCA) and FBAR Voluntary Disclosure

In order to make an informed decision, the taxpayers who have undisclosed foreign assets should contact an international tax attorney who is experienced in the are of voluntary disclosures.

Sherayzen Law Office is an international tax law firm that is highly experienced in the area of voluntary disclosures involving FBARs and Forms 8938. Owner Eugene Sherayzen is an experienced international tax attorney who will thoroughly analyze your case, identify all relevant issues, provide accurate estimates of your FBAR and Form 8938 liability, and propose creative legal voluntary disclosure options.

Contact Sherayzen Law Office for help with FBARs and Form 8938.

Application of Offshore Penalty to Business Ownership Interests

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In another essay, I previously discussed the possible inclusion of the business ownership interests in the calculation of the OVDP (2012 Offshore Voluntary Disclosure Program) Offshore Penalty.  In this article, I would like to explore in more depth the application of the Offshore Penalty to ownership of business interests.

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 default penalty rate is 27.5% (in limited cases, the penalty is reduced to 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.

The Offshore Penalty calculation includes business ownership interests related to tax noncompliance. Tax noncompliance includes failure to report income from the assets, as well as failure to pay U.S. tax that was due with respect to the funds used to acquire the asset.

Business Ownership Interests Are Included in the Offshore Penalty; Limited Exceptions

As I previously discussed, the Offshore Penalty is much broader than simply the FBAR penalty. Among other items, the Offshore Penalty encompasses ownership interest in businesses related to income tax non-compliance or acquired by tainted funds (i.e. funds that were subject to U.S. tax but on which no such tax was paid; the definition also includes funds derived from illegal sources such as criminal and terrorist activities).

There are exceptions to this rule, however. Two most prominent exceptions deserve to be emphasized here. First, where a business interest was not obtained by tainted funds and there are no under-reported U.S. tax liabilities, the taxpayer is likely to be able to exclude the business interest from the Offshore Penalty.

Second, the OVDP rules carve out a limited exception for U.S. taxpayers who are foreign residents and quality for the third category of 5% penalty rate. For these taxpayers only, the IRS stated that the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence. This exception only applies if the income tax returns filed with the foreign tax authority included the offshore-related taxable income that was not reported on the U.S. tax return.

Obviously, the determination of whether either of these two exceptions (or any other exception) applies in your individual case should only be determined by an international tax attorney experienced in the area of offshore voluntary disclosures.

Major Types of Business Ownership Interests Covered by the Offshore Penalty

The biggest category of business ownership interests covered by the Offshore Penalty includes ownership of foreign entities for which information returns, such as Forms 5471, 8865, 8858, 926 and so on, should have been filed by the non-compliant taxpayer. Most often, this category includes ownership of closely-held foreign corporation, interest in the controlled foreign partnership and contribution of property to a foreign corporation.

Notice that, even if the business entity controlled by the taxpayer is not itself tax non-compliant, but it holds the assets which are non-compliant (usually because they were purchased by using tainted funds), the entire ownership interest in the business entity may be exposed to the Offshore Penalty.

Another type of business interest that is often subject to Offshore Penalty involves business entities that are virtually indistinguishable from its owners. In situations where a business entity is an alter ego or nominee of the taxpayer, the IRS may determine that the Offshore Penalty should be applied to the underlying assets of the entity.

The most spectacular reach of the OVDP, however, is the possibility of involving domestic entities. In spite of having “Offshore” in its name, the Offshore Penalty can actually apply to ownership of U.S. businesses acquired with tainted funds. This is a critically-important consideration for non-compliant U.S. taxpayers who repatriated tainted funds back to the United States and invested them into U.S. businesses.

Contact Sherayzen Law Office for Help With Your Voluntary Disclosure of Offshore and Domestic Business Ownership Interests

Sherayzen Law Office can help you with the disclosure of any of your foreign assets, including Offshore and Domestic business ownership interests. Our international tax law firm is highly experienced in conducting offshore voluntary disclosures of business interests. We will thoroughly analyze your case, assess your tax liability as well as the liability that you would face under the OVDP, determine the available disclosure options and implement the disclosure strategy (including preparation of all legal and tax documents as well as IRS representation).

Contact Sherayzen Law Office to schedule your consultation!

12.5% OVDP Offshore Penalty Category

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In an earlier article, I introduced the structure of the OVDP (Offshore Voluntary Disclosure Program) Offshore Penalty. In this essay, I would like to explore one aspect of that structure – the possibility of reducing the Offshore Penalty to 12.5%.

Offshore Penalty

The taxpayers who enter the OVDP must 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 default rate of the Offshore Penalty under the OVDP is 27.5%, but, in limited circumstances, it is possible to reduce the penalty to only 12.5% (assuming that the taxpayer does not otherwise qualifies to a lesser penalty rate).

Eligibility Requirements for 12.5% Penalty Rate

The taxpayers may be qualified to a reduced Offshore Penalty rate of 12.5% under the following circumstances. During each of the years covered by the OVDP, the taxpayer’s penalty base (i.e. the highest aggregate balance in foreign bank accounts and the fair market value of assets in undisclosed offshore entities and the fair market value of any foreign assets that were either acquired with improperly untaxed funds or produced improperly untaxed income) must be less than $75,000.

Therefore, there are two basic requirements. First, the highest penalty base must be less than $75,000. Second, this must be the case in each of the years.

Strict compliance is required by the IRS. For example, in a situation where the taxpayer made one deposit in some early year covered by the OVDP and that deposit briefly brought the account balance above $75,000, the taxpayer will not be eligible to the reduced 12.5% Offshore Penalty.

Contact Sherayzen Law Office for Help With Your Offshore Voluntary Disclosure

Whether the 12.5% Offshore Penalty rate applies in your particular situation is a question that can only be answered by an international tax attorney who has thoroughly examined your case.

This is why you should contact Sherayzen Law Office for help NOW.

Our international tax firm is highly experienced in conducting offshore voluntary disclosures. We will thoroughly analyze your case, assess your current FBAR 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).