50% Offshore Penalty of the 2014 OVDP

The 50% Offshore Penalty is a unique feature of the 2014 OVDP. What is so unusual about this penalty is that its impact widens with each passing month and year to include and affect more and more US taxpayers. In this article, I would like to explore the emergence of the 50% Offshore Penalty and its importance to US international tax compliance.

2014 OVDP Penalty Structure

On June 18, 2014, the IRS completely changed the entire legal landscape of US voluntary disclosure. The unwieldy and uncompromising penalty structure of the 2012 OVDP was replaced by the new Streamlined Procedures and a completely modified 2014 OVDP.

Under the new rules, the IRS eliminated the 5% and 12.5% penalties of the 2012 OVDP and replaced them with milder and more flexible Streamlined Domestic Offshore Penalty of 5% and Streamlined Foreign Offshore Penalty of 0%. On the other hand, the old default 25% penalty of the 2012 OVDP evolved into a new stringent system of dual penalty structure: 27.5% default Offshore Penalty and 50% Offshore Penalty.

FAQ 7.2 and 50% Offshore Penalty

The 27.5% default Offshore Penalty applies unless the participating US taxpayer has foreign accounts in a bank on a special IRS list as described in FAQ 7.2.

FAQ 7.2 states that, starting August 4, 2014, any taxpayer who enters OVDP will be subject to a 50% Offshore Penalty if, at the time the Preclearance letter is submitted to the IRS-CI (Criminal Investigation), a “public disclosure” has already occurred.

FAQ 7.2. further states that a “public disclosure” has occurred if one of the following three events occurs. First, if the foreign financial institution (FFI) where the undisclosed foreign account is held or another “facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement” (“facilitator”) is under IRS or US DOJ investigation. The investigation should be the one that is related to accounts that are beneficially owned by a US person.

Second, the FFI or facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person. In other words, where a foreign bank signs a Non-Prosecution Agreement with US DOJ; this means every Swiss bank that reached resolution with the DOJ under the Swiss Bank Program; OR

Third, the FFI or facilitator has been identified in a John Doe Summons seeking information about U.S. taxpayers who may hold financial accounts at this FFI or have accounts established or maintained by the facilitator.

FAQ 7.2 provides an example of when a public disclosure occurs: “a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.

It is easy to see now why the 50% Offshore Penalty has been increasing in influence – every Non-Prosecution Agreement, every DOJ investigation, every John Doe summons automatically expands the application of the 50% Offshore Penalty to another FFI or even a set of FFIs.

Entire Penalty Base is Subject to 50% Offshore Penalty

If a public disclosure occurs with respect to the FFI or facilitor where the US taxpayer has one or more foreign accounts, the 50% Offshore Penalty applies not only to these accounts but to all of the taxpayer’s assets included in the penalty base. For example, if a US taxpayer has one account at UBS, ten accounts in an Australian bank (for which no public disclosure occurred) and a foreign rental property that generated unreported foreign income, the 50% Offshore Penalty will apply to all of these assets.

List of FFIs and Facilitators

The IRS published the list of all FFIs and Facilitators for which public disclosure has occurred with the dates when the 50% penalty is activated with respect to these FFIs and Facilitators. Here, I am only providing the list up to date through January 7, 2016:

Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
Wegelin & Co.
Liechtensteinische Landesbank AG
Zurcher Kantonalbank
swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG
CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India)
The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates
Sovereign Management & Legal, Ltd., its predecessors, subsidiaries, and affiliates (effective 12/19/14)
Bank Leumi le-Israel B.M., The Bank Leumi le-Israel Trust Company Ltd, Bank Leumi (Luxembourg) S.A., Leumi Private Bank S.A., and Bank Leumi USA (effective 12/22/14)
BSI SA (effective 3/30/15)
Vadian Bank AG (effective 5/8/15)
Finter Bank Zurich AG (effective 5/15/15)
Societe Generale Private Banking (Lugano-Svizzera) SA (effective 5/28/15)
MediBank AG (effective 5/28/15)
LBBW (Schweiz) AG (effective 5/28/15)
Scobag Privatbank AG (effective 5/28/15)
Rothschild Bank AG (effective 6/3/15)
Banca Credinvest SA (effective 6/3/15)
Societe Generale Private Banking (Suisse) SA (effective 6/9/15)
Berner Kantonalbank AG (effective 6/9/15)
Bank Linth LLB AG (effective 6/19/15)
Bank Sparhafen Zurich AG (effective 6/19/15)
Ersparniskasse Schaffhausen AG (effective 6/26/15)
Privatbank Von Graffenried AG (effective 7/2/15)
Banque Pasche SA (effective 7/9/15)
ARVEST Privatbank AG (effective 7/9/15)
Mercantil Bank (Schweiz) AG (effective 7/16/15)
Banque Cantonale Neuchateloise (effective 7/16/15)
Nidwaldner Kantonalbank (effective 7/16/15)
SB Saanen Bank AG (effective 7/23/15)
Privatbank Bellerive AG (effective 7/23/15)
PKB Privatbank AG (effective 7/30/15)
Falcon Private Bank AG (effective 7/30/15)
Credito Privato Commerciale in liquidazione SA (effective 7/30/15)
Bank EKI Genossenschaft (effective 8/3/15)
Privatbank Reichmuth & Co. (effective 8/6/15)
Banque Cantonale du Jura SA (effective 8/6/15)
Banca Intermobiliare di Investimenti e Gestioni (Suisse) SA (effective 8/6/15)
bank zweiplus ag (effective 8/20/15)
Banca dello Stato del Cantone Ticino (effective 8/20/15)
Hypothekarbank Lenzburg AG (effective 8/27/15)
Schroder & Co. Bank AG (effective 9/3/15)
Valiant Bank AG (effective 9/10/15)
Bank La Roche & Co AG (effective 9/15/15)
Belize Bank International Limited, Belize Bank Limited, Belize Corporate Services Limited, their predecessors, subsidiaries, and affiliates (effective 9/16/15)
St. Galler Kantonalbank AG (effective 9/17/15)
E. Gutzwiller & Cie, Banquiers (effective 9/17/15)
Migros Bank AG (effective 9/25/15)
Graubundner Katonalbank (effective 9/25/15)
BHF-Bank (Schweiz) AG (effective 10/1/15)
Finacor SA (effective 10/6/15)
Schaffhauser Kantonalbank (effective 10/8/15)
BBVA Suiza S.A. (effective 10/16/15)
Piguet Galland & Cie SA (effective 10/23/15)
Luzerner Kantonalbank AG (effective 10/29/15)
Habib Bank AG Zurich (effective 10/29/15)
Banque Heritage SA (effective 10/29/15)
Hyposwiss Private Bank Genève S.A. (effective 10/29/15)
Banque Bonhôte & Cie SA (effective 11/3/15)
Banque Internationale a Luxembourg (Suisse) SA (effective 11/12/15)
Zuger Kantonalbank (effective 11/12/15)
Standard Chartered Bank (Switzerland) SA, en liquidation (effective 11/13/15)
Maerki Baumann & Co. AG (effective 11/17/15)
BNP Paribas (Suisse) SA (effective 11/19/15)
KBL (Switzerland) Ltd. (effective 11/19/15)
Bank CIC (Switzerland) Ltd. (effective 11/19/15)
Privatbank IHAG Zürich AG (effective 11/24/15)
Deutsche Bank (Suisse) SA (effective 11/24/15)
EFG Bank AG (effective 12/3/15)
EFG Bank European Financial Group SA, Geneva (effective 12/3/15)
Aargauische Kantonalbank (effective 12/8/15)
Cornèr Banca SA (effective 12/10/15)
Bank Coop AG (effective 12/10/15)
Crédit Agricole (Suisse) SA (effective 12/15/15)
Dreyfus Sons & Co Ltd, Banquiers (effective 12/15/15)
Baumann & Cie, Banquiers (effective 12/15/15)
Bordier & Cie Switzerland (effective 12/17/15)
PBZ Verwaltungs AG (effective 12/17/15)
PostFinance AG (effective 12/17/15)
Edmond de Rothschild (Suisse) SA (effective 12/18/15)
Edmond de Rothschild (Lugano) SA (effective 12/18/15)
Bank J. Safra Sarasin AG (effective 12/23/15)
Coutts & Co Ltd (effective 12/23/15)
Gonet & Cie (effective 12/23/15)
Banque Cantonal du Valais (effective 12/23/15)
Banque Cantonale Vaudoise (effective 12/23/15)
Bank Lombard Odier & Co Ltd (effective 12/31/15)
DZ Privatbank (Schweiz) AG (effective 12/31/15)
Union Bancaire Privée , USP SA (effective 1/6/16)

Contact Sherayzen Law Office for Help with Your Undisclosed Foreign Accounts

If you have undisclosed foreign accounts, including those FFIs and Facilitators for which public disclosure has occurred, contact the experienced international tax team of Sherayzen Law Office, Ltd. Our international tax law firm has helped hundreds of US taxpayers around the globe to bring their tax affairs into full compliance with US tax laws, while reducing their penalty exposure.

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Offshore Voluntary Disclosure Program: Advantages and Disadvantages

2012 Offshore Voluntary Disclosure Program (2012 OVDP) now closed may offer tremendous benefits to certain types of taxpayers, but it may not be as beneficial in other circumstances. Whether to enter the 2012 OVDP is a decision that should be made by the taxpayer only after he had an opportunity to discuss this matter in depth with an experienced attorney who specializes in offshore voluntary disclosures. In this article, however, I wish to outline some of the broader considerations with respect to entering into the 2012 OVDP in order to provide some background information to the readers so that they can understand better their attorney’s advice.

Background Information

2012 OVDP was announced by the IRS barely four months after the end of the wildly-successful 2011 OVDI (Offshore Voluntary Disclosure Initiative). However, the actual terms of the program were not announced until much later, June 26, 2012.

2012 OVDP brought in tougher terms than 2011 OVDI (for example, the highest penalty category is 27.5% instead of 25% as it was under 2011 OVDI rules), closed some 2011 OVDI loopholes and created a more complex and detailed set of rules. 2012 rules also clarified many heretofore obscure procedures and contained new features that may benefit certain classes of taxpayers, especially those who owned Canadian retirement accounts.

The basic structure of 2012 OVDP, however, remains largely similar to 2011 OVDI. It still has three penalty levels (27.5%, 12.5% and 5%), highly demanding information disclosure requirements and general rigidness with respect to its terms.

General Cost-Benefit Considerations

There are actually three general analytical steps with respect to benefits and drawbacks of entering into the 2012 OVDP. First, the extent of current liability exposure of the taxpayer outside of the 2012 OVDP. Second, the estimate of the OVDP liability of the taxpayer and comparison of OVDP versus non-OVDP exposure (here, an attorney would also explore the non-tax aspects of the OVDP disclosure such as the comfort level of the taxpayer with the invasive nature of the OVDP requirements). Finally, whether 2012 OVDP is the best route to proceed vis-a-vis alternative voluntary disclosure options.

Since the first and the third steps are outside of the scope of this article, I will concentrate on the calculation of advantages and disadvantages of entering of the 2012 OVDP versus non-OVDP exposure. It should be remembered, however, that this calculation will depend heavily on the individual circumstances of each case.

Primary Advantages of the 2012 OVDP

2012 OVDP enjoys five primary advantages over non-OVDP options. First, it is an official IRS program with a virtual certainty (though, according to the IRS, not a 100% guarantee) of elimination of criminal prosecution.

Second, 2012 OVDP provides a taxpayer with an opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues at the same time. This is the case because OVDP rules assess one single Offshore Penalty with respect to all information returns – Forms 5471, 8865, 926, 3520, FBARs, et cetera. This can highly advantageous for the taxpayer, because, outside of the OVDP, he will have to deal with the penalties associated with each form.

Moreover, paying one single penalty may represent huge savings over paying penalties outside of the OVDP. The IRS provides a hypothetical example where a taxpayer would pay, outside of the 2012 OVDP, $4,543,000 (plus interest) in tax, accuracy-related penalty, and FBAR penalty on a single $1,000,000 account with the undisclosed income of $50,000 per year. This is not even counting the additional penalties and jail time in case the IRS decides to initial a criminal prosecution. On the other hand, in the same example, a taxpayer would pay only $518,000 plus interest under the 2012 OVDP rules (assuming 27.5% offshore penalty category).

Third, 2012 OVDP rules provide for a certain flexibility where the taxpayer’s attorney can look for strategies to lower the Offshore Penalty further if the circumstances of the case allow for such possibility. Therefore, despite its overall rigidness, the OVDP does take some individual circumstances into the account. However, it is important to point out that much of this flexibility is likely to be achieved only securing the agreement of the IRS agent in charge of your case, his manager and the technical analyst – this is a very hard achievement even for an experienced attorney (though, unfortunately, there are a number of cases where the taxpayers’ representatives failed to even try to achieve this goal) and it puts very strict limits on the OVDP flexibility.

Fourth, 2012 OVDP limits the taxpayer’s liability to eight years and the IRS will not look further absent extraordinary circumstances. Outside of the OVDP, the IRS does have an argument that failure to file certain information returns may keep the statute of limitations open to IRS examination with respect to affected tax returns.

Finally, 2012 OVDP provides a definite closure to the case. At the end of the OVDP process, Form 906 (the Closing Agreement) is signed by the taxpayer and the IRS by which both sides agree to the terms of the Agreement and the case is over (absent extraordinary circumstances, such as fraudulent claims by the taxpayer during the voluntary disclosure process).

Primary Disadvantages of the 2012 OVDP

2012 OVDP also has numerous disadvantages. First, this is a very rigid program with numerous requirements. The side-effect is that the OVDP process can be an expensive one for the taxpayer when it comes to legal and accounting fees.

Second, despite having some flexibility with respect to the calculation of penalties, OVDP rules are not likely to be sensitive to major circumstances of a taxpayer’s case, such as non-willfulness of his conduct. While it is never officially stated, the OVDP unofficially incorporate the assumption that the OVDP applicants acted willfully in its Offshore Penalty structure and there is no reasonable cause that can explain their failure to comply with U.S. tax laws. This often leads to a result where innocent taxpayers with smaller cases or taxpayers who live overseas (and for one reason or another do not satisfy the requirements of the 5% penalty category) can be highly penalized under the OVDP structure.

Third, related to the preceding paragraph, the OVDP penalty structure may actually impose a higher penalty on a taxpayer where IRS is not able to establish the willfulness of the taxpayer’s conduct. This is a highly complex calculation that should be made by an attorney, but, generally, the higher the chances of the taxpayer to establish non-willfulness, the less appealing the OVDP penalty structure is likely to be. This is especially true where OVDP Offshore Penalty includes the assets that would not otherwise either be subject to penalty outside of the OVDP or be subject to a much lower penalty.

Fourth, 2012 OVDP has no real appeal structure in place – in most cases, the IRS agent’s decision is final. If you do not like it, the only real recourse is to opt-out with its murky consequences (it may still be an option depending on the individual circumstances of the case, especially when the taxpayer should not have been in the OVDP program in the first place). The only exception is having a full examination of the tax return and an appeal maybe filed with respect to any tax and penalties imposed by the IRS on examination, but the IRS decisions on the terms of the OVDP closing agreement is almost never subject to an appeal. Such dependance on the good will of an IRS agent in charge of the case naturally produces certain anxiety among the OVDP applicants and constitutes a major drawback of entering into the program.

Finally, 2012 OVDP may take a fairly long time to complete (there are still some 2009 OVDP cases open in 2013). The IRS does try to process the cases as soon as possible, but it has few resources and its agents are overwhelmed with the number of cases pending on their desks. On the average, a taxpayer should expect about a fifteen to eighteen-month process between the acceptance into the OVDP and the final resolution of the case.

Contact Sherayzen Law Office for Help with Your Offshore Voluntary Disclosure

This article merely outlines some of the main consideration with respect to the 2012 OVDP. The actual cost-benefit calculation is much more complex and will vary wildly depending on the individual circumstances of each case.

This calculations and the probabilities with respect to each disclosure option should be done by an international tax attorney experienced in the offshore voluntary disclosures.

This is why you should contact Sherayzen Law Office for help with your voluntary disclosure. Our international tax firm is highly experienced in the voluntary disclosure process. We will thoroughly examine the circumstances of your case, assess your penalties under the various disclosure scenarios, prepare all of the required legal documents and tax forms, and rigorously represent your interests during negotiations with the IRS.