When U.S. citizens have undisclosed bank accounts overseas, they can evade paying taxes on the money. The Internal Revenue Service has focused on offshore enforcement efforts. In January of 2012, the IRS began an open-ended offshore FBAR voluntary disclosure program, known as OVDP due to the success of similar initiatives in 2009 and 2011. The 2012 program has no set due date, but may end or change at any point in the future.
The offshore FBAR voluntary disclosure program offers taxpayers with undisclosed income in offshore accounts to be current with tax returns, as well as a uniform penalty structure for taxpayers who voluntarily report any foreign accounts and/or assets which produced income that was previously unreported.
For taxpayers who have undisclosed overseas, the offshore FBAR voluntary disclosure program is an IRS tax settlement option that should strongly be considered. By making a voluntary disclosure taxpayers avoid large civil penalties, as well as avoid the possibility of criminal prosecution. Taxpayers who do not apply for OVDP risk being detected by the IRS. The IRS is serious about taxpayer who evading tax and are active in discovering identities of individuals with undisclosed accounts. If a taxpayer decides not to voluntarily disclose their hidden accounts, the IRS has the ability to impose substantial penalties including fraud and foreign information return penalties.
In order to qualify for tax settlement the offshore FBAR voluntary disclosure program, taxpayers have to:
- Provide copies of previously filed original federal income tax returns for the years covered by the voluntary disclosure (usually the previous eight years)
- Provide accurate amended federal income tax returns for all years covered by the disclosure. These must include all applicable schedules for the amount and type of income that was previously unreported. This might include Schedule B, Schedule D, Schedule E, and Statement of Specified Foreign Financial Assets.
- Prepare and sign the Offshore Voluntary Disclosure letter and attachment
- Have a check made out to the U.S. Treasury for the amount of tax owed, plus the interest and penalties accrued.
- Complete Foreign Account or Asset Statements for the previously undisclosed foreign accounts or assets during the disclosure period.
- Complete a penalty computation worksheet showing the highest balance of the account during the disclosure period, the fair market value of foreign assets, and the penalty computation. This worksheet must be signed by the applicant and the applicant’s tax attorney or other representative.
- Complete and sign agreements to extend the period of time to assess tax penalties and to assess FBAR penalties.
- Complete Form TD F 90.22-1, the Report of Foreign Bank and Financial Accounts (FBAR) if the applicant is disclosing offshore financial accounts. This report must be made for all calendar years covering the voluntary disclosure. If the applicant has previously filed FBARs, copies must be provided to the IRS.
- Applicants who are disclosing offshore financial accounts with a balance in any year greater than $500,000, must include copies of financial statements with the account activity for each of the tax years in the disclosure. Applicants must also explain any differences between the amounts reported and the amount of the tax return. For applicants who are disclosing offshore financial accounts whose aggregative account balances is less than $500,000 must provide this documentation upon request by the IRS.
- Applicants who are disclosing offshore entities must provide a statement identifying all entities for the tax years covered by the disclosure. These must include entities that were held both directly and indirectly, and how much of the entities was owned by the applicant. When an applicant had offshore accounts or assets held in the name of a foreign entity, they must also accurately and completely amend information for the returns being filed. This might also include Form 3520, Form 3520-A, Form 5471, Form 5472, Form 926, and Form 8865 for all tax years covered by the disclosure.
- If an applicant is an estate or an executor or advisor of an estate, they must provide an accurate and complete estate gift tax return for the tax years covered by the voluntary disclosure. This is done to correct any underreporting of assets.
- Applicants whose returns involve Passive Foreign Investment Company (PFIC) issues must provide a statement as to whether the amended returns involve these issues. If they do, the applicant must choose to elect the alternative method to the statutory PFIC computation or not.
- Applicants with Canadian registered retirement savings plans or registered retirement income funds who wish to defer U.S. taxes on these earning must include a statement requesting the extension, Form 8891, and a statement describing why the applicant failed to make the election, and the discovery of the failure.
The offshore FBAR voluntary disclosure program is the best IRS tax settlement option for taxpayers with undisclosed accounts overseas. Taxpayers should consult with an experienced New York tax attorney when moving forward with the OVDP process to make sure that they qualify for tax settlement with this program. Unfortunately this tax matter is never resolved quickly, and with so many requirements to participate, experienced and knowledgeable help is only beneficial to the applicant.