We have talked with over a thousand people that have undisclosed foreign accounts and foreign income. We have learned a lot since the first Offshore Disclosure Initiative in 2009. It is our position that the IRS is the most powerful collection agency in the world. Truth, justice, liberty, limited government…well, those are all nice ideas, but the fact is that we are all supplicants of the IRS. And that includes those with unreported income and unreported FBARs, the IRS says, use the OVDP. No matter how unfair it may seem.
Not everyone understands this so we, as counselors, find ourselves in the position of having to "sell" the IRS Offshore Voluntary Disclosure Program. Not that we think the OVDP is fair or equitable, or is even constitutionally permissible. But when faced with two bad alternativesc – the OVDP or rolling the dice, OVDP comes out ahead. That's our opinion anyway. Gambling with the IRS, especially when the stakes are so high, just doesn't make sense to us. Maybe you disagree. But to help you make sense of what is the best course of action, here are the most common objections we hear.
OVDP Objection One: "This just can't be right."
Why can't it be right? Or, to put it another way, why isn't this logical extension of a progressive tax structure that was specifically designed to take more from people who made more? Objections to the income tax unfairness have been going on for hundreds of years. The progressive tax is about being unfair to (certain) people with higher wealth.
Up until the Kennedy tax cuts, the top marginal income tax rates were 91%! So after paying taxes, you were left with nine pennies on your dollar. It wasn't until the Reagan tax cut that the top marginal rate was a more earthly 28%. Of course, these high marginal rates taxes are based on income, not on account value like the FBAR offshore penalty, but at least the case is made: this is not the first time a punitive tax has been imposed.
This doesn't take the sting away for a widow expat who has been living in Europe for 40 years, who, even though she hired tax professionals and tried to always do the right thing and didn't know she had to include her foreign interest in her return. And now she has her entire life savings at risk. I really wish someone at the IRS thought of these people before not including them from the much simpler and far less punitive streamlined OVDP.
OVDP Objection Two: "I want to do the right thing, but the OVDP penalty is just too high"
Let's see if some math can take away the sting. Yes, math.
Let's say it is 2013 and you are in the OVDP. Assume the worst possible case (you have no reasonable cause) and you agree to pay an FBAR penalty of 27.5% on a bank account you have in Switzerland that is worth $4,000,000.00. So, after paying a $1.1 million Offshore Penalty, how long will it take you to get back to $4 million?
At 5 percent interest, a little less than 7 years. So in 2020, you're back to being whole, quicker if there are some good years in there. And that's not just seven years of not IRS FBAR worries. That's the rest of your life of no FBAR IRS worries!
Let's say you gamble and decide not to get into the OVDP. Did you know that it will take the IRS a long time to get to you to assess you FBAR penalties in an FBAR audit?
But would you believe that this is not a good thing?
It is going to take the IRS a long time to go through all the people it suspects of having undisclosed accounts. The IRS has a limited resources. The IRS has about 10,000 soft disclosures it uncovered to go through. So the chances of you being audited for FBARs this year or next or even the year after are very low.
Let's say it is 2017 and you finally are selected for an FBAR audit. Suppose you are fortunate and instead of being hit with several FBAR penalties, you are "lucky" and only get hit with one 50% FBAR penalty, or $2 million. So in 2017, after you pay the IRS, you are down half. So how long will it take you to get back to $4 million?
Over 14 years.
That's right, sometime in 2031, you'll be at where you could have been in 2020. And that is, if you are lucky. The truth is you will never catch up to where you could have been had you disclosed. And non-disclosure is a permanent decision that you can not take back.
(yes, I know in these hypotheticals, I assume all earning can be reinvested tax-free, obviously there are certain restrictions on that, and also I do not take into account the other smaller OVDP taxes and penalties payable)
OVDP Objection Three: "I am not liquid enough to pay the OVDP penalty."
That's easy. An OVDP Payment negotiation can be made if you can't afford to pay the FBAR-equivalent offshore penalty.
OVDP Objection Four: "My CPA said not to worry."
Great advice. Just what is the point of worrying? Maybe you won't get caught. Maybe you'll be dead before you get caught. Maybe your spouse, your kids will be the ones who have to worry about cleaning up the offshore mess you left behind.
OVDP Objection Five: "My CPA told me just to file missing FBARs and amend my returns instead of going into the OVDP."
I wonder if this advice, telling a client essentially to make an ill-named quiet disclosure, constitutes CPA malpractice. I wonder….did a CPA give this advice to gloss over his own errors? That is, has a mistake been advised to cover-up a previous mistake?
I am sure there will be CPA malpractice litigation over FBARs, foreign account reporting, that will determine that question. Maybe even some harmed taxpayers will recover some money from their CPAs.
OVDP Objection Six: "I don't think I'll get caught."
I can assure you that the IRS will not catch 100% of those with hidden foreign accounts.
What I can't say is if you will be one of the people they don't catch.
OVDP Objection Seven: "I'll just renounce my citizenship"
The only way to renounce your citizenship properly is to pay exit tax and disclose all assets properly. You can try to renounce, but the IRS may ignore you wishes and still subject you to the worldwide tax jurisdiction of the IRS.
OVDP Objection Eight: "What countries won't allow me to be extradited?"
Countries you probably wouldn't want to live in.
OVDP Objection Nine: "It still doesn't feel right."
Before any of our clients enter into the program, we need them to be okay with the decision.
One point I'd like to make about the entire offshore disclosure business is a little philosophical. The entire point of having assets is security, right? Security that you can live the life more or less how you expect. But you see, if your foreign assets are undisclosed, those assets are actually liabilities. Liabilities that will not allow you to live the life more or less how you expect.
If you're unsure what action you should take, contact us for a complmentary, confidential consultation.
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After getting caught, there is ALWAYS regret. Take for instance FBAR defendant Jon McBride. He went through the battle. He says getting into the current OVDP is a "no-brainer" for anyone.