Did you recommend that everyone with unreported income or FBARs enter into the standard IRS Offshore Voluntary Program (OVDP) and pay the 27.5% (or 50%) offshore penalty?
Absolutely not. The majority of our disclosure clients are eligible for a Streamlined Disclosure, which comes with either a 5% penalty for US-based clients and a 0% offshore penalty for those who live abroad. Oftentimes, we find that due to the nature of the earnings abroad, even a Streamlined Disclosure isn’t required.
Because of the cost and complexity we always strive to point our clients to a less-intrusive disclosure, if at all possible.
I reported all my taxable income but haven’t filed my FBARs. Would you enter me into a Voluntary Disclosure?
No. If you’ve paid taxes on unreported accounts, you may not have to enter into the any full blown disclosure program. We may just need to submit delinquent FBAR reports (or other missing forms).
Am I at risk for criminal prosecution?
Based on statistics, probably not. There are only about 3,000 criminal indictments a year coming from the Department of Justice for tax-related crimes. This number is a little inflated, as tax evasion charges are often tacked on to other charges (think Al Capone).
But the tax evasion charge can be easier to prove, and accomplish the goal of the government: put the accused in jail. If you are truly concerned about criminal prosections a generic Voluntary Disclosure remains open. The downside is that there is no standard pre-determined penalty schedule. Each penalty is decided one case at a time. The good news is that we are very familiar with these types of audits and have been very succesful in reducing penalties.
From our experience, the government has created a near-perfect environment of fear to encourage compliance. Those with little risk of criminal charges often overestimate their likelihood of criminal investigation. However, those who do have exposure often underestimate their chances of an indictment.
What are some of the criminal charges I might face if I don’t enter into voluntary disclosure and the IRS examines me?
Possible criminal charges related to tax returns include tax evasion, filing a false return, and failure to file an income tax return. Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties.
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
What are some of the civil penalties that might apply if I don’t come in under voluntary disclosure and the IRS audits me? How do they work?
Civil penalties and fines are the true threat that most taxpayers face. These are some potential penalties:
- The FBAR penalty — for failing to file. This is the most ominous and would be catastrophic if imposed. Generally, the civil FBAR penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. The IRS can assess this penalty for multiple years, but in our experience has not as of yet. Non-willful penalties are generally $10,000, but in this case, we have seen the IRS assess penalties for multiple years.
- Fraud penalties — Where an underpayment of tax or a failure to file a tax return is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
- A penalty for failing to file a tax return — Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
- A penalty for failing to pay the amount of tax shown on the return — If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
- An accuracy-related penalty on underpayments — Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
- If applicable, penalties for failing to file — Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; Form 3520-A, Information Return of Foreign Trust With a U.S. Owner; Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations; Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business; Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation; Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.
Can I use a Voluntary Disclosure for my business?
Absolutely.
How long should the process take?
It can take quite some time if a full voluntary disclosure is involved. There is a monstrous amount of work to be done to file, and then the IRS also has a monstrous amount of work to do to review it. We suspect this is why the IRS came out with the Streamlined Programs.
How do you know if I should use the streamlined program? What are the benefits? Downsides?
The most important factor in determining if you can use the streamlined program is answering this question: Did you willfully not file an FBAR form or intentionally take overt steps to learn about the FBAR? If you did not do either one of these, even if you were perhaps negligent, you likely still qualify. Before assuming you do or don’t quality, we strongly urge you to seek a legal opinion from us, because the benefits of the Streamlined program are huge.
It is our job to prepare a submission that is as rock-solid and audit-proof as possible. If you’d like to schedule a confidential, complimentary consultation to find out the best option for you, contact us. Call us at 888-727-8796 or info@irsmedic.com.
We invite you to review success stories and case studies of clients of ours.
