UPDATE 2016: Since this article was published in 2012, there have been dramatic changes to the IRS Offshore Voluntary Disclosure (OVDP) programs. First, the old Streamlined Procedures, which incredibly few people qualified for was greatly liberalized in 2014. The biggest winners: "Non-willful" Expats who now only have to file three years of tax returns and are subject to an 0% penalty. Domestic Streamlined candidate also have three years, but are subject to a 5% offshore penalty that is not just based upon FBAR non-compliance, but also FATCA Form 8938 non-compliance.
For those who have entered, or are considering to enter, into the into the Standard OVDP and are concerned about the 27.5% penalty or the 50%(!) offshore penalty, be advised we do now have a track record of successful OVDP "opt-outs," and now are in a terrific position to give you a legal opinion on how an opt-out will likely play out for you.
For historical perspective, the original article follows below:
Transcript:
Hi this is Tax Attorney Anthony Parent of Parent & Parent the IRSmedic. In this video I'll be discussing 6 serious defects of the IRS Streamlined OVDI and the one painful reality.
But before we get into it, I want to give an overview to anyone who is unfamiliar with OVDI process some background information.
The United States has something know as universal tax jurisdiction. This means that if you are a US person — by the way a US person isn't just a US citizen, but also include green card holders AND foreign national in on a visa — well, if you are a US person the IRS demands you report all your worldwide income. Even if you paid taxes in your home country. And not only that, the IRS will penalize you for failing to report the existence of your offshore accounts that are over $10,000, in the aggregate.
In 2009, the IRS came out with its first Offshore Voluntary Disclosure Initiative to give amnesty to those who either intentionally or unintentionally did not report income or accounts. The problem with this initiative is that the penalty structure was the same for someone who evaded taxes and someone who just made an innocent mistake.
So in 2011, the IRS changed the rules by increasing penalties on those who intentionally engaged in tax evasion and gave those who made innocent mistakes a chance to argue for a lower penalty by "opting out" of the standard penalty structure.
The deadline passed for the 2011 OVDI, and now there is a rolling 2012 OVDI. The 2012 OVDI is vastly similar to the 2011 with one notable exception. The penalties have increased again for those engaging in intentional evasion. But there is the opportunity for those who made innocent mistakes to "opt-out" of the standard FBAR penalty structure.
Now the area of 'opt-out' like mostly everything of the OVDI is confusing. By opting out, one is not opting out of the OVDI. If you opt out, all the same protections from criminal charges are still in place. The opt out refers to the standard penalty structure. Most importantly opting out of the 27.5% FBAR equivalent penalty.
This FBAR equivalent penalty is calculated on the highest account value in the last 8 years. Or any income producing assets were the income was not reported. For instance, the FBAR equivalent penalty is calculated against rental property, even though rental poverty is something that you do not need to disclose on an FBAR. I told you the rules are complicated.
And I should make an important note. The 2009 OVDI only had a 6-year look back. The 2011 and 2012 OVDI's have an 8 year period.
To date, approximately 34,000 OVDIs have been filed from 2009 until today. Based on this number, the IRS is aware that many people have not come forward and will not come forward, which is why they are stepping up their enforcement by auditing those it suspects of having foreign accounts.
The people we have seen coming forward in 2012 to take advantage of the OVDI are typically those who made innocent or no worse than negligent mistakes. Among these clients, and understandably so, there has been intense grumblings about how the OVDI program is really unfair for people who had no idea what was going on. Not only are the lower penalties still somewhat punitive, but allow me to be blunt: attorney and accounting fees are very real as well.
The IRS claims, it response, it created the streamlined OVDI program. Initially, I was hopeful. This would decrease the compliance cost and penalties for so many people who did nothing all that wrong. My optimism was crushed, as I started analyzing the nitty gritty of the streamlined program. And I found 6 serious deficiencies.
First, this streamlined program is only available to anyone who has not filed a US tax return in the last 6 years. Again, if you filed a US tax return you can not participate in the streamlined program no matter how small your unreported tax was. This is a perverse standard, as someone who made a partial attempt at compliance is at a disadvantage to someone who made no attempt.
Second, this streamlined agreement only applies to expats or US persons living abroad. So for the vast amount of Visa holders and green card holders and dual citizens living in the US, this program is totally useless. This is particularly unfair as a non-citizen US person is in a worse position to know about the US tax system, and certainly benefited less from it, then some one who is an actual citizen.
Third, the streamlined program is only available if your unreported taxes were $1500 or less in any year. This can be unfair as well. Suppose someone had $0 in unreported taxes for 5 years. And $1501 for one year. well according to the program requirements, they would be disqualified from the streamlined program. That is, someone who has less unreported income is treaty more harshly than someone who has higher unreported income.
Fourth, the vagueness. The program is only available to those who are something the IRS calls low compliance risks. But the IRS doesn't give any concrete specifics of the vast gray area between low and high. I have a good idea the lowest risk would be. But as we move up the continuum — what about medium risk? And what could someone with medium risk do? At least the standard OVDI provides relief from criminal prosecution — and that makes all the compliance work worth it. But the IRS gives no such adequate protection for someone making a streamlined disclosure.
Fifth, this 'high-risk' 'low-risk' analysis is going to give many tax professionals cover to suggest a 'soft' disclosure. Let me get to my point. The OVDI program is REALLY complicated. And this streamlined process just made it more complicated. And based upon how many tax professionals are advising soft disclosure, I guarantee you more of them, falsely citing the streamlined OVDI program as an authority to claim someone is a low compliance risk and thus, can just blindly sent in amended returns and FBARs outside the OVDI program. The IRS has warned about this. And the DOJ will likely be prosecuting those who attempt a soft disclosure. So let me make this clear: Low compliance risk only applies if you qualify for the streamlined OVDI. Do not even make a risk, analysis if you live in the US or have already filed tax returns — this line of questioning of what your 'risk;' profile is does not apply to you.
Sixth, with this initiative, there may be a perceived implication that the IRS may come out with another streamlined program that addresses some of the concerns I raised above. The shifting standards could convince someone to delay a decision to use the standard OVDI program, because after all, they wish-cast for more a more understanding IRS. Meanwhile, the more favorable rules never come and they get caught, penalized to the hilt.
Look the streamlined OVDI is fine. But it only works if you live outside the US, you never filed a return, and your unpaid taxes are less than $1500 per year and you are a low-compliance risk — whatever that is. .But for anyone and I mean anyone else, who misses just one of those qualifications, if you wish to avoid criminal charges and staggering penalties if audited and get this behind you permanently, you need to use the standard 2012 OVDI program.
Concluding remarks. Look, I understand the IRS is handing a lot of foreign account holders are a raw deal. I know it is unfair. But just because it is really unfair does not mean it is not true. Right now, my firm is taking on new clients who are now under audit and have unreported foreign accounts. Sure, we'll be able to help them. But all of them wished that they accepted the painful reality and got into the standard program when they had a chance.
