The IRS Offshore Voluntary Disclosure Program (OVDP) is not just for individuals. Thanks to a harsh and extensive international tax form penalty regime, there can be a great incentive to enter into an offshore program to cure any of these unfiled or substantially incomplete forms:
- Form 5471 (US-owned foreign corpoation)
- Form 5472 (Foreign-owneed US corporation)
- Form 926 (Transfers to US-owned foreign corporation)
- Form 3520 (Certain foreign trusts and foreign inheritence and gifts receipts)
- Form 3520-A (Certain foreign trusts, filed by US trustee)
- Form 8621 (Foreign Passive Income Companies)
- Form 8865 (Foreign partnerships)
Along with possible willful FBAR penalties of 50%, with the exception of Form 3520, all of the above penalties are $10,000 (per year). Also, failure to file these forms keeps the entire return of the US-reporting taxpayer, be it a corporation or individual, open indefinitely.
For instance, a US corporation that has a Form 5471 filing requirement for its foreign subsidiary since 2000, yet has not filed, could be assessed in 15 failure to file penalties equalling $150,000 (16 if the corporation fails to properly file its 2016 Form 5471). It's not just Form 5471 the IRS is looking to penalize. The IRS has admitted it is looking to maximize penalties on as many as these international forms as it can.
Offshore Disclosure Programs for international business entities
OVDP for US Corporations or Partnerships
If the entity is a US Corporation (S Corporation or C Corporation) or a US Partnership, it has its own FBAR filing requirements. If it has foreign accounts that were not previously declared on its tax returns and on timely-filed FBARs, it needs to go through the IRS’s Offshore Voluntary Disclosure Program as itself. The company will need to file Amended Returns, FBARs, and pay the standard penalty (or elect to opt out of the standard penalty structure and undergo an audit of its tax returns). All of this will happen in the company’s own name, not in the name of the individual partner or shareholder. The company is not eligible for the Streamlined Program.
It matters just not what type of entity, but also where it is located that determines your optimal OVDP course.
If the partners or shareholders have their own foreign accounts, they would need to enter the OVDP or the appropriate Streamlined Program on their own name as well. If the partners or shareholders are simply listed as signers on the company’s accounts and have no previously undeclared foreign accounts of their own, they can likely just file amended FBARs with an explanation of why this account was not declared previously under the IRS’s guidelines for filing delinquent FBARs.
Foreign corporations and other entities with unreported income, unreported informational returns, and unfiled FBARs may enter into the IRS Offshore Voluntary Disclosure Program (OVDP).
OVDP for a US Company, Trust, Foundation or Estate
If foreign financial accounts are held in the name of a US company, trust, foundation or estate, that company, trust, foundation, or estate needs to file its own FBARs. If it has not been doing so, and if the income from the foreign financial accounts has not been properly declared, then this entity needs to participate in the Offshore Voluntary Disclosure Program. What its options are depend on what type of entity it is.
OVDP for US Single-Member LLCs
If you are the sole-owner of a Limited Liability Company (LLC) that is reported on the Schedule C of your tax return, and that LLC owns foreign financial accounts, it has its own FBAR filing requirements even though it does not have to file its own tax returns. If your LLC has its own foreign bank accounts, it is likely that you at least have signatory authority on the bank accounts and therefore both you and the LLC would need to file FBARs.
For an LLC that is reported on the Schedule C of its owner’s tax return, bank interest and capital gains transactions are taxed as if they belonged directly to the owner. Therefore, these sorts of income would be reported on your Schedule B (for Interest or Dividends) or your Schedule D (for Capital Gains transactions). If you did not properly report the income from these foreign sources and did not properly file FBARs for you and for the LLC, then you would need to go through the standard OVDP program OR the relevant Streamlined Program. The LLC would not need to go into the program as itself.
If you properly reported the accounts on your tax return but just did not file FBARs, for either yourself or the LLC, it is likely that you would be able to just file the delinquent FBARs under the IRS’s guidelines.
OVDP for US Estates
If a US Estate has foreign financial accounts, it has its own FBAR filing requirements. The Trustee of the estate is required to file these for the estate. He or she likely has his or her own FBAR filing requirements with regards to the same accounts. If these foreign accounts produced income that was not declared on the Estate Tax Return, the estate would need to participate in the Offshore Voluntary Disclosure Program. The Estate may also be eligible to participate in the relevant Streamlined Program.
The Trustee would likely qualify to just file the delinquent FBARs under the IRS’s guidelines unless the Trustee had income from these accounts that should have been reported on the Trustee’s own tax return.
OVDP for US Trusts
If a US based trust (that is not a grantor trust, see below) has foreign financial accounts, it has its own FBAR filing requirements. The Trustee is responsible for filing these FBARs and the trust’s tax returns. The Trustee also likely has his or her own FBAR filing requirements for the same accounts. If these foreign accounts produced income that was not declared on the Trust’s Tax Return, the trust would need to participate in the Offshore Voluntary Disclosure Program. The trust would not be eligible to participate in the relevant Streamlined Program.
Grantor Trust OVDP
Grantor Trusts are trusts that are set up by a person who contributes money to the trust but retains substantial control over the trust. This is a common method of creating a trust during your lifetime for the purposes of passing on the assets held within the trust to beneficiaries after your death. For US tax purposes, this trust is disregarded. It must still file a Trust Tax Return each year but does not report the income of the trust on the return. Instead, the Grantor, the person who established the trust and retains control over the trust, reports the income from the trust on his or her own tax return.
If a Grantor Trust has foreign financial assets held in the name of the trust, the Trust AND the Grantor both have their own FBAR filing requirements. If the foreign financial accounts produced income that was not reported on the Grantor’s tax return, then the Grantor would need to go through the OVDP or the relevant Streamlined Program under his or her own name, and file FBARs for both the Grantor and the Trust through the relevant program.
OVDP for a Foreign Company, Trust, Foundation or Estate
In each of these situations, the person who is a US citizen or resident who had a financial interest in the foreign financial account that the company, trust, foundation or estate holds and who did not file their own FBARs declaring their interest in that account, would enter the OVDP or proper Streamlined program on their own name. Disclosure forms would need to be filed based on the ownership interest in the company, trust or estate with the IRS during that individual’s disclosure under the relevant program.
If the “entity” involved was opened solely to avoid disclosing the ownership of the account or for tax avoidance purposes, this can impact your ability to participate in the Streamlined Program and could negatively impact your case if you attempt to opt out. That being said, many banks also had individuals open accounts in the name of an entity even though the individual did not share these tax avoidance purposes. In these cases, the individual should be very careful to present their situation accurately and effectively to seek the best possible resolution to their issue.
No matter what situation you or your business is in, we can help. From setting you up to get the best tax benefits, to form filing, to getting into a disclosure program. Contact us to set up a free consultation.
