It's no secret that many US persons who have been intentionally hiding income from the IRS have used shell companies, such as foreign corporations, trusts and partnerships. I claim no clairvoyance on the possibility of avoiding detection, but I've been told by people within the IRS that the IRS suspects that the vast majority of people who haven't come clean with unreported accounts and income are hoping that their use of these foreign shell companies will protect them from detection.
The IRS wants people who've used foreign entities to come clean, but the IRS doesn't want to have to do an undue amount of work. The Offshore Voluntary Disclosure Program (OVDP) units in charge of processing voluntary disclosures are strained to complete disclosures within two years.
The onerous the filing requirements for foreign partnerships, trusts, corporations — Forms 5471, 5472 and 3520 are really time-consuming for a taxpayers' representative to prepare, and it is really time-consuming for the IRS to review.
There is good news…with a caveat. The IRS allows taxpayers who are using the OVDP to waive the filing requirement of these informational returns. Sounds great right? Well there is a danger to taking this shortcut.
Offshore Voluntary Disclosure Program FAQ 29
If you wish to waive your foreign information return filing requirements, you may be harming yourself if you plan on opting out of the standard 27.5% offshore penalty.
Why would this happen? The waiver makes complete sense for people who have engaged in intentional tax evasion because in those cases, the standard 27.5% offshore penalty is a great deal. However, not everyone who failed to file and prepare their foreign informational returns did so intentionally. Many people who inherited money overseas, many people already already had a legitimate reason why they had money overseas. These are the people who can greatly benefit from the opt-out aspect of the OVDP.
It is our experience, from the calls and emails we receive, that 85% of taxpayers who made a mistake did so innocently or negligently. It is important for those people not to agree to waive the filing requirement. By doing so, they have to admit they did so to avoid paying taxes; which is obviously NOT a helpful fact when under an opt-out examination.
If you engaged in intentional tax evasion, an OVDP FAQ 29 waiver may not be a bad idea. If you made an innocent mistake, be wary of a waiver, as it may make sense to pay to get your proper forms filled out and filed. You don't want to agree to something you know isn't true that could lead to you being forced to agree to a penalty that is wildly inappropriate. If you're unsure what action you should take, contact us for a complimentary, confidential consultation.
