Once again, IRS is offering taxpayers with undisclosed income from offshore accounts an opportunity to disclose and come clean. IRS announced that the new program Offshore Voluntary Disclosure Initiative (OVDI) will be available only through August 31, 2011.
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OVDI – Commonly asked Questions :
How OVDI is recommended?
OVDI 2011 requires taxpayers to report undisclosed accounts, assets and pay back taxes including interest on undisclosed income from 2003 to 2010. Doing so enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. OVDI also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Without OVDI, taxpayers always run a risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.
OVDI can save some of the penalties that might apply by not filing any of the following forms:
Form TD F 90-22.1 – FBAR
Form 3520 – Return to report transaction with Foreign Trusts & receipt of Foreign Gifts.
Form 3520-A – Information return of Foreign Trust with a US Owner.
Form 5471 – Return of US persons with respect to Certain Foreign Corporations
Form 5472 – Return of a 25% Foreign-Owned US Corp / Foreign Corp engaged in US
Form 926 – Return by US transferor of property to a Foreign Corporation
Form 8865 – Return of US Persons with respect to Certain Foreign Partnerships.
OVDI saves from the possible criminal charges related to tax returns including tax evasion (26 U.S.C. § 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income tax return (26 U.S.C. § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.
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 the chances that IRS will find my remote foreign account / assets information in future?
The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistle-blowers, and will become more available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (new IRC § 6038D) become effective.
What are the main terms of OVDI?
Under the terms of the 2011 Offshore Voluntary Disclosure Initiative, taxpayers must:
Provide copies of previously filed original (and, if applicable, previously filed amended) federal income tax returns for tax years covered by the voluntary disclosure;
Provide complete and accurate amended federal income tax returns (for individuals, Form 1040X, or original Form 1040 if delinquent) for all tax years covered by the voluntary disclosure, with applicable schedules detailing the amount and type of previously unreported income from the account or entity (e.g., Schedule B for interest and dividends, Schedule D for capital gains and losses, Schedule E for income from partnerships, S corporations, estates or trusts).
File complete and accurate original or amended offshore-related information returns (see FAQ 29 for certain dissolved entities) and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”) for calendar years 2003 through 2010;
Cooperate in the voluntary disclosure process, including providing information on offshore financial accounts, institutions and facilitators, and signing agreements to extend the period of time for assessing tax and penalties;
Pay 20% accuracy-related penalties under IRC § 6662(a) on the full amount of your underpayments of tax for all years;
Pay failure to file penalties under IRC § 6651(a)(1), if applicable;
Pay failure to pay penalties under IRC § 6651(a)(2), if applicable;
Pay, in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties, a miscellaneous Title 26 offshore penalty, equal to 25% (or in limited cases 12.5% (see FAQ 53) or 5% (see FAQ 52)) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure;
Submit full payment of all tax, interest, accuracy-related penalty, and, if applicable, the failure to file and failure to pay penalties with the required submissions set forth in FAQ 25 or make good faith arrangements with the IRS to pay in full, the tax, interest, and these penalties (see FAQ 20 for more information regarding a taxpayer’s ability to fully pay) (the suspension of interest provisions of IRC § 6404(g) do not apply to interest due in this initiative); and
Execute a Closing Agreement on Final Determination Covering Specific Matters, Form 906.
Who is eligible to make a voluntary disclosure under this initiative?
Taxpayers including legal entities such as corporations, partnerships and trusts are eligible to apply for OVDI. If IRS has already initiated a civil examination, regardless of whether it relates to undisclosed foreign accounts or entities, such taxpayers will not be eligible to come clean under OVDI. If you reported and paid taxes on all taxable income but did not file FBARs, you should not be using OVDI. Instead contact us and we can help filing with late FBARs. Taxpayer making quite disclosure can apply for OVDI to take an advantage of penalty framework but participants in the 2009 OVDP are not eligible.
IRS’s John Doe summons seeking information that may identify you will not make you ineligible to for OVDI.
How SK Tax can help?
OVDI is very sensitive issue and must be handled by experienced professionals only. It is very important that your disclosure is very accurate and complete. Service reserves the right to conduct an examination and in some situations taxpayer may not have appeal rights with respect to the Service’s determination. Professionals at SK Tax Associates have in-depth knowledge and experience to handle this situation and process. We have qualified and experienced tax attorney if your case need to be handle with extra- care or you case needs attorney – client privilege. We have dealt with number of cases from reporting late FBARs to voluntary disclosure and amend past years tax and information returns.
If you think you missed filing / reporting foreign assets or accounts, please feel free to consult us for a confidential consultation. OVDI requires that a completed package be received before August 31, 2011. So it is important that you begin the preparation process as soon as possible. We are confident that our team is one of the most competent to handle this situation.
Manendra Kothari, CPA
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