OFFSHORE VOLUNTARY DISCLOSURE PROGRAM

STEER CLEAR OF UNWANTED TAX PENALTIESWITH INFORMATION THAT BRINGS YOU UP TO SPEED ON THE IRS OFFSHORE VOLUNTARY DISCLOSURE PROGRAM

Presented by: Jeffrey D. Moss, Esq.

Dawda, Mann, Mulcahy & Sadler, PLC39533 Woodward Avenue, Suite 200

Bloomfield Hills, MI 48304(248) 642-1485

jmoss@dmms.comJune 25, 2014 and June 26, 2014

Definition Of Account

• Financial Account. A financial account includes, but isnot limited to, a securities, brokerage, savings,demand, checking, deposit, time deposit, or otheraccount maintained with a financial institution (orother person performing the services of a financialinstitution). A financial account also includes acommodity futures or options account, an insurancepolicy with a cash value (such as a whole life insurancepolicy), an annuity policy with a cash value, and sharesin a mutual fund or similar pooled fund (i.e., a fundthat is available to the general public with a regular netasset value determination and regular redemptions).

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Foreign Financial Account. A foreign financial account is a financial account located outside of the United States. For example, an account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account.

I. History of OVDP

• 2009 OVDP – March 23, 2009 – October 15, 2009

• 2009 US – Switzerland Agreement

• 2011 OVDI – February 8, 2011 to September 9, 2011

• 2012 OVDP – No Set Deadline

• IRS Objectives – Bring taxpayers with foreign accountsand entities into tax compliance and stop undisclosedand unreported accounts

• As of January, 2014 there have been over 38,000taxpayer disclosures and over 5.5 Billion dollars ofrevenue collected thus far.

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II. The Penalty Framework (2012)

• How Does The Penalty Work?

• What Are The Benefits To Your Clients If They Participate In OVDP?

• What Are The Ramifications If Someone Doesn’t Participate And They Are Caught?

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How does the Offshore Penalty Framework Work? Can you give us an example?The values of foreign accounts and other foreign assets are aggregated for each year and the penalty is calculated at 27.5% of the highest year’s aggregate value during the period covered by the voluntary disclosure. If the taxpayer has multiple accounts or assets and the highest value of some accounts or assets is in different years, the values of accounts and other assets are aggregated for each year and a single penalty is calculated at 27.5% of

the highest year’s aggregate value.

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For example, assume the taxpayer has the following amounts in a foreign account over the period covered by his voluntary disclosure. It is assumed for purposes of the example that the $1,000,000 was in the account before 2007 and was not unreported income in 2007.

Year Amount on Deposit Interest Income Account Balance

2007 $1,000,000 $50,000 $1,050,000

2008 $50,000 $1,100,000

2009 $50,000 $1,150,000

2010 $50,000 $1,200,000

2011 $50,000 $1,250,000

2012 $50,000 $1,300,000

2013 $50,000 $1,350,000

2014 $50,000 $1,400,000

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For purposes of illustration, assume a five (5%) percent interest rate or earnings factor.

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(NOTE:) This example does not provide for compoundedinterest, and assumes the taxpayer is in the 35-percenttax bracket, does not have an investment in a PassiveForeign Investment Company (PFIC), files a return butdoes not include the foreign account or the interestincome on the return, and the maximum applicablepenalties are imposed.

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• If the taxpayers in the example come forward and theirvoluntary disclosure is accepted by the IRS, they face thispotential payment scenario:

• They would pay a total of $518,000 plus interest. This amountincludes:

Tax of $140,000 (8 years at $17,500) plus interest.

An accuracy-related penalty of $28,000 (i.e., $140,000 x20%), and

An additional penalty, in lieu of the FBAR and otherpotential penalties that may apply, of $385,000 (i.e.,$1,400,000 x 27.5%) against highest account balance.

What Penalties Are Possible If They Don’t Come Forward

• If the same taxpayers didn’t come forward, when theIRS discovered their offshore activities, they could faceup to $3,993,000 in tax penalty, accuracy-relatedpenalty, and FBAR penalty. The taxpayers would alsobe liable for interest and possibly additional penalties,and an examination could lead to criminal prosecution.

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The civil liabilities outside the Offshore VoluntaryDisclosure Program potentially include:

The tax, accuracy-related penalties, and, if applicable, thefailure to file and failure to pay penalties, plus interest,i.e., $168,000, as described above.

Plus FBAR penalties totaling up to $3,825,000 for willfulfailure to file complete and correct FBARs (2009 -$575,000, 2010 - $600,000, 2011 - $625,000, 2012 -$650,000, and 2013 - $675,000 and 2014 - $700,000).

• The potential of having the fraud penalty (at 75%) apply, and

• The potential of substantial additional information returnpenalties if the foreign account or assets is held through aforeign entity such as a trust or corporation and requiredinformation returns such as Form 5472, or Form 8865 werenot filed.

• Note that if the foreign account activity started before 2007,the Service may still examine tax years prior to 2007 if thetaxpayer is not part of the OVDP.

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III. Features – What Does OVDP Require?

• Preclearance – Names, Date of Birth, Address, SSN – Send to Criminal Division

• Preliminary Acceptance – OVDP Letter

• Obtain Prior Returns

• Obtain Statements from Offshore Bank or Banks

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What Does OVDP Require?

• Prepare Amended Returns

• Calculate and Pay Tax & Interest

• Prepare Prior FBARs

• Extend Statute of Limitations and Cooperate

• Pay 20% Accuracy Penalty on Tax

• Pay 27.5% Penalty on Highest Balance – Proxy for FBAR Penalty.

• Sign Closing Agreement – Form 906.

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IV. Quiet Disclosures – Why Not?

A. What is a “Quiet Disclosure”?

B. Unlike OVDP, no Statute of Limitation Protection.

C. Bare Amended Returns do not meet requirements of IRM 9.5.11.9. as a Voluntary Disclosure.

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V. Late FBARs Or Late 5471 Or Late 3520 Only

Is OVDP appropriate when all offshore income tax reported and income tax paid?

· - No – Q & A 17 – LATE FBAR

• Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1) a/k/a FBAR. Now called FinCEN Form 114.

• FinCEN stands for “Financial Crimes Enforcement Network”.

• Must be filed electronically.

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Who Must File an FBAR. A United States person that has afinancial interest in or signature authority over foreignfinancial accounts must file an FBAR if the aggregate valueof the foreign financial accounts exceeds $10,000 at anytime during the calendar year.

Penalty for Non-Filing: For willful violations, greater of$100,000 or 50% of Account per year. Non-willfulviolations are penalized at $10,000 per year.

More On FBAR

• Purpose. FinCEN Form 114, Report of Foreign Bankand Financial Accounts, is used to report a financialinterest in or signature authority over a foreignfinancial account. The FBAR must be received by theDepartment of the Treasury on or before June 30th ofthe year immediately following the calendar year beingreported. The June 30 filing date may not be extended.

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LATE FORM 5471 OR LATE FORM 3520

For Late Form 5471 (Controlled Foreign Corporation) or Late form 3520 (Foreign Trust) –Taxpayer can file late per Q & A 18.

No Penalty Imposed.

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VI. Applying the 27.5% Penalty

• Combining Personal and Business Accounts . Yes Required.

• How are prior transactions before disclosure period handled?

• Does penalty apply to other assets such as art or real estate (Q & A 35 and 36)?

• Examine source of assets and impact on non-compliance.

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VII. Situations

• Joint Accounts.

• Multiple holders.

• Movement from one bank to another.

• Ownership v. Signature Authority.

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VIII. Opting Out – Does The IRS Have Discretion To Vary The Terms Or Settle

Cases

• General Answer – No.

• However, in some situations the OVDP penalty mightbe higher in the Program than outside the Program.

• 27.5% is supposed to be proxy for FBAR Penalty.

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Non-opt out example with lower penalty.

FACTS: Offshore account with $100,000 (one year only) and foreign income producing RE valued at $1,000,000.

In this scenario – FBAR Penalty is $100,000 because only bank account is subject FBAR Penalty but OVDP Penalty is $302,500.

Opt-Out Examples

Example 1 – US Citizen residing and working abroad has$2,000,000 account with $150,000 in account income, hereports and pays tax in foreign country only.

• Has US unreported income but not income tax due.

• Under OVDP would owe offshore penalty of $555,000.

• If “reasonable cause for non-disclosure” (non-filing FBAR) – TP could opt out and try for non-willful FBAR penalty of $10,000 per year ($60,000).

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Opt Out Example 2

US Citizen working abroad in 2007, 2008 and 2009. TP filed US returns but did not report interest income of $2,000. Account valued at $200,000. Filed FBARs in 2008 and 2009 but not 2007.

Tax: $700 + $140 = $840 [35% tax plus 20% penalty]

Penalty: OVDP $55,000 versus non-willful FBAR for 1 year = $10,000.

Taxpayer might elect to opt out and try for lower non-willful FBAR Penalty.

There are other examples in the Q & A’s.

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IX. Reduced Penalties

A. Five (5%) percent Penalty - 3 categories

1. Did not open account, exercised minimal contact, except to close account. Less than $1,000 withdrawn during relevant years. Must also establish that US taxes paid on funds initially deposited.

2. Foreign Residents (unaware US citizens). Never knew that they were US citizens or that US tax laws applied to them.

3. Foreign Residents who: reside in foreign country. Fully tax compliant in foreign country, have less than $10,000 in US Source income. Additional benefit will not have to include foreign house in penalty calculation.

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B. Reduced 12.5% Penalty – Small Accounts

- If highest aggregate balance is less than $75,000 in each of reported years.

- Even a temporary fluctuation over $75,000 makes someone ineligible for reduced 12.5% penalty.

- Had early 2009 participant receive a refund.

X. What Is Your Duty As A Tax Practitioner

• Due Diligence to determine correctness of statementsmade to clients and implications going forward.

• Due Diligence in determining correctness of statementsmade to Department of Treasury.

• Advise client of consequence of non-compliance.

• If a client declines to make a full disclosure, thepreparer cannot prepare an income tax return for anon-compliant year without being in violation ofCircular 230.

• “Kovel Letters” and continuing to work with client.

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