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Offshore Voluntary Disclosure Program (OVDP) – Deciding to Pay to Avoid Criminal Exposure

Alex Moretsky

Alex Moretsky

By Alex Moretsky – July 14, 2014

So while on that island vacation years back you decided that instead of getting yourself a second home you’d find an offshore one for your money and investments. Well, be advised that the IRS has been pursuing international tax violations through civil audits and criminal investigations of unreported foreign bank accounts. So how can you avoid being caught up in this sweep? Glad you asked. In 2012, the IRS has announced a continuation of its Offshore Voluntary Disclosure Program (OVDP) whose objective is to bring taxpayers who have used undisclosed foreign accounts and foreign entities to avoid or evade taxes into compliance with U.S. tax laws. This program allows taxpayers to avoid substantial civil penalties and any criminal prosecution. The concept is that a qualifying person comes forward to the IRS before being contacted by the Service and attempts to correct past failures. The IRS will not seek criminal prosecution of anyone coming forward voluntarily who satisfies certain criteria. To qualify for the OVDP you need a pre-clearance which entails faxing to the IRS Criminal Investigation Development Center your name, date of birth, social security number and address. You will be notified if you are cleared to make a voluntary disclosure. After that there are criteria you need to meet:

  1. The source of the funds must be legal;
  2. You must be truthful and accurate;
  3. Come forward in a timely manner before the IRS initiates investigation of or receives information from a third party about your offshore assets;
  4. Records must be complete, so go back six (6) years which is the statute of limitations;
  5. Be willing to cooperate by paying taxes or making a good faith arrangement to pay;
  6. Civil Penalties must be paid;
  7. Two types of Disclosure – quiet or noisy. Here noisy is typically better because it includes the requesting of a clearance (request clearance, file return, make payments). Quiet just has you file a return and make payment without alerting the IRS to the previous years’ misstatements.

Besides bringing the taxpayer into compliance, the OVDP program allows the IRS to further its understanding of how bankers, advisors, promoters and others may be assisting U.S. taxpayers in ways to avoid or evade taxes. The IRS is mining information gathered from taxpayers who enter the program to build cases against other taxpayers, promoters et al involved in illegal tax schemes or in aiding and abetting U.S. taxpayers in hiding their assets and evading taxes. How to go about it? Under the IRS’s voluntary program, the aforementioned Offshore Voluntary Disclosure Program (OVDP), you will need to pay the following: Pay a penalty for failing to file Form TDF-90-22-1: report direct or indirect financial interest in financial accounts maintained by financial institution located in a foreign country if aggregate value exceeds $10,000 In all foreign accounts;

  • Pay a civil penalty of $100,000 or 50% per violation;
  • Pay a non-willful penalty of $10,000;
  • Pay for failing to file form 8938: $10,000 penalty with failure beginning after 90 days;
  • Pay for failing to file Form 3520 Foreign Trusts: all gifts greater of either $10,000 or 35% of gift, whichever is larger.

If these terms and penalties are not met, the IRS may lodge criminal charges and severe penalties can be assessed. They include the following:

  • Tax evasion – Prison term of five years+$250,000 fine
  • Filing a false return – Prison term of three years + $250,000
  • Failure to file tax returns – Prison term of one year + $100,000
  • Failure to file Fbar – Prison term of 10 years + $500,000

If you are deciding whether to come forward and avoid criminal penalties, speak with an experienced tax attorney in the Philadelphia, Pennsylvania area. For more information, please contact me at 215-344-8343 or by email at amoretsky@moretskylaw.com

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