Originally published on Forbes.com.
If you still have issues with unreported foreign transactions and accounts, you don’t need a wake-up call. You need to be hit on the head with a two by four. The announcement that the IRS is closing its OVDP (Offshore Voluntary Disclosure Program) program on September 28th might have been your wake-up call, but you might have had plans to spend the summer in Luxembourg visiting your money, so you are putting it off until after Labor Day. Don’t do it. There are many thousands of people who can knock out a reasonably OK tax return for you, but not that many who can help you navigate OVDP, and they are going to be having a pretty busy summer.
I spoke with Shannon Retzke Smith of Withers Bergman, which now seems to be branded Withersworldwide, which is pretty fair with 450 attorneys and 17 offices including San Francisco, Geneva, and Sydney among others. They are still missing a couple of continents, but let’s not quibble. Ms. Smith is based in New Haven and has been pretty busy with OVDP for quite a while. We went over who it might apply to and why she thought the IRS was premature in shutting the program down.
Who Needs To Worry?
There are three broad classes of people who need relief from failure to comply with reporting requirements on foreign income and assets. There are the scoundrels who used secret off-shore accounts to avoid taxes and stiff creditors. There are people who violated disclosure requirements and avoided paying income taxes, that they didn’t realize they owed. And there are people who failed in disclosure but didn’t get away with anything as a result.
The simplest disclosure requirement is the FBAR, which is required if you had ownership or signature authority over foreign accounts aggregating over $10,000. The FBAR is filed electronically with the treasury not the IRS. As foreign disclosures go it is not so bad, but it can be bit of a chore as you can see from the instructions. The penalties for not filing are very nasty.
Then there are the forms that have to be filed with the IRS. Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Form 8938– Statement of Specified Foreign Financial Assets.Form 5471 – Information Return of US Persons With Respect To Certain Foreign Corporations. Form 8621 – Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. Form 8865 – Return of US Persons With Respect to Certain Foreign Partnerships.
You know it is June, so your tax preparer has recovered from the April deadline and is not yet feeling the hot breath of September and October on his or her neck. Put in a call and ask which of those forms they have filed. Or to make it a little less challenging which ones they have heard of. Form 5471 is one that I have actually done. It borders on the impossible when you throw in trying to get the information you need, which might not be in English and will definitely be in a different currency with the rules for translating the currency almost as hard as the language problem.
The thing that is important in this area is that you are not willful in the things that you have missed. As Ms. Smith explained it to me that can mean that you told your tax preparer about the circumstances that might have required the filing. If it didn’t occur to you to volunteer the information and the preparer did not think to ask, you might still be willful in the eyes of the IRS. Using the Streamlined Filing Compliance Procedures which will continue hinges on you not being willful and from what Ms.Smith tells me the judgment of the IRS in that area tends to be pretty subjective.
So if you are thinking about cleaning up your foreign compliance act, you don’t want to let the chance for OVDP to slip away, because unlike Streamlined Compliance, which is a better financial deal, OVDP forecloses the possibility of criminal prosecution.
What Is The Real Deadline?
Ms. Smith sketched out for me what you would be facing if you were to show up in her office on September 27 ready to beat the OVDP deadline. She refers to an IRS Frequently Asked Question guide which you can go to here, if you want to follow along.
A client comes in to your office on September 27. There is no hope of obtaining a response from Criminal Investigations to a request for preclearance under FAQ 23 before the September 28th deadline. Your client must then decide either not to participate or choose to make a full admission against interest via the FAQ 24 letter without receiving any indication from the IRS that they will allowed to participate.
The same scenario could also unfold with FAQ 23 requests sent long before the deadline but not yet processed by the IRS before the deadline. The 2014 program included a penalty transition program only available for those who had sent in the FAQ 24 letter and attachments. Some clients had been waiting months for preliminary clearance, some for weeks and some for days. They needed to make that same decision that many summer OVDP applicants will face. Some chose to file the FAQ 24 letter and pray. Some chose not to do so and requested transition treatment (which was granted to some, but not all similarly situated taxpayers). Practitioners will need to be ready to explain options and risks to their clients.
The initial step (FAQ 23) is to contact the IRS to see if you are already on the naughty list, which will mean “No OVDP for you”, as the Soup Nazi would say, if he were in charge of the program. CI would like to get back to you withing 30 days. So by waiting to the last minute you are handing them their case for them (i.e. “admission against interest”) without knowing whether they are already on to you. If you weren’t such a procrastinator you could have waited to send the disclosure documents in. Here is Form 14454 which needs to be filled out for each account. They will try to get back to you within 45 days to indicate preliminary acceptance of your package.
Putting the 45 and 30 days together makes me think that the practical deadline for your initial filing is effectively July 15 or so. In other words get going right now (I’m writing this the weekend before June 4). Putting together the information will probably be a project.
Professional costs can run into the tens of thousand, but there is something about that that I find wonderful. She told me that the accounting fees often run higher than the legal fees. It is understandable that the approach of just complying going forward, which is not recommended, is being adopted by some.
Are They Closing The Program Too Soon?
Ms. Smith thinks the OVDP program serves a need that is not going away
There are 9 million Americans who live overseas many of whom have over $10,000 in foreign accounts
Just over 1 million FBARs are filed each year and that is for everyone (American citizens, green card holders and resident). The sheer magnitude of the noncompliance is staggering. With FATCA, CRS and IGAs, the IRS now has the tools to find people, but it can’t find everyone – it just does not have the resources. A robust set of reasonable penalty options lets people address their noncompliance in a manner properly tailored to their situation.
We are seeing more and more cases from abroad. Whereas, in the beginning of the programs, the IRS understood that if an American lived and worked abroad, he or she might have not understood US filings, and even missed them entirely, the IRS is now viewing more and more of these candidates as willful. A taxpayer abroad who tried, but made foot faults, will increasingly be viewed as willful based on some harmful internal IRS guidance.
Schadenfreude
Back in the nineties, I remember our firm getting pitched to pitch our clients on asset protection strategies. Some of them involved having all your money in accounts in some obscure country like the Duchy of Grand Fenwick where there are strong bank secrecy laws and an opaque creditor hostile legal regime. One of the things that always worried me about these schemes was that you might end up protecting your money against everybody including you. Ms. Smith told me that they are dealing with people who find themselves in that situation and it is not even one of the more obscure places. From a distance, I can experience schadenfreude, but I imagine I would be more sympathetic if it were up close and personal.
Where my sympathy does go is to people who have innocently gotten caught up in this nightmare. If that is you take a good look at OVDP, but do it soon.