DOES YOUR OFFSHORE BANK ACCOUNT ATTORNEY ASK THE RIGHT QUESTIONS?
Erroneous advice regarding offshore voluntary disclosures and offshore bank accounts and other assets could result in surprising consequences that clients may not be prepared for during a voluntary disclosure. If done correctly, a tax professional can calculate, with a reasonable degree of certainty, the cost of resolving all offshore tax issues.
The current amnesty program is called the Offshore Voluntary Disclosure Program (OVDP) and was introduced in January 2012 on the heels of strong interest in the 2011 and 2009 programs. The IRS may end the 2012 program at any time in the future. The IRS is offering another opportunity to people with undisclosed income from offshore accounts to get current with their tax returns.
It is currently June 11, 2013. Richard has had two offshore bank accounts from 2003 through the present. In 2003 Richard had his highest bank aggregate account balance because he took a huge gain from the account and bought real estate with it, reducing his aggregate balances for future years. His real estate produced no income since his family living abroad moved into it right away. In early 2011 Richard heard about the investigation and prosecution proceedings against one of his acquaintances regarding undisclosed offshore accounts. On his 2010, 2011, and 2012 tax return, he decided to “play it safe” and report the income from the offshore account although he still did not report the account itself because he feared getting hit with big penalties. His next highest aggregate balance was in 2012 where he reached $1 million dollars; after 2012 the next highest balance was in 2011. He thinks all those gains are going to go to waste because he knows that the OVDP penalty will apply to the highest aggregate balance. Now Richard is contemplating disclosing his offshore accounts. What are some of the issues apparent in Richard’s disclosure?
First and foremost, we should assess whether Richard has United States FBAR reporting obligations during the years he has owned the account. We need to know when Richard became a United States Person for tax purposes. Many of our clients have lived and worked all over the world, so there may be a chance that their obligations could be cut off in earlier years. If Richard had transitioned to the United States during this period of time, we’d want to know what kind of right he had to be in the United States, how long he stayed in the United States each year and other details about his transition to the United States.
For instance, one of our clients had his highest aggregate balance in 2007, but he was able to show that his FBAR reporting obligations actually started in 2009 because he was able to show a closer tie to another country even though he spent substantial time in the United States. This helped reduce his penalty to a much lower amount. The IRS is not going to make this argument for you; it is something that needs to be advocated for.
Next, we can explore what years of the disclosure would be considered for the penalty base. For the current amnesty program the penalty is 27.5% and looks back eight years which does not include current years for which there has not yet been non-compliance. In the example above both 2012 and 2013 would not count if were to file an FBAR by June 30, 2013. Since the market has been going up in 2012 and 2013, usually it’s advisable to file the FBAR immediately before the June 2013 deadline and disclose before June 30, 2013. If the taxpayer discloses after June 30, 2013 then 2012 would also be included in the penalty base but it would extend a year less on the other end of the statute period. Thus, a disclosure done before June 30, 2013 would include years 2004 through 2011. A disclosure after the June 30, 2013 date would include the years 2005 through 2012.
Another thing to consider here is that the taxpayer began paying the tax related to the accounts starting in the 2010 tax year, therefore those years can be excluded from the penalty base because as long as all of the tax generated from the account is reported. The 2003 tax year will not be considered in Richard’s penalty base or as a part of his voluntary disclosure.
Next, we should consider what assets would be included in the penalty base. A key consideration in the simple hypothetical is whether or not the real estate would be considered in the penalty base. Here the real estate is not producing income and thus normally it would not be considered in the penalty base. However, under the OVDP the real estate may be considered in the penalty base if it relates to tax non-compliance. Tax non-compliance includes failure to report income from the assets, as well as failure to pay U.S. tax that was due with respect to the funds used to acquire the asset.
The question to ask is whether it was bought with “tainted” money, i.e. money that stems from tax non-compliance. Part of the answer will depend on whether some of the money that was in the account originated from money in tax compliance which in turn may also depend on when the taxpayer had U.S. tax obligations and where the source income came from. The eight year look back no longer applies when assessing whether the real estate is bought with “tainted” money, the IRS will look back to see if the real estate purchase can be traced to a source that has been properly taxed. The taxpayer will have to prove this. We know that any interest or gains made in 2003 were not in compliance for the foreign account, but money originally deposited in the account may have come from a compliant source. A detailed assessment should be made to tie the real estate with a compliant source.
Also, it’s important to remember that real estate is not included in the penalty base for FBAR violations under normal statues, thus if under normal statutes the penalty base is less than entering the OVDP, the IRS will apply the normal statutes under the OVDP.
Even with the basic hypothetical illustrated above, once can see there are many things to consider. In the real world each story has layers of complications and concerns to be evaluated when voluntarily disclosing offshore accounts. Find the right offshore voluntary disclosure attorney who can ask the right questions today to give you the clearest most precise answers before disclosing. The rules for voluntary disclosures could get very complicated; find the right offshore voluntary disclosure attorney that will make sure you do not over pay in an erroneous disclosure.
The IRS is constantly summonsing information from banks they suspect have U.S. clients. They are broadening their scope of the countries they are focusing on, including India, Israel, the Caribbean, and a continued stringent focus on Switzerland. They implement strategies using “turncoat” bankers and John Doe Summonses. Also keep in mind that new FATCA rules and regulations could result in foreign financial institutions giving annual reports regarding United States client owned accounts to the U.S. Treasury or else be subject to stringent withholding requirements. FATCA can result to more foreign financial institutions revealing taxpayer names or else risk stern monetary consequences.
At Abajian Law, I take pride in personally working your offshore voluntary disclosure case. I am one of the few good offshore bank account lawyers. I will give you the personal attention, expertise, and service your case deserves. I’m not just the face of my firm; I am the work product behind it. To assess your circumstances, get in compliance and repatriate your money in an economy full of opportunity, call me so we can talk in complete discretion, confidence, and privilege. Don’t let your capital waste another day in an offshore account.
Professional Tax Representative
September 23, 2022