April 29, 2013. Executive Summary. With San Francisco an International city, we have many inbound requests for help with the ‘OVDP’ or ‘Offshore Voluntary Disclosure Program.’ This program, of course, has to do with the disclosure of foreign-based assets by US residents. Because of continued strong interest from taxpayers and tax practitioners alike, the IRS has reopened its Offshore Voluntary Disclosure Program (OVDP) for a third time. This blog post details the OVDP program and explains how the 2012 program differs from the previous two; where possible we will try to focus in on issues of importance to San Francisco Bay Area residents.
IRS reopens the OVDP for a third time
Because of continued strong interest from taxpayers and tax practitioners alike, the IRS has reopened its Offshore Voluntary Disclosure Program (OVDP) for a third time. (The OVDP sometimes is referred to as the “Offshore Voluntary Disclosure Initiative.”) The two previous OVDPs, offered in 2009 and 2011, resulted in the collection of $4.4 billion. The IRS says the current program will be open for an indefinite period; thus, there isn’t a set deadline for taxpayers to apply.
The OVDP allows taxpayers to disclose unreported income from undisclosed foreign accounts and other foreign assets. The program isn’t just for “tax evaders.” Many taxpayers unknowingly violate federal tax laws by failing to report income from foreign accounts or assets. This is all the more true in a city like San Francisco, in which many residents have very complicated relationships with foreign assets, and may not even be aware of US reporting requirements. Many legal residents and US citizens alike remain strongly connected to overseas relatives and businesses.
What the law requires
As a general rule, U.S. citizens and residents (including of course residents of San Francisco and other cities in California) are subject to federal tax on all of their income, regardless of the source. This includes foreign income, subject to certain exemptions and exclusions.
Whether foreign income is taxable or not, you’re required to file annual information returns reporting the existence of foreign bank and investment accounts if their aggregate value exceeds $10,000, as well as the existence of certain interests in and transactions with foreign trusts, corporations and partnerships.
Failure to comply with these requirements can result in substantial civil penalties and even criminal charges.
The benefits of coming clean bout the OVDP
Voluntary disclosure provides three significant benefits:
- It generally eliminates the risk of criminal prosecution.
- It reduces the severity of civil penalties.
- It enables you to calculate, with a reasonable degree of certainty, what it will cost you to become current with your federal tax obligations.
Even if your failure to comply was inadvertent, taking your chances with an IRS civil or criminal investigation can be risky.
Key difference in the 2012 OVDP
The overall penalty structure for the 2012 program remains the same as that for the 2011 program, except for the highest penalty category. If you qualify for the OVDP, you can settle your tax obligations by paying your unpaid taxes, interest and accuracy-related penalties, plus a penalty equal to 27.5% of the highest aggregate balance or value of foreign accounts and assets during the eight full tax years prior to the disclosure. The highest penalty category for the 2011 program was 25%.
The OVDP imposes smaller penalties under certain mitigating circumstances. For example, if the highest aggregate balance or value of foreign accounts and assets is less than $75,000, you’ll qualify for a 12.5% penalty instead of the 27.5% penalty. And a 5% penalty is available under certain circumstances, such as inheritance of a foreign account with minimal account activity.
To take advantage of the OVDP, you must provide copies of previous federal income tax returns; provide amended returns for tax years covered by the voluntary disclosure; file required information returns; and pay all required taxes, interest and penalties. For our own clients, we make this as easy as possible – we can also work with new San Francisco clients to help you organize your records and prepare for an OVDP situation vs. the IRS. The goal is to be transparent, honest, and professional and to make the process as painless as possible. The good news it that once we work together on an accounting system, you will have a much easier time each subsequent year.
If we are working together on not just your OVDP but your accounting and tax needs, including both Federal taxes and California taxes, Safe Harbor LLP can become your ‘one stop shop’ for tax and accounting needs. Our goal is to make it easy for you.
Making the next move about the OVDP
If you have undisclosed foreign accounts or assets, you may participate in the OVDP to preclude criminal prosecution and keep monetary penalties to a predictable minimum. You may want to act soon, because the IRS has cautioned that the program’s terms could change at any time. This might include increasing the penalties for some or all taxpayers. The IRS can also terminate the program at any time as the agency continues to work with the Justice Department to pursue criminal prosecution of international tax evasion.
Reach Out for More Information to Safe Harbor LLP
For more information on foreign account disclosure requirements and the ins and outs of the OVDP, please give us a call at 415.742.4249 or contact us via email. We can also help you determine whether you should enroll.
IRS Circular 230 Notice
The Internal Revenue Service requires Safe Harbor LLP to inform the reader that any tax advice contained in this correspondence cannot be used for the purpose of avoiding penalties under the Internal Revenue Code or for promoting, marketing or recommending to another party any transaction or matter addressed.
About Safe Harbor CPAs – a Professional CPA Firm in San Francisco
Safe Harbor LLP is a CPA firm that specializes in accounting and tax services for individuals and businesses throughout the San Francisco Bay Area and greater California. Safe Harbor CPAs helps both individuals and businesses with tax preparation, IRS audit defense, and audited financial statements. The firm prides itself on friendly yet professional service and utilizes state-of-the-art Internet technology to provide quality customer service.