Saturday, September 21, 2013

The Painful Truth about IRS OVDI Program






In this blog post, I’ll be showing you six major defects of the IRS Streamlined OVDI and the one painful truth.

But before we go into it, I'm going to give an outline to those who is unfamiliar with OVDI process some background information.

The U.S. has something called universal tax jurisdiction. This means if you're a American person - incidentally an American individual isn’t just a US citizen, but can include permanent resident card holders AND foreign national in on a visa - well, if you are a US individual the government requires you report all of your global earnings. Even if you paid taxes in your home country. And not just only that, the Internal Revenue Service will penalize you for failing to report the presence of your overseas banking accounts which are above $10,000, on the aggregate. 

During 2009, the IRS came out with its first Offshore Voluntary Disclosure Initiative to provide amnesty to those who either purposely or unintentionally didn't report income or bank accounts. However, the problem with this initiative would be that the penalty fee structure was the exact same for someone who avoided taxes and someone who just made a true mistake.

So in 2011, the IRS changed the rules through increasing penalties on people who purposely involved in tax evasion and gave those who made innocent mistakes an opportunity to claim for a decreased penalty by “opting out” from the typical penalty structure.

The deadline passed for the 2011 OVDI and now there exists a rolling 2012 OVDI. The 2012 Offshore Voluntary Disclosure Initiative is vastly similar to the 2011 with one important difference. The penalties have increased again for those stepping into deliberate evasion. But there is an opportunity for those who made innocent mistakes to “opt-out” of the usual FBAR penalty structure.




Like most things of the OVDI, now the area of ‘opt-out’ is confusing.  By opting out, a person is not really opting out from the OVDI. If you opt out, all the exact same protections from felony charges continue to be in place. The opt-out signifies the standard penalty structure and even more importantly, opting out of the 27.5% FBAR equivalent penalty.

This FBAR equivalent penalty is actually computed on the highest account value within the last eight years. Or any income generating assets were the income was not reported. For example, the FBAR equivalent penalty will be calculated against rental building, although rental property is something that you do not need to divulge on an FBAR. I told you the rules are complicated.


And I have to make a pretty important note. The 2009 OVDI just had a 6-year look back. But the 2011 and 2012 OVDI’s come with an 8 year period.

Currently, approximately 34,000 OVDIs have been filed from 2009 to 2012. By looking at this number, the IRS knows that lots of people have not come forward and won't come forward, which explains why they are stepping up their enforcement by auditing individuals it suspects of having overseas bank accounts.

The people we have seen coming forward in 2012 to make the most of the OVDI are generally individuals who made innocent or no worse than negligent mistakes. Among these clients, and understandably so, there has been extreme grumblings about how the OVDI program is really unfair to people who was clueless about what was going on. Not only are the lower penalty charges still relatively punitive, but please let me be blunt: lawyer and accounting fees are very real as well.

In the next blog post, I will discuss about the major defects of the IRS streamlined OVDI program.

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