OVDP – (Offshore Voluntary Disclosure Program)

The following is a summary of the options related to disclosure of offshore accounts.

• Scenario 1 – Disclosure under “regular” OVDP (Offshore Voluntary Disclosure Program). 8-year lookback period, filing amended returns and paying tax on income from investments/foreign accounts.

            In addition, a 27.5% offshore penalty (levied on highest balance in account) is paid to the IRS.

• Scenario 2 – Disclosure under “Streamline” OVDP. 3-year lookback period, filing amended returns and paying tax on income from investments/foreign accounts.

            In addition, a 5% penalty is levied on highest balance in account. A 0% penalty is only available to taxpayers that lived abroad during the period              covered by the filing.

• Scenario 3 – Silent disclosure. Filing of amended returns and FBAR reports to report previously undisclosed income. Usually done for a statutory period of 6 years. Tax on unreported income is paid but no additional penalty is included. IRS discourages these types of filings, but some attorneys still think it is a viable option.

FBAR – Form 114

What is an FBAR – (Foreign Bank Account Reporting)

An FBAR includes the following two components:

1. Foreign Financial Account – A foreign financial account is a financial account located outside of the United States. For example, an account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account.
2. Financial Account – A financial account includes, but is not limited to, securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions).

Who Must File?

United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year.

What is the Filing threshold?
Single/MFS in US	>$10,000 at any time during the tax year
MFJ in US	>$10,000 at any time during the tax year
Single/MFS living abroad	>$10,000 at any time during the tax year
MFJ living abroad	>$10,000 at any time during the tax year

Failure to File Penalty

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

PFIC Form 8621

What is a PFIC – (Passive Foreign Investment Company)

A passive foreign investment company (PFIC) is a foreign-based corporation that exhibits either one of two conditions.

1. Income – if at least 75% of the corporation’s gross income is “passive,” income that is derived from investments rather than from the company’s regular business operations.
2. Assets – if at least 50% of the company’s assets are investments that produce income in the form of earned interest, dividends, or capital gains.

Who Must File?

Generally, a U.S. person that is a direct or indirect shareholder of a PFIC must file Form 8621 for each tax year under the following five circumstances if the U.S. person:

• Receives certain direct or indirect distributions from a PFIC,
• Recognizes gain on a direct or indirect disposition of PFIC stock,
• Is reporting information with respect to a QEF or section 1296 mark-to-market election,
• Is making an election reportable in Part II of the form, or
• Is required to file an annual report pursuant to section 1298(f).

Failure to File Penalty

Section 1298(f) and the regulations do not impose a specific penalty for failure to file Form 8621. However, the regulations coordinate the Form 8621 filing requirements with the Form 8938 filing requirements. Therefore, a U.S. individual shareholder who fails to disclose a directly held PFIC investment on either Form 8621 or Form 8938 when required can be subject to a $10,000 penalty under §6038D(d).

FATCA – Form 8938

What is FATCA – (Foreign Account Tax Compliance Act)

FATCA promotes cross border tax compliance by implementing an international standard for the automatic exchange of information related to US taxpayers. FATCA regulations require tax authorities to obtain detailed account information for US taxpayers on an annual basis.  It is intended to increase transparency for the Internal Revenue Service (IRS) with respect to US persons that may be investing and earning income through non-US institutions.

Who Must File?

Unless an exception applies, you must file Form 8938 if you are a specified person (either a specified individual or a specified domestic entity) that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.

What is the Filing threshold?
Single/MFS in US	>$50,000 on the last day of the tax year or >$75,000 at any time during the tax year
MFJ in US	>$100,000 on the last day of the tax year or >$150,000 at any time during the tax year
Single/MFS living abroad	>$200,000 on the last day of the tax year or >$300,000 at any time during the tax year
MFJ living abroad	>$400,000 on the last day of the tax year or >$600,000 at any time during the tax year

Failure to File Penalty

Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Form 5471 – Information Return of U.S. Persons with Respect to Certain Foreign Corporations

Purpose of Form

Form 5471 is used by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations. The form and schedules are used to satisfy the reporting requirements of sections 6038 and 6046, and the related regulations.

Failure to File Penalty

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

Purpose of Form

Use Form 5472 to provide information required under sections 6038A and 6038C when reportable transactions occur during the tax year of a reporting corporation with a foreign or domestic related party.

Failure to File Penalty

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency

Form 8865 – Return of U.S. Persons With Respect to Certain Foreign Partnerships

Purpose of Form

Use Form 8865 to report the information required under section 6038 (reporting with respect to controlled foreign partnerships), section 6038B (reporting of transfers to foreign partnerships), or section 6046A (reporting of acquisitions, dispositions, and changes in foreign partnership interests).

Failure to File Penalty

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.