I have seen the following scenarios quite often in working with clients to determine whether a voluntary disclosure (OVDI) is appropriate and how they should report foreign account.
First, a parent or grandparent entrusts a younger generation family member with management of family assets. Often these assets are set aside by persons who are foreign nationals who are living outside the U.S. and not subject to U.S. taxation. The funds are often not reported to or in many cases are hidden from their native government. The persons engaging in this conduct are often oppressed minorities or expect to be political or religious refugees and the funds are flight capital.
Second, the account is often opened in the sole name of a member of the younger generation charged with fund management on the condition that he or she use the funds only as directed by the family elder. In cases that I see, the account holder is now a U.S. taxpayer.
The second circumstance I often see is where the elder family members deposit funds into an account and have members of the younger generation sign on as powers of attorney or beneficiaries. Often the funds are intended as either current or future gifts. The younger generation beneficiaries are U.S. taxpayers while the elder may not be or was not at the time the account was opened.
The reporting obligations follow the beneficial use of the funds in both cases. The U.S. taxes income and estates and gifts on a worldwide basis. So, if a U.S. person has actual dominion or control over the use and enjoyment of funds in foreign accounts, then the accounts are reporting laws and income from the accounts is includable in the U.S. persons tax returns. If the funds were acquired by gift or bequest a Report of Foreign Gift or Bequest(Form 3520) may also need to be filed.
Whether the U.S person has dominion or control over the account is determined by subjective and objective factors. Objective factors include (1) whether there is a written agreement between the parties and its terms, and (2) how the funds were actually used. Subjective factors are cultural backgrounds of the parties (what is the custom and practice for the specific community). In some cultures the parents open accounts in the names of their children and do not tell their children about the existence of the accounts for years.
I am often asked whether a voluntary disclosure (OVDI) should be filed by U.S persons who are in one of these scenarios. The answer is often, it depends. It depends on the facts. Most foreign financial institutions are or soon will begin to require proof of compliance with U.S. income tax laws in order to keep accounts in good standing if the account is in the name of a U.S. person. If a U.S. person has the ability to make independent decisions and use the funds and not previously filed FBAR’s or reported the income an OVDI filing may be warranted. In all cases where there is a purported claim of a gift of foreign account funds or an inheritance of such funds, an explanation must be provided to establish “reasonable cause” for not filing the proper information returns (Report of Foreign Gift or Bequest) on a timely basis to avoid severe penalties.
As the IRS focuses more and more resources on international tax evasion techniques and tax evasion careful reporting is a must to avoid penalties, including penalties for tax evasion, tax fraud and FBAR penalties.