Roadmap To IRS' Offshore Voluntary Disclosure

by Sanford Millar

In January of 2012 the Internal Revenue Service enacted the Offshore Voluntary Disclosure Program, or OVDP for short. This is actually the third recent version of the offshore voluntary disclosures. The voluntary disclosure program is offered by the IRS to those taxpayers with undisclosed offshore accounts or unreported offshore assets. The objective of the OVDP is to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws. The voluntary disclosure period is the most recent eight tax years for which the due date has already passed. Currently is the eight years ending December 31, 2013.

This article provides a general roadmap on how to make an offshore voluntary disclosure under the program.

STEP 1: Obtaining a pre-clearance to file Offshore Voluntary Disclosures Letter to Criminal Investigation in Philadelphia.

Prior to entering the program taxpayers are required to obtain a clearance from the IRS Criminal Investigations. The pre-clearance request is made to the Criminal Investigations Lead Development Center, which determines whether taxpayers are eligible to submit an offshore voluntary disclosure. Eligibility is determined by inquiry into the following:

1. Whether the taxpayer is the subject of criminal investigation or civil investigation.
2. Whether the IRS has notified taxpayer that it intends to commence examination or investigation.
3. Whether the taxpayer is under investigation by any law enforcement agency.
4. Whether the source of undisclosed income is from illegal activity.
5. Whether the IRS has served John Doe summons or made a treaty request seeking information that may identify a taxpayer as holding an undisclosed foreign account or undisclosed foreign entity.
6. Whether the taxpayer appeals a foreign tax administrator’s decision authorizing the providing of account information to the IRS and fails to serve the notice as required under existing law.
7. Whether the IRS has announced that certain taxpayer groups that have or had accounts at specific financial institutions will be ineligible due to U.S. government actions in connection with the specific financial institution.

Criminal Investigations will notify taxpayers whether they have been cleared to submit an offshore voluntary disclosure.

STEP 1: Submitting Offshore Voluntary Disclosures Letter to Criminal Investigation in Philadelphia.

After receiving a pre-clearance notification, taxpayers must truthfully, timely, and completely submit an Offshore Voluntary Disclosures letter and attachments to Criminal Investigations in Philadelphia. A separate attachment is completed for each foreign financial account the taxpayer wishes to disclose, which provides a detail overview of the taxpayers activity with regards to the account.

The IRS will review the Offshore Voluntary Disclosures letter and notify taxpayers by mail whether the voluntary disclosure has been preliminarily accepted or declined. Preliminary acceptance into the OVDP is conditioned upon the information provided by the taxpayer being, and remaining, truthful, timely, and complete.

Timeline: The timeline to submit the Offshore Voluntary Disclosures letter and attachments is 45 days after receiving a pre-clearance. Once the package is submitted to the Philadelphia office a preliminary acceptance to the OVDP will be issued by the Criminal Investigation team. It is intended that Criminal Investigation will complete its work within 45 days of receipt of a complete Offshore Voluntary Disclosures letter. Generally, Criminal Investigation will issue the preliminary acceptance within two months of submission.

STEP 2: Complete Voluntary Disclosure Package.

Once the voluntary disclosure has been preliminarily accepted, the next step of the process requires taxpayers to submit the full voluntary disclosure package to the IRS Campus in Austin, Texas.

The complete voluntary disclosure package will include the following items:

1 Copies of signed Offshore Voluntary Disclosures letter previously submitted to Philadelphia.
2 Copies of Attachment To Offshore Voluntary Disclosures Letter previously submitted to Philadelphia.
3 Signed Penalty Computations.
4 Foreign Account or Asset Statement – one for each account and foreign corporation.
5 Signed FBAR Penalty Extensions.
6 Signed Form 872 – Consent to Extend Time to Assess Tax (including tax penalties).
7 Copies of original filed Federal Income Tax Returns for prior eight years.
8 Signed Amended Federal Income Tax Returns.
9 Checks for Amended Federal Income Tax Returns.
10 Printed copies of electronically submitted FBARS, Form FinCEN 114, for prior eight years.
11 Copies of offshore financial account bank statements.
12 Applicants disclosing offshore entities.
• Statement identifying all offshore entities and Form 5471 entity in existence.
• Statement of dissolved entities* under Frequently Asked Questions 29.

In situations where spouses both desire to participate in OVDP, they may do so jointly or separately. If the joint approach is chosen, the spouses should be sure to include all required information and documents for each spouse and clearly indicate the intention to disclose jointly.

Timeline: A full and complete submission is required for acceptance into the program. You have 45 days to submit a complete voluntary disclosure package from the date you are preliminary accepted to the OVDP. You may request an extension of the deadline to complete the submission. Requests for up to a 90 day extension must include a statement of those items that are missing, the reasons why they are not included, and the steps taken to secure them. Requests for extensions must be made in writing and sent to the Austin Campus on or before the date specified in the letter from Criminal Investigation for completing the voluntary disclosure.

STEP 3: Certification Process.

After submitting your full and complete voluntary disclosure package, your case will be assigned to a civil examiner to complete the certification of your tax returns for accuracy, completeness and correctness. The examiner will certify that your voluntary disclosure is correct, accurate and complete by reviewing your records along with your amended or delinquent income tax returns. The examiner will also verify the tax, interest and civil penalties you owe.

The examiner has the right to ask any relevant questions, request any relevant documents, and even make third party contacts, if necessary, to certify the accuracy of the amended returns without converting the certification to an examination.

Timeline: Generally, an examiner will be assigned to your case in six months to a year after a full submission is made to Austin. Because every case is different, there is no way to predict how long the examination process will take for you.

Once the examination process is complete the examining agent will issue a closing letter verifying the tax, interest and civil penalties. At this time, the examining agent will also calculate the offshore voluntary disclosure 27.5% miscellaneous penalty.

Next step for you:

Entering the voluntary disclosure program provides taxpayers a valuable opportunity to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution.

If you determine that you have previously undisclosed offshore financial accounts, unreported income, or foreign assets should consult a tax professional to determine whether the OVDP is the right step in becoming compliant with regards to offshore accounts and/or assets.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Sanford Millar, Law Offices of Sanford I. Millar | Attorney Advertising

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Sanford Millar

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