Cordoba Management Consultancy Company LLC
U.S. Tax Planning is Impossible if You Have Hidden Tax Problems
- How did it all start?
- Bradley Birkenfeld blew the whistle on UBS in 2007. US Government hearings were held in the summer of 2008 to investigate how foreign banks aided U.S. taxpayers’ tax avoidance through unreported foreign accounts. OVDP first instituted in 2009.
REMEMBER THIS: if your foreign assets are undisclosed, those assets are actually liabilities!
- How do you clean up your tax problems or those of a US family member?
- Seek Professional Tax Advice – Lawyer? Accountant?
Best advice - consult a US tax attorney, obtain a full understanding of the possible civil and/or criminal implications you are facing. Learn about the latest OVDP and other options you can consider. With the attorney examine the possible penalties and risks under each option.
- Bear in Mind – the Attorney-Client Privilege
- Possible protection from disclosure to the US tax authorities pursuant to the attorney-client privilege. Accountants and financial advisors do not have this privilege. your matter must be worked on with such third parties, it is best if your attorney works under a so-called Kovel agreement which generally tries to extend the attorney-client privilege to information revealed to these persons.
- Use of Kovel Letter – can possibly extend the Attorney-Client Privilege to non-attorneys.
“Quiet Filings” or “Quiet Disclosures”
- US taxpayer files 3 to 6 years of past tax returns with the IRS Service Center to regularize past noncompliance by either amending previous US tax returns or filing original tax returns for the first time. Pays back taxes due (interest / penalties as well or wait to hear from IRS).
- Distinguish “delinquent” v. “amended” returns
- Government Accountability Office report indicates IRS scrutiny of such filings may increase
- IRS has indicated it is looking for QDs with re to amended returns
- Risk of audit / penalties / criminal sanctions if appropriate
- Can you establish “Reasonable Cause” for not filing?
- FS 2011-13 (“Reasonable Cause”) Overseas Americans and Dual Nationals Abroad
- Designed for taxpayers whose tax noncompliance with regard to overseas assets was “nonwillful” (delinquent filings or amended returns).
- Non-willful means “due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law”. Must provide a very detailed statement under penalty of perjury. Get professional advice.
- Different program for taxpayers residing abroad (SFOP) or for those resident in the United States (SDOP).
- For SFOP and SDOP file only 3 years of US income returns + information returns that are either late or that need amendment, plus file 6 years of “FBARs”. Pay only back taxes owed plus interest for the past 3 years.
- SFOP escape all non-filing / omission penalties.
- SDOP pay only miscellaneous offshore penalty - 5% of the highest aggregate balance/value of the taxpayer’s foreign financial assets (determined by aggregating the year-end account balances and year-end asset values) in the reporting time frame
- Still a suitable strategy if expatriation is contemplated (requires 5 years of past US tax compliance); IRS accepting more than the required 3 years of filings.
OVDP – To Enter or Not to Enter….?
- Examine risk factors specific to your case. Do you have criminal exposure?
- OVDP is the “gold standard” – removes criminal exposure and civil fraud penalty (75% penalty)
- Experiences in OVDP
- Will IRS terminate the OVDP soon because FATCA is here? If IRS obtains information about the T before he enters OVDP, he will be ineligible for the program (e.g., bank reports T to IRS via FATCA).
One Way Out -- Expatriation
- Considerations – need to have an alternate citizenship; possible difficulty in entering US; must be tax compliant for 5 year period prior to expatriation.
- Expatriation Tax Regime -- Who is a “covered expatriate?” Three Alternative Tests --
Net Worth Test: net worth of USD2 million or more on day before expatriation
Income Tax Liability: average annual net income tax for the 5 taxable years ending before the expatriation date is over USD 162,000 (2017 inflation adjusted amount)
IRS Filing Form 8854 – certify under penalty of perjury you have been tax compliant for the 5 year period prior to expatriation date (Including Gift Tax / Income Tax / Employment Taxes / Information reporting…..FBARS? BSA versus the IRC)
- EVEN IF YOU DON’T MEET THE DOLLAR THRESHOLDS FOR THE EXPATRIATION PROVISIONS TO APPLY, THEY WILL APPLY IF YOU FAIL TO FILE THE REQUIRED FORMS TO THE IRS. You must certify 5 years of tax compliance.
- “Exit Tax” (exemption for gain 2017 -- $699,000 )
- Taxation of Recipients of A Gift or Bequest from a “Covered Expatriate”
- Reed Amendment & Recent Legislative Proposals – 2012 and 2013 - Is it Now or Never?
- Exceptions : (i) individual who became at birth a US citizen and citizen of another country / continues to be a citizen of, and is taxed as a resident of, that other country. Plus, the individual must not have been a US resident for more than 10 years during the 15-year period ending with the year of expatriation. (ii) minors who expatriate before reaching the age of 18½ if they have not been a resident of the US for more than 10 years before expatriation. In both cases, the individual must still meet the tax compliance certification requirement.