OVDP Penalty Defense

Our Offshore Voluntary Disclosure Program (OVDP) defense services include the following:

 

Offshore Voluntary Disclosure Program: 2009 Program; 2012 Program; and 2014 Program.

  • Tax Return Preparation
  • Transition from the OVDP to the Streamlined Procedures
  • Minimizing the Penalty Base
  • Opt Out and Complete Penalty Abatement

Domestic Streamlined Procedures

Foreign Streamlined Procedures 

FBAR Compliance Only

 

For details, click on one or more the above hyperlinks. For a detailed article issued as of July 16, 2014, click on IRS Announces Sweeping Changes to its Offshore Voluntary Disclosure Programs. For success stories, please click on this hyperlink.

 

(1)   Income Tax Return Preparation

 

Income tax return preparation is an integral part of our OVDP Penalty Defense Services. The taxpayer was not in compliance with the United States income tax laws, foreign financial disclosure laws, and Bank Secrecy Act. Therefore, it is important that the tax returns submitted as part of the OVDP submission be both factually accurate and technically correct. Matters addressed in these returns include:

 

  • Expatriate Americans (U.S. Citizens and Green Card Holders Living Abroad)
  • Foreign Tax Credit: United States and Massachusetts
  • Foreign Grantor Trust/Australian Superannuation Fund
  • Interspousal Transfers Where One Spouse is Not a U.S. Citizen
  • Income (and Foreign Tax Credits) in Respect of a Decedent
  • Installment Tax Accounting Treatment
  • Real Estate Businesses and Utilization of Passive Rental Losses
  • Section 1031 Exchanges of Real Estate
  • Tax Accounting for Transactions in Foreign Currencies

 

(2)   Transition from the OVDP to the Streamlined Procedures

 

There are special transitional rules for taxpayers who filed their OVDP submission documents on or before June 30, 2014. Under these rules, the income taxes and related income tax penalties associated with the OVDP process remain. But the miscellaneous penalty rate is reduced from 27.5 percent to 5 percent for taxpayers who qualify under the domestic streamlined program. The miscellaneous penalty is removed entirely for taxpayers who qualify under the foreign streamlined program. We have had experience with several clients who are involved in the transition. So far, all affected clients have been accepted into the Streamlined Procedures.

 

(3)   Minimizing the Penalty Base

 

We have had success by critically reviewing the penalty base to avoid double counting of items that make up the penalty base. In addition to avoiding the double counting of currency transfers, we have also been successful in avoiding the double counting of assets where underreported financial assets were used to acquire real estate that became part of the penalty base.

 

(4)   Opt Out and Complete Penalty Abatement

 

Under the OVDP as it existed prior to July 1, 2014, the penalty rate was typically 27.5 percent of the penalty base. This resulted in substantial penalties that could be abated outside the OVDP if the taxpayer used the appropriate “opt out” procedures. We used “opt out” on several occasions. In each case we were successful and saved our clients, in total, more than $250,000 in miscellaneous penalties.

 

(5)   Domestic Streamlined Procedures

 

Under the domestic streamlined procedures:

  • The “look back” period is reduced to only three years for income tax purposes, except for taxpayers who are involved in the Transition from the OVDP to the Streamlined Procedures.
  • The penalty base for calculation of the miscellaneous FBAR penalty is reduced.
  • The penalty rate is limited to 5 percent.

 

Under these circumstances, the penalty savings often do no justify the expenditure in legal fees to “opt out.” For details, on “opt out,” please click on the preceding hyperlink.

 

(6)   Foreign Streamlined Procedures

 

Under the foreign streamlined procedures:

  • The “look back” period is reduced to only three years for income tax purposes, except for taxpayers who are involved in the Transition from the OVDP to the Streamlined Procedures.
  • The miscellaneous penalty no longer applies.

 

(7)   FBAR Compliance Only

 

Under the Offshore Streamlined Procedures, the failure to file an FBAR does not lead to FBAR penalties unless there was also income tax noncompliance. In some cases, a taxpayer has only signature authority, but not ownership over a foreign financial asset. The taxpayer’s signature authority triggers the obligation to file an FBAR. But the lack of ownership means that income from the foreign financial asset does not need to be reported. In such cases, we have avoided significant FBAR penalties by simply filing the FBARs with an explanatory note.

 

Success Story 

 

Complex OVDP cases require a two-pronged approach. First, we try to minimize the so-called miscellaneous penalty by minimizing the penalty base. Second, we try to minimize federal and state income taxes through careful tax planning. In one hard-fought case, we were able to reduce the IRS review assessments by well over $1,000,000 through careful tax planning and the careful amendment of all income tax returns during the look-back years. In this case, the careful preparation of income tax returns was an important contributing factor towards the achievement of an outstanding result.