Friday, September 9th is the last day of the IRS Offshore Voluntary Disclosure Initiative. For all of those with a Fideicomiso or other IRS Foreign Reporting Requirements, and no unreported income issues, I highly advise that you file by 9/9. It’s too late for us to help you.
However, after the deadline, we are available to review your filings to see if they require amending.
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Often I hear that people are upset with having to file form 3520 & 3520-A for their Fideicomiso.
While understanding their frustration of being inconvenienced by complex IRS Foreign Reporting requirements, those that I feel sorry for are those with a Fideicomiso that want to report to the IRS under the OVDI but cannot because they had a Foreign Bank Account with a tiny amount of interest income that wasn’t reported, or they were the joint account holder of a foreign account that earned interest that wasn’t reported.
Unfortunately, the IRS OVDI FAQs account for two types of taxpayers, those who were criminally hiding assets and income offshore, and those who reported or had no offshore income and didn’t know about the IRS Foreign Reporting requirements.
However, there is a third group of people, those who had a small amount of unreported foreign income and did not know about the IRS Foreign Reporting requirements.
Shockingly, the IRS Offshore Disclosure Initiative treats this group of taxpayers the same as they treat those criminally hiding income and assets offshore. The OVDI left no room for reasonableness or common sense with the issue of unreported foreign income.
I left a message on the IRS OVDI Hotline regarding this issue and sent the following letter to the IRS Commissioner. As of 9/8/2011, I have heard nothing.
So far the news media has almost completely ignored this issue. However, with the deadline quickly approaching, maybe you can help by sending the following letter to your congress person and your local media.
Thank you in advance.
Dillinger Carter & Associates, Inc.
4235 24th Street
San Francisco, CA 94114
(415) 524-7572
jdillinger@dcataxservice.com
Sent via email
Notice.comments@irscounsel.treas.gov
August 8, 2011
The Honorable Douglas H. Shulman
Commissioner
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
The Honorable William J. Wilkins
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
Re: 2011 Offshore Voluntary Disclosure Initiative
Dear Commissioner Shulman and Chief Counsel Wilkins:
FAQ #2 of the 2011 Offshore Voluntary Disclosure Initiative states that the objective of the initiative 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.
However, FAQ #17 states that the purpose of the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to come forward voluntarily and resolve their tax matters. Thus, if you reported and paid tax on all taxable income but did not file FBARs, do not use the voluntary disclosure process.
Additionally, FAQ #18 states that a taxpayer who has failed to file tax information returns, such as Form 5471 for controlled foreign corporations (CFCs) or Form 3520 for foreign trusts but who has reported and paid tax on all their taxable income with respect to all transactions related to the CFCs or foreign trusts, should file delinquent information returns… The IRS will not impose a penalty for the failure to file the information returns if there are no underreported tax liabilities and the information returns are filed by August 31, 2011.
As a CPA specializing in International Tax, I can attest that there are many U.S. Persons that are unaware of the concept of taxation of worldwide income. In fact, many U.S. Citizens are unaware of the concept of taxation of worldwide income. Unfortunately, most U.S. Income Tax Practitioners do not ask their clients about their offshore accounts or entities. Hopefully, FAQ #47 will prompt Tax Practitioners to discuss international issues with their clients on a yearly basis.
It is not unusual for a person coming to the U.S. to be a cosigner or joint account holder on a relative’s foreign account. Additionally, it is not unusual for a person coming to the U.S. to be involved with a relative’s foreign entity. The same is true for a U.S. Citizen with family overseas.
However, the person coming to the U.S. would sooner ask if “pigs fly” in the U.S., than ask their U.S. Tax Practitioner about the taxation of worldwide income. As mentioned previously, it is not common for a U.S. Tax Practitioner to inquire about a client’s foreign activities.
As a result, I hear from many people who have undisclosed foreign accounts and undisclosed foreign entities. The accounts were not used to avoid or evade tax. Most have had their U.S. tax returns prepared by a qualified U.S. Tax Practitioner, and were never asked about their foreign activities.
Unfortunately, the accounts had de minimis amounts of unreported income. However, FAQ #33 states that no amount of unreported income is considered de minimis for purposes of determining whether there has been tax non-compliance with respect to an account or asset and whether the account or asset should be included in the base for the 25 percent penalty.
FAQ #33 creates a cognitive dissonance between FAQ #2 which states the program is for those avoiding or evading taxation and FAQ #17 which states that the purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to come forward voluntarily and resolve their tax matters.
As a result, the 2011 OVDI only applies to two types of people: those evading and avoiding taxes and those with unreported foreign reporting requirements and no unreported foreign income.
However, there is a third group of people, those who had foreign reporting requirements and some unreported foreign income. The failure to report the required forms and foreign income was the cause of overly complex U.S. tax laws and too many Tax Practitioners unaware of International Tax Issues.
Mr. Commissioner, you publicly stated that you do not file your own taxes due to the complexity of the tax code. Is it fair to severely punish taxpayers due to international tax law that is too complex for qualified tax professionals to understand?
A fair and just approach would be to treat those in the third category more like those with no unreported income. Except to amend the prior year returns and pay the resulting additional tax, penalties and interest, if any. Unfortunately, it appears that the IRS OVDI might be treating those in the third category like intentional tax evaders.
I discussed the above paragraph with the IRS Acting Director of Field Operations of Individual International Compliance, regarding how to advise those who fall into the third category. She was unable to provide guidance except to say that “she didn’t envy me”.
As the August 31st deadline is looming, people need answers to the following questions:
Is FAQ #2 correct in meaning when it states that the 2011 OVDI is for those who have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with U.S. tax laws?
If FAQ #2 is correct in meaning, should a person with unreported foreign income wait until after August 31, 2011 to disclose their foreign accounts and undisclosed foreign entities if there was no intent to evade or avoid tax?
If a person discloses their unreported foreign accounts and undisclosed foreign entities after August 31, 2011, because they did not fit the FAQ#2 description, will they be subject to all applicable civil penalties, including the willful FBAR penalty and other consequences mentioned under FAQ #11 ?
(Paragraph stricken as it applies to a specific client)
The Taxpayer Advocate reported in her June 30, 2011 Report to Congress the inconsistencies regarding how the IRS handled the 2009 OVDP. The above mentioned client is a prime example of the inconsistencies described in the report.
(Paragraphs stricken as it applies to a specific client)
I look forward to your questions above as there are many people in the U.S. in a similar situation, afraid that the IRS considers them to be criminals because of extremely complex tax law.
I apologize for late date of this letter in regards to the August 31, 2011 deadline. However, I was hoping that others within the service could clarify the matter before reaching out to you.
Sincerely,
John Dillinger, CPA, PFS, MS.tax
of Dillinger Carter & Associates, Inc.
