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Offshore Voluntary Compliance Initiative - FAQs - General
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Home > Businesses > Small Bus/Self-Employed
Small Bus/Self-Employed
Offshore Voluntary Compliance Initiative - FAQs -
General
General Questions
a.. What is the Offshore Voluntary
Compliance Initiative?
b.. How can I get additional
information about OVCI?
c.. What is the objective of OVCI?
d.. Why should I participate in OVCI?
e.. What is in it for me?
f.. Will I have to pay both negligence
and substantial understatement penalty?
g.. Will I be subject to failure to
pay, failure to file, estimated tax penalty and interest on any
delinquent filed return?
h.. What penalties will I be subject to
if I do not participate in the OVCI?
i.. What does a taxpayer have to do to
participate in OVCI?
j.. What happens if I don't have the
promoter materials?
k.. If I am a tax practitioner and I
want to run a hypothetical situation by an IRS employee, whom do
I contact?
l.. I'm a tax practitioner – what are
my responsibilities under due diligence?
m.. Does participation in OVCI exempt
me from criminal prosecution?
n.. When must a taxpayer file a Report
of Foreign Bank and Financial Accounts?
--------------------------------------------------------
General Questions
What is the Offshore Voluntary Compliance
Initiative?
A - The Offshore Voluntary Compliance
Initiative (OVCI) provides an opportunity for taxpayers who have
avoided taxation through financial arrangements outside the
United States to disclose their activities to the IRS and limit
their exposure to some penalties.
The Initiative reflects an attempt to
gather more information about the promoters of these offshore
schemes while quickly bringing taxpayers back into compliance.
OVCI covers all types of offshore
activities such as, but not limited to, the use of credit, debit,
and charge cards (offshore payment cards), and arrangements with
banks, financial institutions, corporations, partnerships,
trusts, or other entities (offshore financial arrangements). OVCI
is available for tax years after December 31, 1998, but can
include prior years.
With respect to potential criminal
penalties, the IRS will treat the request to participate in the
Offshore Voluntary Compliance Initiative as a request to make a
voluntary disclosure pursuant to its Voluntary Disclosure
Practice (IRM 9.5.3.3.1.2.1) , as revised December 11, 2002, and
announced in News Release 2002-135 .
Return To Top
How can I get additional information
about OVCI?
A - You should direct your questions to
the OVCI Unit in Philadelphia at 215-516-3537, or by sending an
e-mail to [email protected]. The phones are staffed Monday through
Friday, from 7 a.m. until 11 p.m. Eastern Time. After-hours
(including weekends) callers may leave a message and will receive
a callback within two business days. The OVCI unit will also
respond to e-mail inquiries within two business days.
Return To Top
What is the objective of OVCI?
A - The objective of OVCI is to gain
information on offshore activities for use in developing
additional strategies to inhibit offshore tax scheme promoters
from cultivating new clients. The success of our
"self-assessment" tax system depends on the willingness of the
public to honestly report and pay the taxes imposed on them by
law. To maintain the integrity of that system, the IRS is charged
with seeing that all taxpayers pay their fair shares of the
nation's taxes.
The vigorous pursuit of promoters who
facilitate tax evasion through the concealment of income and
assets is the long-term solution to the offshore problem. OVCI is
designed to encourage "offshore" taxpayers to provide information
to stop the promoters. In the process, many individual cases will
be resolved, freeing IRS resources to aggressively pursue those
who do not participate in the Initiative.
Return To Top
Why should I participate in OVCI? What is
in it for me?
A- The main benefit to a taxpayer
participating in OVCI is to withdraw from involvement in abusive
offshore activities and become compliant with the Internal
Revenue laws with some certainty as to what to expect in terms of
overall cost. By contrast, taxpayers who choose not to take
advantage of this opportunity will face the full range of
penalties, as well as interest on additional penalties and may
face potential criminal prosecution.
Such penalties and interest can be
quite substantial. For example, on a $100,000 liability for 1999
in the case of a false but timely return, a taxpayer responding
to OVCI would pay tax of $100,000, accuracy related penalty of
$20,000, (20 percent) and interest of $29,319, for a total of
$149,319. The same taxpayer, if found by the IRS outside of OVCI,
would expect to pay $100,000 tax, fraud penalty of $75,000 (75
percent), and interest of $42,758, for a total of $217,758, as
well as a number of additional penalties for failure to file
various information returns related to the offshore activity.
These penalties can range from $10,000 to over $100,000 per
return for a single year, depending on the facts of a particular
case.
Return To Top
Will I have to pay both negligence and
substantial understatement penalty?
A - Negligence and substantial
understatement are two reasons for imposing the accuracy-related
penalty of Internal Revenue Code (I.R.C.) section 6662. The law
imposes an accuracy-related penalty for one or the other reason,
but not both, in any given year. The Initiative does not specify
the particular basis for the accuracy-related penalty to be
agreed to by the taxpayer, who must simply agree to one 20
percent penalty for each year.
Return To Top
Will I be subject to failure to pay,
failure to file, estimated tax penalty and interest on any
delinquent filed return?
A - Yes. If you have not filed a return
for one or more years covered by the Initiative, I.R.C. section
6651 imposes a failure to file penalty of five percent a month of
the unpaid tax from the due date of the return, up to a maximum
of 25 percent, and a failure to pay penalty of .5 percent a month
of the unpaid balance from the due date of the return (in some
cases the date of notice and demand for payment), up to a maximum
of 25 percent. For any month where both delinquency penalties
apply, the amount of the failure to file penalty is reduced by
the amount of the failure to pay penalty. In addition, section
6654 imposes a penalty on unpaid estimated tax, which is
essentially equivalent to interest on the unpaid installments of
estimated tax from the date each installment is due until the due
date of the return. This penalty is difficult to approximate in
the absence of specific facts.
Return To Top
What penalties will I be subject to if I
do not participate in the OVCI?
A - The following is a summary of
penalties that may apply to U.S. taxpayers involved in offshore
schemes, but that will not be imposed on taxpayers who come
forward under the Initiative:
Fraud penalties (sections 6651(f) and
6663):
Where an underpayment of tax, or a
failure to file a tax return, is due to fraud, the taxpayer is
liable for penalties that, although calculated differently,
essentially amount to 75 percent of the unpaid tax. Both
penalties require proof by the Government that the underpayment
(or failure to file) was due to willful intent to evade tax.
Penalties for failure to file certain
information returns (sections 6035, 6038, 6038A, 6038B, 6038C,
6039F, 6046, 6046A, and 6048:
Form 5471, Information Return of U.S.
Persons With Respect To Certain
Foreign Corporations. U.S. persons who
are officers, directors, or shareholders in certain foreign
corporations (including, for example, an International Business
Corporation used in an offshore scheme) report information
required by sections 6035, 6038, and 6046, and compute income
from controlled foreign corporations under sections 951-964. The
penalty for failing to file each one of these information returns
is $10,000, with an additional $10,000 added for each month the
failure continues beginning 90 days after the taxpayer is
notified of the delinquency, up to a maximum of $50,000 per
return.
Form 5472, Information Return of a 25%
Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged
in a U.S. Trade or Business. Reports transactions between a 25%
foreign-owned domestic corporation or a foreign corporation
engaged in a trade or business in the United States and a related
party as required by sections 6038A and 6038C. The penalty for
failing to file each one of these information returns, or to keep
certain records regarding reportable transactions, is $10,000,
with an additional $10,000 added for each month the failure
continues beginning 90 days after the taxpayer is notified of the
delinquency, up to a maximum of $50,000 per return.
Form 926, Return by a U.S. Transferor
of Property to a Foreign Corporation. Reports transfers of
property to a foreign corporation and to report information under
section 6038B. The penalty for failing to file each one of these
information returns is ten percent of the value of the property
transferred, up to a maximum of $100,000 per return, with no
limit if the failure to report the transfer was intentional.
Form 3520, Annual Return to Report
Transactions With Foreign Trusts and Receipt of Certain Foreign
Gifts. Reports various transactions involving foreign trusts,
including creation of a foreign trust by a U.S. person, transfers
of property from a U.S. person to a foreign trust, and receipt of
distributions from foreign trusts under section 6048. This return
also reports the receipt of gifts from foreign entities under
section 6039F. The penalty for failing to file each one of these
information returns, or for filing an incomplete return, is 35
percent of the gross reportable amount, except for returns
reporting gifts, where the penalty is five percent of the gift
per month, up to a maximum penalty of 25 percent of the gift.
Form 3520-A, Annual Information Return
of Foreign Trust With a U.S. Owner. Reports ownership interests
in foreign trusts, by U.S. persons with various interests in and
powers over such trusts under section 6048(b). The penalty for
failing to file each one of these information returns, or for
filing an incomplete return, is five percent of the gross value
of trust assets determined to be owned by the U.S. person.
Form 8865, Return of U.S. Persons With
Respect to Certain Foreign Partnerships. U.S. persons with
certain interests in foreign partnerships use this form to report
interests in and transactions of the foreign partnerships,
transfers of property to the foreign partnerships, and
acquisitions, dispositions, and changes in foreign partnership
interests under sections 6038, 6038B, and 6046A. Penalties
include $10,000 for failure to file each return, with an
additional $10,000 added for each month the failure continues
beginning 90 days after the taxpayer is notified of the
delinquency, up to a maximum of $50,000 per return, and ten
percent of the value of any transferred property that is not
reported, subject to a $100,000 limit.
Penalties for failure to comply with
the Bank Secrecy Act, U.S.C. section 5324, which requires
taxpayers to file a Report of Foreign Bank and Financial Accounts
(FBAR):
FBARs are information returns required
to be filed with the Department of the Treasury (not the IRS)
under 31 U.S.C. section 5314 and 31 C.F.R. Part 103. These
returns, filed on Treasury Form TD F 90-22.1, are used to report
the existence of foreign bank or financial accounts, under any
name, over which the U.S. person has actual control, through any
means, if such accounts total over $10,000 at any time during the
year. The penalty for failing to file an FBAR is the total amount
in the account up to $100,000, or $25,000, whichever is greater,
under 31 U.S.C. section 5321(5)(B)(ii).
Return To Top
What does a taxpayer have to do to
participate in OVCI?
A - Taxpayers who want to participate in
OVCI must, on or before April 15, 2003, make a written request to
participate in the Initiative. The request should be mailed to:
National Offshore Voluntary Compliance Initiative Coordinator,
P.O. Box 480, Bensalem, PA, 19020. Alternatively, the request may
be submitted by e-mail at [email protected]. In the written request,
the taxpayer must state:
a.. The taxpayer requests to
participate in the Offshore Voluntary Compliance Initiative and
is a taxpayer eligible to participate in the program as defined
in section 4 of Revenue Procedure 2003-11.
b.. The taxpayer's name, taxpayer
identification number, current address, and daytime telephone
number;
c.. The name and employer
identification number of any entity (including but not limited to
corporations, partnerships, trusts, and estates) that the
taxpayer caused to use offshore payment cards or offshore
financial arrangements, or that was the source of funds that the
taxpayer caused to be transferred to a foreign jurisdiction;
d.. The name and office location of any
Service official whom the taxpayer has previously contacted about
making a Voluntary Disclosure ; and
e.. Complete information regarding the
taxpayer's introduction to offshore payment cards and offshore
financial arrangements, including the following:
(a) the names, addresses, and telephone
numbers of any parties who promoted or solicited the taxpayer's
use of offshore payment cards or offshore financial arrangements,
along with a detailed description of how and from whom (including
names, addresses, and telephone numbers) the taxpayer learned
about the offshore payment card or offshore financial
arrangement;
(b) if known to the taxpayer, the
names, addresses, and telephone numbers of any parties who
advised or assisted the promoters or solicitors in marketing
offshore payment cards or offshore financial arrangements; and
(c) all promotional materials,
transactional materials, and other related correspondence and
documentation that the taxpayer at any time received regarding
offshore payment cards or offshore financial arrangements.
Taxpayers who send a written request to participate in the
Offshore Voluntary Compliance Initiative by e-mail to [email protected]
must send these materials by mail or private delivery service (to
the Philadelphia addresses above) within five days of the e-mail.
These taxpayers should include with the materials a copy of the
email sent to [email protected].
Return To Top
What happens if I don't have the promoter
materials?
A - Taxpayers are only expected to
produce materials that are still in existence, either in their
possession or accessible to them. However, the circumstances
surrounding a claimed inability to produce promoter materials
will be evaluated by IRS in determining whether a taxpayer is
being fully cooperative, as required under the terms of OVCI. In
addition, even if the taxpayer did not retain documents provided
by the promoter, the taxpayer will be expected to identify the
promoter, produce copies of notes or other documents created by
the taxpayer about conversations with the promoter, and perhaps
submit to an interview, as requested by the IRS.
Return To Top
If I am a tax practitioner and I want to
run a hypothetical situation by an IRS employee, whom do I
contact?
A - IRS employees will not predict the
IRS's reaction to hypothetical situations, because of the
potential for misunderstanding that exists when there is no
assurance that the hypothetical contains all relevant facts. In
addition, tax practitioners should be aware that posing a
situation as a hypothetical does not satisfy the requirements of
a request for participation in the Initiative. If practitioners
have questions about the terms of the Initiative, they should
contact the OVCI Unit in Philadelphia at 215-516-3537 or send an
e-mail to [email protected].
Return To Top
I'm a tax practitioner - what are my
responsibilities under due diligence?
A - Tax practitioner responsibilities are
outlined in Treasury Department Circular 230, Regulations
Governing Practice Before the Internal Revenue Service. In
particular, practitioners should note Subpart B sections 10.21
and 10.22 on due diligence which state:
Section 10.21 Knowledge of client's
omission
A practitioner who, having been
retained by a client with respect to a matter administered by the
Internal Revenue Service, knows that the client has not complied
with the revenue laws of the United States or has made an error
in or omission from any return, document, affidavit, or other
paper which the client submitted or executed under the revenue
laws of the United States, must advise the client promptly of the
fact of such noncompliance, error, or omission. The practitioner
must advise the client of the consequences as provided under the
Code and regulations of such noncompliance, error, or omission.
Section 10.22 Diligence as to accuracy
(a) In general. A practitioner must
exercise due diligence--
(1) In preparing or assisting in the
preparation of, approving, and filing tax returns, documents,
affidavits, and other papers relating to Internal Revenue Service
matters;
(2) In determining the correctness of
oral or written representations made by the practitioner to the
Department of the Treasury; and
(3) In determining the correctness of
oral or written representations made by the practitioner to
clients with reference to any matter administered by the Internal
Revenue Service.
(b) Reliance on others. Except as
provided in Sections10.33 and 10.34, a practitioner will be
presumed to have exercised due diligence for purposes of this
section if the practitioner relies on the work product of another
person and the practitioner used reasonable care in engaging,
supervising, training, and evaluating the person, taking proper
account of the nature of the relationship between the
practitioner and the person.
Return To Top
Does participation in OVCI exempt me from
criminal prosecution?
A - OVCI does not directly address issues
of potential criminal prosecution. The IRS Voluntary Disclosure
Practice (IRM 9.5.3.3.1.2.1) , as revised December 11, 2002, and
announced in News Release 2002-135, addresses those issues.
The Service will treat the request to
participate in the Offshore Voluntary Compliance Initiative as a
request to make a voluntary disclosure pursuant to its Voluntary
Disclosure Practice as described in IRM 9.5.3.3.1.2.1, revised
December 11, 2002. The Service will apply its Voluntary
Disclosure Practice in determining whether to refer a taxpayer
for criminal prosecution.
Return To Top
When must a taxpayer file a Report of
Foreign Bank and Financial Accounts?
A - An Report of Foreign Bank and
Financial Accounts (FBAR) must be filed annually by any U.S.
person who had a financial interest or signature or other
authority over any financial accounts, including bank,
securities, or other types of financial accounts in a foreign
country if the aggregate value of those accounts exceeds $10,000
at any time during the calendar year. The courts have interpreted
the terms "financial account" and "control or other authority"
very broadly, to include such things as a ledger entry on the
books of a Swiss corporation and the ability to give oral
instructions as to the disposition of funds in an account.
Return To Top
--------------------------------------------------------
Other FAQ Topics
a.. Updated Questions - 3/17/03
b.. Eligibility
c.. Request Period
d.. 150-Day Submission Period
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Revised January 13, 2003
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