What tax professionals need to know about the IRS Offshore Voluntary Disclosure Program (OVDP)
I was very fortunate to be able to contribute to the good people over at the Tax Insider, an article entitled “What tax professionals need to know about the IRS voluntary disclosure program.” Here’s an except:
Plenty of great CPAs and other tax professionals have neglected to report their clients’ foreign account holdings. If you were one of them, here are three reasons you are in good company.
First, although filing an FBAR (Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts) has been required since 1970, until recently, this requirement was rarely acknowledged or followed. It was, in essence, like driving five mph over the speed limit. Everyone drives at least five mph over the speed limit. It is the custom. It is odd when someone drives the speed limit or even below it. A similar custom was true of FBAR filings. For years FBARs were legally required to be filed. However, this law was all but unenforced. It was an after-the-fact crime to tack onto already-established charges of money laundering and similar crimes.
Second, much of the software used by tax professionals assumes that taxpayers do not have foreign accounts. At least some brands of software would, until recently, automatically check the box indicating that the client had no foreign accounts. To report clients’ accounts, practitioners would have to specifically train staff and implement a fail-safe to verify that clients were specifically asked if they had offshore holdings.
Third, clients are unaware that there is worldwide tax jurisdiction and, with no specific intent to defraud, neglect to tell their CPAs about these accounts. This is especially true for recent immigrants and workers in the United States on visas. When providing tax information, it is common for clients to assume that their holdings in their countries of origin are not relevant for their U.S. taxes. There is some good reason for this. The United States is the only member of the G-7 nations (France, Germany, Italy, Japan, the United Kingdom, and Canada) to have a worldwide tax system, which means that U.S. citizens or residents are taxed on all of their income no matter where it is earned.
This, combined with a general lack of knowledge about FBAR filing and potential consequences of improper reporting, has led many diligent tax professionals to omit foreign accounts from their clients’ tax preparation.