Timing and Asset Considerations under the OVDP
As essential part of determining your Offshore Voluntary Disclosure Programsubmission is calculating the OVDP disclosure period. As defined by the IRS, the voluntary disclosure period consists of the most recent eight years for which the due date has already passed. Each disclosure must contain an eight-year period. For example, if a taxpayer makes a disclosure prior to the due date for 2013, the voluntary disclosure period will be 2005 through 2012. If that same taxpayer makes a disclosure after the due date for 2013, the voluntary disclosure period includes 2006 through 2013.
Are There Years Which Are Not Included in the Disclosure Period?
Yes, some years will not be counted in calculating the OVDP disclosure period. Any year in which the taxpayer was fully compliant is not included in the disclosure period for the purposes of the Offshore Voluntary Disclosure Program. Sometimes, a taxpayer can begin filing compliant tax returns before making a disclosure under OVDP, which will change the calculation of the disclosure period. If a taxpayer can show that he or she has made timely, original, and compliant returns in an attempt to disclose previously undisclosed OVDP assets, and then made a voluntary disclosure, the disclosure period for OVDP will be affected by the compliant returns. In that case, the voluntary disclosure period will include the eighth year preceding the most recent year for which the return filing due date has not yet passed. However, the voluntary disclosure period will not include the years for which the taxpayer made those compliant tax returns.
Can I Use OVDP if my Undisclosed Assets Include Passive Foreign Investment Companies?
In previous versions of the Offshore Voluntary Disclosure Program, taxpayers had difficulty including disclosure of investments and assets from passive foreign investment companies (PFIC) because of the difficulty of obtaining historical information on the cost basis and holding period of these assets. Under the 2014 OVDP program, taxpayers with assets from passive foreign investment companies can elect to use an alternative method of calculating cost basis and holding period. The alternative method is not based on the statutory PFIC method of calculation, but instead allows taxpayers to resolve PFIC issues consistent with a Mark-to-Market form of calculation. As such, the 2014 OVDP process does not require a complete reconstruction of historical data.
The terms of calculation of PFIC assets under the 2014 OVDP are as follows:
- If the taxpayer chooses to use the alternative calculation method, then this election will apply to all PFIC assets that have been accepted into the Offshore Voluntary Disclosure Program. The calculation must be made for every PFIC investment, and the MTM calculation of gain or loss should be applied to the first year of the voluntary disclosure application.
- Certain tax rates apply to gains and losses calculated under the MTM method. A tax rate of 20 percent applies to gains and net gains calculated under the MTM method from PFIC dispositions made during the voluntary disclosure period.
- For the first year that the MTM calculation is used for PFIC assets under the Offshore Voluntary Disclosure Period, a tax rate of 7 percent is added to the yearly tax.
- If the taxpayer elects to use the alternative MTM calculation method for OVDP, losses can be limited. These MTM losses will generally be limited to the unreserved inclusions on a case-by-case basis as set forth in IRC § 1296. These losses are treated as ordinary losses during the voluntary disclosure period. The tax benefit may also be limited under the MTM calculation scheme. The benefit is limited to the tax rate applicable to the MTM gains derived during the voluntary disclosure period (20%).
- When computing the Regular and Alternative Minimum Tax, the taxpayer should use the computation without accounting for the PFIC dispositions or MTM gains and losses.
- If the taxpayer has underpaid, the interests and penalties applying to the underpayment should be calculated under the terms required by the Offshore Voluntary Disclosure Program.
- If the taxpayer retains a PFIC investment or asset after the voluntary disclosure period has ended, he or she should continue to calculate that investment using the MTM method. This requirement is subject to the statutory rules of IRC § 1296 and IRC §§ 1291-1298, as applicable.
How a Tax Attorney Can Help
Determining the proper disclosure period for the Offshore Voluntary Disclosure Program can be complicated, but essential in making a complete disclosure under the program. The OVDP program is rapidly changing, but a tax attorney can help you navigate the confusing aspects of the IRS program.
The Tax Lawyer - William D Hartsock Tax Attorney Inc. has been successfully helping clients with tax issues related to their foreign assets since the early 1980s and we are committed to keeping up to date with the latest developments in the Offshore Voluntary Disclosure Program. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.