How to clean up In the past we have informed you about the benefits of the Deferred Variable Annuities (DVAs), the legal requirements for policies to qualify for tax deferred growth and all the new reporting requirements. In this letter we would like to discuss what you need to do, if – for whatever reason – you failed to report your policy. Contrary to what you may think, this is not a hopeless situation that willland you in jail automatically, provided you deal with it the right way: Voluntary Disclosure (Standard Voluntary Disclosure vs Optional Voluntary Disclosure Program) Both the recent Foreign Bank Account Report (FBAR) regulations (FinCEN Form 114) and a new Specified Foreign Asset Reports (Form 8938) are part of the U.S. government’s campaign against “international tax evasion”, which has included the indictment of Swiss banks UBS and Wegelin, prosecution of various “promoters” and taxpayers, and the transfer of Swiss bank account information as agreed between the Swiss and U.S. governments, including information on 4,500 UBS accounts and the ongoing negotiations for the transfer of historical Credit Suisse account data. In conjunction with this “campaign”, the IRS has instituted three “offshore voluntary disclosure initiatives” (“OVDI”) in 2009, 2011 and ongoing in 2012. Encouraging taxpayers to voluntarily disclose tax errors and omissions has been an IRS “practice” for over fifty years; historically this has been an informal practice in which the voluntary disclosure of a taxpayer did not automatically guarantee immunity from prosecution but was a “factor” to be considered by the IRS in deciding whether to recommend prosecution (and historically very few voluntarily disclosing taxpayers have been prosecuted). For such an informal voluntary disclosure, the mechanics of a disclosure can differ significantly. “Quiet disclosures” occur when accurate amended or delinquent returns are filed with the IRS along with any taxes due and interest payments, but without any penalty calculations or payments, in the hope that these filings will either be accepted by the IRS, or better still never actively reviewed.1 The other method is the “noisy disclosure” where the taxpayer or his representative contacts the IRS, generally describes the situation and tries to get an indication from the IRS whether the taxpayer qualifies for voluntary disclosure and is eligible to avoid criminal prosecution. Noisy disclosures typically involve filing back returns (including taxes due and interest), accompanied by a “reasonable cause letter”. This letter is intended to explain why the failure to file has not been “wilful” and based on “reasonable cause”, and is intended to mitigate IRS penalties per the discretionary powers of the examining agent. A noisy disclosure is typically closed when an agreement is reached on 1 We note that the IRS now formally discourages quiet disclosures by promising to audit late filed and amended returns and stating that it may criminally prosecute quietly disclosing taxpayers where appropriate. NMG International Financial Services Ltd. Hottingerstrasse 21 • 8032 Zurich – Switzerland • Phone: +41 44 266 21 41 • Fax: +41 44 266 21 49 • www.nmg-ifs.com • info@nmg-ifs.com 2 the imposition of penalties – which agreement is based on the discretion of the examining agent and the negotiating skills of the taxpayer or his/her advisors. The three OVDI programs have instead promised that cases would be settled “in an organized, co-ordinated manner”, with an exposure to civil penalties that would be “uniform”, and a centralized processing structure designed “to ensure that taxpayers are treated consistently and predictably”. Thus, under the 2009 OVDI, the IRS would not assess civil fraud penalties, and agreed to limit all other applicable penalties (including not filing FBARs) by imposing a onetime “miscellaneous offshore penalty” equal to 20% of the highest aggregate balance of undisclosed foreign bank accounts or other assets held during the period covered by the disclosure (2003 through 2008). The 2011 OVDI was then launched under the same premises, except that the penalties were more severe than under the 2009 program, including an accuracy-related penalty, plus failure to file and failure to pay penalties, the total of which can be up to 50% of the tax owed. In addition, the miscellaneous offshore penalty was increased to 25% of the value of undisclosed foreign assets during the relevant period (now 2003 through 2010). A reduced 5% penalty was also introduced for taxpayers who, amongst other things, had exercised minimal, infrequent contact with the account and not withdrawn more than $1.000 from the account in any year for which the taxpayer was non-compliant. On January 9, 2012, amid some fanfare the IRS announced that the 2009 & 2011 OVDIs had yielded 33.000 voluntary disclosures and $4.4 billion of collections, as well as the reopening of the OVDI, this time with no closing date for the program, and with a penalty increase from 25 to 27.5% with regards the miscellaneous offshore penalty. All other aspects of the 2011 OVDI are in effect for this new initiative. The stated “benefit” of the OVDI is mostly two-fold: no criminal prosecution and certainty of penalties. As to criminal prosecution, the criminal investigation division of the IRS examines a taxpayer’s background and history, as well as the source of the undisclosed assets, before accepting the taxpayer into the OVDI, but once accepted the taxpayer can rest easy as long as the facts presented are truthful and complete. With regard to certainty of penalties, an agreement as to what “statutory” penalties should apply and in what fashion is not a straightforward process and often delayed the closure of cases, or sent the taxpayer to appeals. For example, the determinations of whether an act was wilful, or whether there was reasonable cause for the failure to properly file, are not black and white questions but rather based on the “facts and circumstances” of each particular case. Also, the decision to consider extenuating circumstances and how to weight these when determining statutory penalties is in significant part within the discretion of the particular examining agent – so for many taxpayers, the “certainty” of the OVDI penalties, even though they are substantial, outweighs the uncertainty which attends the statutory penalty process. The Good News To be clear, for a taxpayer who purchased a foreign annuity with previously undisclosed assets, the purchase does not purge any of their past non-compliance and they remain liable for their past, including not paying the excise tax or filing an FBAR in 2010. Our advice to these taxpayers is to undertake a voluntary disclosure because in the current NMG International Financial Services Ltd. Hottingerstrasse 21 • 8032 Zurich – Switzerland • Phone: +41 44 266 21 41 • Fax: +41 44 266 21 49 • www.nmg-ifs.com • info@nmg-ifs.com 3 climate of prosecutions and exchange of information, undisclosed assets may not remain undisclosed for much longer. For those, however, who purchased a DVA with after tax money and simply forgot to report, the “back filing” can be done very easily and with very little penalty for the simple reason that since the policy grows tax-deferred, you did not have taxable gains, you simply forgot to report and this can be fixed fairly easily. For all U.S. persons who continue to hold assets in foreign structures for all the traditional reasons: asset diversification, privacy, asset protection, etc., a foreign annuity provides these benefits and remains one of the only tax efficient vehicles because the deferral of tax on the inside build-up within the contract is still effective under the Code. Of course Uncle Sam wants to collect an excise tax on premiums paid, and now requires that information be provided on the annuity contract via the FBAR and Specified Foreign Asset Report, but these compliance issues are fairly simple when compared to other foreign investment structures (e.g. controlled foreign corporation or foreign grantor trust filings). Need professional help If you forgot to report your policy in the past and would like to “back file” or if you are interested in the OVD program, we would highly recommend that you get professional assistaelp. We work with skilled and experienced professionals who will be pleased to consult with you. We maintain a network of experienced tax experts either in the U.S. or here in Switzerland. Here in Switzerland we established a cooperation with “U.S. Tax and Financial Services”, an international group of experienced CPAs. They can assist you in all the above matters. Just let us know and we will be pleased to make an introduction to your personal U.S. Tax and Financial Services adviser. Disclaimer: Recipient has requested information from NMG-IFS Ltd (“NMG”) and acknowledges, understands and accepts that receiving requested information is not a direct solicitation by NMG. in any way, form or manner. This information may not be copied, altered, offered, sold or otherwise distributed to any other person by any recipient without the prior written consent of NMG. Although all reasonable effort has been made to ensure the facts stated herein are accurate and opinions contained are fair and reasonable, this information is selective in nature and is intended to provide an introduction only. None of the information contained in this page or its attachments constitutes legal, financial, investment, tax, accounting or any other advice. Neither NMG nor any of its directors or employees and advisors, nor any other person shall have any liability for its accuracy, inaccuracy or liability, loss damage or harm, howsoever arising, directly or indirectly from the use of this information. We do not recommend or guarantee that this information and any attachments should be used as a guideline, template or to replace independent legal, tax, accounting, financial or any other professional advise. No comments contained in this mail or presentation (including any attachments) are intended to be used, for the purpose of avoiding penalties imposed under any countries’ tax code. Please consult your local legal and tax advisor. NMG International Financial Services Ltd. Hottingerstrasse 21 • 8032 Zurich – Switzerland • Phone: +41 44 266 21 41 • Fax: +41 44 266 21 49 • www.nmg-ifs.com • info@nmg-ifs.com