4Thought Blog

The Offshore Voluntary Disclosure Program ends Sept. 28, the IRS announced this month.

OVDP is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. OVDP is an option that offers protection from criminal liability and terms for resolving civil tax and penalty obligations.

The IRS has warned for several years it would be ending the Offshore Voluntary Disclosure Program.

Internal Revenue Service reminds U.S. taxpayers with undisclosed offshore accounts that they should use existing paths to come into full compliance with their federal tax obligations.

Taxpayers that have undisclosed foreign financial accounts and assets, including those held through undisclosed foreign entities should consider using one of the IRS’ Offshore Voluntary Disclosure Programs to come into compliance. Each program offers advantages and disadvantages.

The ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with U.S. tax obligations have raised awareness of U.S. tax and information reporting obligations with respect to non-U.S. investments. Because the circumstances of taxpayers with non-U.S. investments vary widely, the IRS offers the following options for addressing previous failures to comply with U.S. tax and foreign information return obligations with respect to those investments:

Even intercompany management fees have complex tax rules

Most U.S.-based businesses with international operations perform centralized or shared service functions at their company headquarters. This can include services such as accounting, human resources, information technology, legal services, marketing and other back-office services.

Companies regularly centralize these functions in order to generate cost efficiencies, leverage centralize expertise and maintain consistency throughout the company. In order to justify these headquarter costs, an intercompany charge commonly referred to as a management fee or intercompany service charge is billed to the foreign subsidiary or other foreign entity for their share of the expenses.

Too often, though, some companies may be performing these services but not charging anything out to their foreign subsidiaries or other foreign entities. The costs associated with these supporting services stays on the U.S. books. By not allocating a portion of the costs to any foreign subsidiaries, the company is understating income subject to U.S. taxation and overstating foreign taxable income.

Be careful before borrowing from your foreign subsidiary

In today’s economy, many small businesses conduct operations overseas.  Many of our partnership and S-Corporation clients have expanded into international markets. You have probably heard in the news that many multinational corporations have billions of dollars parked offshore.  Even individuals owning interests in partnerships, LLCs and S-Corporations with foreign subsidiaries do the same. They know that if the funds are brought back or repatriated, that U.S. taxes will be due at tax rates of up to 43%, (including the Medicare tax).

Not only are international sales a great way to increase revenue for your company, but exporting domestically produced products also may create tax savings.

Selling goods in countries where the tax rates are lower than the United States is one way to go about it, but there’s a great tax incentive out there that can benefit even exporters operating in countries with tax rates higher than the United States.

And this option is available without even setting up a foreign business entity. Even more – it can provide big savings.