OVDP And Double Counting: Oh The Agony! – Part II

This is a continuation of Part I. This hypothetical pertains to a taxpayer who has applied to OVDP and who has transferred assets from one foreign account, which was recently closed, to another during the disclosure period.

This is a simple example, yet it illustrates some of the common mistakes that are associated with double counting.

Joe has applied to the OVDP. He had two foreign accounts in 2010: one at Bank A and another at Bank B.

The opening balances in each account were as follows:

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On June 1, 2010, Joe withdrew $ 500,000 (USD) from his Bank B account to purchase a flat, reducing his Bank B balance from $ 2.0 Million (USD) to $ 1.5 Million (USD). See below:

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On June 2, 2010, Joe closed his Bank B account and transferred the balance ($ 1.5 Million) to his Bank A account. Take note of the following. The amount transferred ($ 1.5 million) is $ 500,000 less than what the highest balance in Bank Account B was during 2010. This will be relevant later on. See below:

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There was no other activity with respect to Joe’s Bank A Account for the remainder of the year. Thus, the closing balance in Joe’s Bank A account on December 31, 2010 was $ 4.5 million (USD).

Question # 1: What was each account’s highest balance for 2010 and on what day was it obtained?

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Question # 2: Must these balances be reported on Joe’s FBAR as the “highest balances” for Account A and for Account B for 2010? Yes.

Question # 3: What is the maximum aggregate balance for tax year 2010 without taking into consideration double counting? $ 6.5 Million ($ 4.5 Million + $ 2.0 Million). Think of this as the “inflated” maximum aggregate balance for tax year 2010.

Question # 4: Is there a double counting issue? If yes, why?

• Yes, there is a double counting issue.

• Why? $ 1.5 million was transferred from Account B to Account A when Account B was closed. However, it was used to determine the highest balance of not just one account but two accounts. Very simply, it was counted twice – first, when calculating the highest balance of Account B on January 1, 2010 and second, when calculating the highest balance of Account A on June 2, 2010.

Question # 5: Can $ 1.5 million be eliminated from the maximum aggregate balance for 2010? Yes.

Question # 6: May the $ 500,000 that Joe withdrew from Account B to purchase a flat be eliminated from the 2010 maximum aggregate balance on the grounds that it had been withdrawn from Account B before Joe made the transfer from Account B to Account A? No. The concept behind double counting is that assets should not be counted twice, not that they should not be counted at all. At the end of the day, that $ 500,000 contributed to Account B’s high balance of $ 2.0 million. Thus, it cannot be ignored. This applies to any amount that Joe withdraws, even those greater than $ 500,000. For example, had Joe withdrawn $ 800,000 to purchase a flat, instead of $ 500,000, $ 800,000 would still be included in the maximum aggregate balance for 2010.

Question # 7: What are the new highest balances for these accounts after taking into consideration double counting?

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Question # 8: What is the adjusted maximum aggregate balance for tax year 2010? $ 5 million ($ 4.5 million + $ 500,000).

Question # 9: Assuming 2010 had the highest maximum aggregate balance of all the years during the look-back period, what is Joe’s offshore penalty? $ 1,375,000 (27.5% of $ 5 million).

Shortcut: When there is a double counting issue, apply the following steps:

(1)   Step 1: Determine what the highest balances in each account were prior to the closing of any accounts and the transferring of any assets between accounts. Amounts withdrawn from a “soon-to-be” closed account must still be included when determining that account’s highest balance.

(2)   Step 2: Add up these balances.

(3)   Step 3: At the end of the day, this will be your adjusted maximum aggregate balance.

Analysis using the above hypothetical:

(1)   Step 1: The highest balances in Account A and Account B prior to June 2, 2010, the day that Joe closed Account B, were $ 3.0 million and $ 2.0 million, respectively. The fact that Joe withdrew $ 500,000 from Account B is meaningless. It must still be included in determining Account B’s highest balance.

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(2)   Step 2: Add up these balances: $ 3.0 million + $ 2.0 million = $ 5.0 million

(3)   Step 3: Joe’s adjusted maximum aggregate balance for 2010 – i.e., after taking into consideration double counting – is $ 5.0 million.

As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.

   

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