Taxpayers need to rely on the expert professional advice of a tax specialist for the treatment of Passive Foreign Investment Companies (PFICs) during Offshore Voluntary Disclosure Program (OVDP) reporting. PFIC computations are challenging for a Taxpayer in an amnesty program such as the OVDP. There is a challenge due to the lack of historical information on the cost basis and holding period of the PFIC. PFIC Computations and the verification process are often reasons why an OVDP closing agreement may be delayed.
In order to avoid delays, IRS offers Taxpayers entering the OVDP an alternative to the statutory PFIC computation. The purpose of the alternative resolution program (ARP) is to resolve PFIC issues, as well as implement a process that is at par with the Mark to Market (MTM) methodology. Under the ARP, there is no requirement to re-construct all historical data as long as the case agent and the reporting Taxpayer’s representative are in agreement.
Here is a summary of the ARP:
- Initial MTM computation of gain or loss will be for the first year of the OVDP application.
- A tax rate of 20% will be applied to the MTM gain(s), MTM net gain(s) and gains from all PFIC dispositions during the voluntary disclosure period under the OVDP.
- A rate of 7% of the tax computed for PFIC investments MTM in the first year of the OVDP application will be added to the tax for that year.
- MTM losses will be limited to unreversed inclusions on an investment by investment basis.
- Regular and Alternative Minimum Tax are both to be computed without the PFIC dispositions or MTM gains and losses.
- Underpayment of interest and penalties on the Deficiency amount is computed under the terms of the OVDP and the Internal Revenue Code.
- Taxpayer must continue using the MTM methodology for any PFIC investment beyond the voluntary disclosure period.
The takeaway here is that if you are an Individual with PFICs and you are going through an OVDP; note that the 20% tax rate of the ARP is lower than the 2017 individual marginal tax rates. Taxpayers should want to take advantage of the ARP.
Don’t be a victim of your own making. If you are a Taxpayer with PFICs and you are entering or considering entering an amnesty program such as an OVDP, your Tax practitioner ought to be an expert in MTM computations and understand how to weigh in all the options. Taxpayers need to ensure that the ARP is more beneficial than the statutory computation. A Tax Practitioner’s full knowledge of all the tax rules in the OVDP program is essential for positive results.