As of July 1, 2014, the Internal Revenue Service (IRS) has implemented several changes to the streamlined filing procedures for offshore compliance, as well as the Offshore Voluntary Disclosure Program (OVDP). These programs provide taxpayers with offshore assets an avenue to bring their tax obligations into compliance. The expanded programs come on the heels of new reporting requirements for foreign financial institutions under the Foreign Account Tax Compliance Act (FATCA).
Expansion of Streamlined Procedures for Offshore Compliance
The streamlined filing compliance procedures provide individuals, including estates of individuals, with an avenue for filing amended or delinquent returns, and terms for resolving the corresponding tax and penalties under such returns. The streamlined procedures are available only to those who did not willfully evade tax with offshore assets and accounts.
The IRS has expanded these procedures to include a wider population of non-residents, and also, for the first time, U.S. residents. To be eligible for the streamlined procedures, the taxpayer must have a taxpayer identification number, and must not currently be under civil examination for any taxable year. Under the expanded procedures, the taxpayer must also certify that previous failures to report income, submit required returns, and pay tax were due to non-willful conduct. The IRS has removed the requirement that the taxpayer have $1,500 or less of unpaid tax per year, and has also eliminated the risk questionnaire.
Under the streamlined procedures, the miscellaneous offshore penalty is 5% of the highest aggregate value of the taxpayer’s foreign financial assets for the applicable period. A taxpayer who complies with the streamlined procedures is not subject to accuracy-related penalties or informational return penalties. The 5% penalty under the streamlined procedures is substantially lower than the penalties under the OVDP, which range from 27.5% to 50%. This provides taxpayers with a strong incentive to make voluntary disclosures under the new streamlined procedures.
To comply with the expanded streamlined procedures, a U.S. resident taxpayer must:
- File amended tax returns on Form 1040X for each of the most recent 3 years for which the U.S. tax return due date has passed, including any informational returns;
- E-file any delinquent Foreign Bank Account Reports (FBARs) for each of the most recent 6 years for which the FBAR due date has passed;
- Submit payment of all tax due, including late-payment interest and the 5% miscellaneous offshore penalty; and
- Complete a certification that the taxpayer is eligible for the streamlined procedures, has filed all required FBARs, that previous failures to comply were non-willful, and that the miscellaneous offshore penalty amount is accurate.
Modification of the Offshore Voluntary Disclosure Program (OVDP)
The OVDP provides an avenue to taxpayers wishing to voluntarily disclose their offshore accounts and assets to limit penalties and avoid prosecution. Unlike the streamlined procedures, the OVDP applies to taxpayers who have willfully failed to disclose foreign accounts and entities to avoid or evade tax. When a taxpayer truthfully and timely complies with the OVDP, the taxpayer can avoid the fraud penalty, the foreign information return penalties, and the IRS will not recommend criminal prosecution to the Department of Justice (DOJ).
The IRS has modified the OVDP penalty structure, and has also required the taxpayer to submit financial account statements. Under the updated penalty structure, the miscellaneous offshore penalty for unreported accounts is equal to 27.5% of the foreign financial assets that are subject to the offshore penalty. The penalty increases to 50% if, before the taxpayer applies for the OVDP, it becomes public that the IRS or DOJ is investigating the financial institution where the taxpayer holds an account.
To comply with the current OVDP, the taxpayer must:
Cooperate in the voluntary disclosure process;
- File amended tax returns for all tax years covered by the voluntary disclosure;
- File a foreign account asset statement, and an account summary with penalty calculation;
- File FBARs for all accounts maintained during the period of voluntary disclosure;
- Provide copies of statements for all financial accounts reflecting account activity;
- Pay, in lieu of all other penalties, the miscellaneous offshore penalty of either 27.5% or 50%;
- Submit full payment of any tax liabilities with applicable interest, or make arrangements with the IRS for such payment;
- Execute a closing agreement; and
- Agree to cooperate with the IRS and DOJ by providing information about offshore financial institutions and facilitators.
The IRS previously launched an OVDP in both 2009 and 2011. Due to strong interest in those programs, the IRS began the current open-ended OVDP in 2012. Since the launch of the 2009 program, more than 45,000 taxpayers have come into voluntary compliance, paying about $6.5 billion in taxes, interest, and penalties. Despite its popularity, the IRS has made it clear to taxpayers that it may end the OVDP at any time.