On June 18, 2014, the IRS made significant changes to the procedures pursuant to which U.S. Persons can disclose any failure to timely file a Report of Foreign Bank and Financial Accounts (FBAR), and/or an international information return (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926 and 8621). First, the IRS announced modifications to the 2012 Offshore Voluntary Disclosure Program (2012 OVDP), effective for new submissions made on or after July 1, 2014. The IRS refers to these modifications as the “2014 OVDP.” Second, the IRS significantly expanded the Streamlined Filing Compliance Procedures (Streamlined Procedures), by breaking the former procedure into two procedures depending upon whether the U.S. Person involved has been residing in the U.S. Finally, the IRS made slight revisions to its safe harbor procedures for those who have failed to file one or more of the above forms, but who have otherwise complied with applicable U.S. income tax laws.
I. OVDP Modifications
The most significant modifications as part of 2014 OVDP are as follows:
Additional information is now required for preclearance by Criminal Investigation.
The miscellaneous offshore penalty increases from 27.5 percent to 50 percent starting August 4, 2014, for any person who has not met the OVDP preclearance requirements by such date, if either (i) a foreign financial institution at which the taxpayer holds or held an account, or (ii) a facilitator who helped the taxpayer establish or maintain an offshore arrangement, has been publicly identified as being under investigation or cooperating with a government investigation. A list of persons currently so identified is accessible here.
The offshore penalty must be paid at the time of the 2014 OVDP submission, unless the taxpayer can demonstrate an inability to pay.
The previously available 12.5 percent and 5 percent reduced penalty rates within 2012 OVDP have been eliminated.
All taxpayers must submit full financial institution statements, but voluminous documents not requiring original signatures may be submitted on CD or flash drive under certain circumstances.
Revisions are anticipated to the Offshore Voluntary Disclosure Letter and related attachment.
The FAQs pertaining to the asset base to which the offshore penalty applies have been modified.
II. Streamlined Filing Compliance Procedures
The IRS has expanded the Streamlined Procedures (first offered on September 1, 2012). The Procedures are now available to individuals (and estates of individuals) residing in the U.S. The revised Procedures eliminate the risk assessment process, including the significance of the $1,500 tax threshold. Further, an individual residing outside of the U.S. can qualify pursuant to the Streamlined Procedures regardless of whether the individual previously filed all required U.S. income tax returns. The Streamlined Procedures impose no penalty on an individual residing outside the U.S. For those residing in the U.S., there is a 5 percent penalty on assets reportable on the FBAR or Form 8938. To be eligible for the Streamlined Procedures, an individual must be able to certify under penalties of perjury that the failure to report all income, pay all tax, and submit FBAR(s) and/or international information return(s) resulted from non-willful conduct. The IRS defines “non-willful” conduct as conduct due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
Tax returns submitted under the Streamlined Procedures will not be acknowledged and a submission pursuant to such Procedures will not result in a closing agreement with the IRS. There will be no automatic audit of the returns submitted pursuant to the Procedures, but such returns may be subject to audit and verification, IRS exam, and civil and/or criminal liability, as applicable.
Once a taxpayer submits an OVDP voluntary disclosure letter on or after July 1, 2014, the taxpayer may not participate in the Streamlined Procedures. Likewise, once a taxpayer submits under the Streamlined Procedures, the taxpayer is ineligible to participate in 2014 OVDP. However, taxpayers who enter OVDP prior to July 1, 2014, can attempt to qualify for the penalty structure of the Streamlined Procedures while remaining in 2012 OVDP. The taxpayer must be able to make the certification of non-willfulness under penalties of perjury. If the taxpayer’s conduct is considered to be non-willful, then the 0 or 5 percent penalty structure would apply (depending upon whether the taxpayer is residing in the U.S.). If the taxpayer were considered to be willful, then the taxpayer would not be eligible for the Streamlined Procedures penalty, but could remain in 2012 OVDP. Additionally, this process would provide the taxpayer with a good understanding of the likely recommendation of the IRS agent regarding willfulness, if the taxpayer were otherwise considering an opt out from OVDP.
III. Safe Harbors (2012 OVDP FAQs 17 and 18)
The previously existing safe harbors, which allowed taxpayers to avoid a penalty for late-filed FBARs or international information returns if the taxpayer did not have U.S. tax non-compliance, have been retained with slight modifications. The most significant modification is that, with respect to a late-filed international information return, the taxpayer must have had reasonable cause for the failure to timely file. A reasonable cause explanation is not required for safe harbor filings made prior to July 1, 2014.
Taxpayers remain ineligible for OVDP, Streamlined Procedures, and the safe harbors if the IRS has initiated a civil examination or criminal investigation of a taxpayer’s return for any taxable year. Similarly, the taxpayer cannot have been contacted by the IRS about the delinquent form before taking action.