IRS Broadens Offshore Amnesty Program

by Perkins Coie
Contact

Over the last several years, the Internal Revenue Service (IRS) has focused its efforts on enforcement of U.S. laws with respect to offshore assets held by U.S. citizens and residents, including their tax payment and reporting obligations.  One initiative has involved  prosecution of foreign financial institutions and personnel who have marketed tax avoidance schemes to U.S. taxpayers.  The IRS has also been encouraging taxpayers to voluntarily disclose their previously unreported and untaxed foreign accounts by offering a series of amnesty programs and a streamlined filing compliance procedure. 

The amnesty programs have been successful.  More than 45,000 taxpayers have come into compliance, and they paid about $6.5 billion in taxes, interest and penalties.  However, the programs have also been routinely criticized for treating willful tax evaders no differently than individuals who inadvertently or non-willfully failed to disclose and pay all taxes on foreign assets, discouraging many taxpayers with non-willful violations from participating in the amnesty programs.  The streamlined filing compliance procedure, designed for U.S. taxpayers living abroad since 2009 and who had not filed a U.S. tax return during the period, was also found to be limited in its effectiveness to encourage participation.  On June 18, 2014, the IRS finally announced changes to address these problems.

2012 Offshore Voluntary Disclosure Program (OVDP)

Under the 2012 OVDP, an individual who wished to declare previously undisclosed foreign assets could send a request to the IRS Criminal Investigation Division (CID) and seek pre-clearance for an OVDP submission.  If pre-clearance was granted (which would generally occur if the CID was not already actively investigating the individual), the individual could then submit an OVDP application. 

As part of the OVDP application, the taxpayer was required to:

  • file amended returns for each of the eight proceeding tax years;
  • pay the back taxes along with interest, an accuracy-related penalty, and (where applicable) failure-to-file and failure-to-pay penalties;
  • file Report of Foreign Bank and Financial Accounts (FBAR) forms for the preceding eight years;
  • file all other required informational returns (e.g., Forms 520, 3520-A, 5471, 5472, 8938);
  • submit copies of account statements for the foreign accounts; and
  • pay a penalty of 27.5% of the highest aggregate balance of all of the accounts and assets in any of the preceding eight years.

Taxpayers who met very limited criteria could qualify for a 5% or 12.5% reduced penalty rates.  When faced with a potential criminal indictment and/or willful FBAR penalties (that are equal to 50% of the account value and are cumulative for each year there was a willful failure to file), the amnesty program is an attractive option.  However, for those individuals who did not willfully fail to disclose the accounts or pay taxes, a flat 27.5% penalty on the highest aggregate value of the accounts seems excessive. 

2012 Streamlined Filing Compliance Procedures

On June 26, 2012, the IRS announced that, starting from September 1, 2012, U.S. taxpayers living abroad since January 1, 2009,  who had failed to file their U.S. federal income tax returns or their FBAR forms, and who presented low compliance risks (e.g., with less than $1,500 tax due each year), had a means to come into compliance.  As part of this procedure, a taxpayer was required to:

  • submit delinquent tax returns and information returns for the last three years;
  • pay all tax and statutory interest due and owing;
  • file delinquent FBARs and submit copies of filed FBARs for the last six years; and
  • submit a Questionnaire (used to assess whether the taxpayer presents a high or low compliance risk).

Changes Announced on June 18, 2014

The June 18, 2014 announcement expanded the streamlined filing compliance procedures and modified the 2012 OVDP.  The streamlined filing compliance procedures are now made to include taxpayers residing in the U.S., and the risk assessment component has been eliminated.  Returns are to be submitted under either the Streamlined Foreign Offshore Procedure or the Streamlined Domestic Offshore Procedure.  Taxpayers are required to certify that their prior failures to comply were non-willful.  Eligible taxpayers residing outside the U.S. may have all penalties waived, while eligible taxpayers residing in the U.S. may be assessed a miscellaneous offshore penalty of 5% of the highest aggregate balance of the foreign financial assets related to the non-compliance.  

With respect to the OVDP, beginning August 4, 2014, taxpayers with accounts held with financial institutions that have been publicly identified as being under investigation (or cooperating with an investigation) are required to pay a 50% offshore penalty on the aggregate balance of the accounts instead of a 27.5% penalty.  Additionally, taxpayers are required to pay the offshore penalty with their OVDP submission.  Previously, the penalty was not due until just before the closing agreement was signed, usually months after the submission.  Taxpayers are now also required to include all account statements at the time of the OVDP application.

Conclusion

The Foreign Account Tax Compliance Act (FATCA) goes into full effect July 1, 2014.  Foreign financial institutions are negotiating with the IRS to enter into deferred prosecution agreements, seeking to reduce the civil penalties, and agreeing to provide information regarding the accounts of U.S. persons.  As a result of FATCA and these negotiations, many financial institutions are closing the accounts of U.S. citizens and residents or are turning over account information to the IRS.  If an individual has undisclosed foreign assets, now is the time to get into compliance, especially (1) with the reduced penalty structure for non-willful taxpayers, and (2) the increased penalty (beginning August 4, 2014) for taxpayers with accounts at financial institutions that have been publicly identified as under investigation.  Once an audit has been initiated (or the CID has begun its investigation), a taxpayer is precluded from entering the OVDP or taking advantage of the streamlined procedures.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Perkins Coie | Attorney Advertising

Written by:

Perkins Coie
Contact
more
less

Perkins Coie on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.