On June 18, 2014, the Internal Revenue Service (IRS) announced major changes to its 2012 Offshore Voluntary Disclosure Program (OVDP) and streamlined procedures. The modifications provide new options to help both taxpayers residing overseas and those residing in the United States come into compliance.
The changes include an expansion of the streamlined filing compliance procedures announced in 2012 and modifications to the OVDP. The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was non-willful.
Expanded Streamlined Procedures
The original streamlined procedures were available only to non-resident, non-filers. Taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a “risk” questionnaire.
The expanded streamlined procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States. Some of the key changes are: (i) eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year; (ii) eliminating the required questionnaire; and (iii) requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.
For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to five percent of the foreign financial assets that gave rise to the tax compliance issue.
Taxpayers that make a submission under the streamlined procedures may not participate in the OVDP. Similarly, taxpayers that begin the OVDP disclosure after July 1, 2014 are not eligible for the streamlined procedures.
Taxpayers eligible for the streamlined procedures who submit, or have submitted, a voluntary disclosure letter under the OVDP before July 1, 2014 but have not executed an OVDP closing agreement can request to be treated under the penalty terms of the expanded streamlined procedures. This is a welcome change for U.S. taxpayers residing outside the United States, who previously had to begin the OVDP process and then opt out when the IRS determined they could qualify for the lower penalties.
Modified Offshore Voluntary Disclosure Program (OVDP)
Some significant changes have been made to the 2012 OVDP. Some of the key changes are: (i) requiring additional information from taxpayers applying for pre-clearance to the program; (ii) eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures; (iii) requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application; (iv) enabling taxpayers to submit voluminous records electronically rather than on paper; and (v) increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice (DOJ).
The list of financial institutions and facilitators currently under investigation or cooperating with the IRS or DOJ is published on the IRS website and can be accessed here. The increase in penalty continues the United States' intensifying crack down on tax evasion and can be traced to information the United States has obtained since entering into the Legacy Agreement with Swiss Tax Authorities in 2009.
The expanded streamlined procedures and modified OVDP provisions come into effect on July 1, 2014. The increased penalty provision in the modified OVDP comes into effect August 4, 2014.
In addition, on July 1, the new information reporting regime resulting from the Foreign Account Tax Compliance Act (FATCA) will go into effect. Thousands of foreign financial institutions will begin to report to the IRS the foreign accounts held by U.S. persons.
The modifications to these programs means that the IRS anticipates receiving significant information of unreported foreign financial accounts as a result of FATCA. The expansion of the streamlined program to include U.S. taxpayers is an opportunity for those taxpayers that have non-willfully undisclosed accounts to come forward.
Due to the overwhelming penalties and complexity in this area, we highly recommend that all U.S. citizens or residents holding any assets offshore seek proper legal advice to determine the most appropriate method to come into compliance.