On June 18, 2014, the IRS announced a revamped Offshore Voluntary Disclosure Program.
The existing OVDP has been in place since March 2009. The program allows a taxpayer to voluntarily come into compliance with US tax reporting obligations and pay a reduced civil penalty rather than facing either greater civil penalty exposure or criminal exposure. The updated program makes significant changes to the penalty structure, as well as changes to streamline the administration of the program.
The penalty structure has been changed significantly. As part of the voluntary disclosure, the taxpayer must agree to pay a penalty in place of any FBAR penalties that would otherwise apply and in place of any penalties that would apply for the non-filing of various information returns that are also required for international tax compliance. For the first time, the IRS has implemented a two-tier structure that prescribes a different penalty for those whose violations were willful and those whose violations were not willful.
The OVDP penalty percentage of 27.5% will continue. The new program introduces a 50% penalty in place of the 27.5% penalty for those taxpayers who had banked with institutions or promoters that the US government has investigated for facilitating evasion activities for its clients, banks or promoters that are cooperating with the US, or banks or promoters who have been publicly identified as having been issued a summons for US taxpayer activity. The IRS has published a list of such banks. The higher penalty will be applicable only after August 4, 2014. It serves as a further incentive for noncompliant taxpayers to come into compliance immediately through the use of the OVDP.
The second significant change is the expansion of the streamlined process, which had been in place since 2012, to U.S. residents and to all taxpayers who certify that their non-compliance was not due to willfulness. The streamlined process allows for taxpayers to submit three years of tax returns and six years of FBARs. There is no preclearance procedure for the streamlined process and no documentation other than the required returns and certification. In addition, there is no longer any maximum tax threshold (previously $1,500) and no risk assessment, which in the 2012 program had limited the streamlined program to those considered low risk because of the nature of the offshore account and the amount in the account. Once the streamlined process is used, the taxpayer can no longer avail himself of the OVDP.
The streamlined process differs slightly between US residents and non-US residents.
Non-residents may submit both delinquent original tax returns and amended tax returns. Residents are only able to submit amended returns and are not eligible if they have not filed returns.
There is no FBAR penalty for a non-resident. A resident must submit a 5% penalty for the FBAR violations. The 5% penalty only applies to bank accounts that need to be reported on an FBAR and is narrower than the penalty base in the OVDP, which includes other assets that were vehicles for offshore tax evasion.
Because of the reduced penalty available for non-willful taxpayers, the IRS has provided guidance for the transition of OVDP participants to the streamlined process. Taxpayers who have opted out of the OVDP can also request to be transitioned to the streamlined program. The important distinction between those who use the streamlined process initially from those who transition in from the OVDP is the requirement for OVDP participants to submit all required OVDP paperwork. This element of the transition must be considered carefully in situations where the documentation shows possible willfulness. The new guidance also notes that the streamlined process is available for those who filed amended returns and FBARs as a “quiet disclosure.”
Where no tax is due
In situations where there is no tax due and only FBARs or other information returns were not filed, the IRS has separately issued revised guidance for filing the information returns and FBAR forms without any penalty.
The question of whether an individual was willful is a legal determination that will depend on the facts and circumstances of each case. The Supreme Court’s definition of willfulness is the “intentional violation of a known legal duty.” How this standard is applied in the context of FBAR violations is the subject of controversy in several recent court cases and is by no means settled law. This legal determination should be made by an attorney.
Immediate Action Items
For those who have accounts at banks under investigation, apply to the OVDP by August 4, 2014 to avoid the 50% penalty.