On June 18, 2014, the IRS announced significant changes to its current Offshore Voluntary Disclosure Program (OVDP) and to the current version of the IRS Streamlined Filing Compliance Procedures (SFCP). Under the new directive, individuals and estates may qualify for penalty reductions from the standard penalty (calculated at 27.5 percent of the highest value of the off shore account or asset) to as low as 5 percent for US. Domiciliaries, and full abatement of penalties for U.S. persons who live abroad.
These new rules are contained in the revised SFCP and OVDP Transitional Rules (OVDPTR). Although the reduced penalties appear enticing, submitting a request under the new procedures requires caution. A Certification signed under penalties of perjury attesting that the taxpayer’s noncompliance was not due to willfulness or fraud, and that the taxpayer did not otherwise exhibit criminal conduct associated with the account during the years covered by the disclosure period is a prerequisite to the SFCP and OVDPTR. Further, taxpayers who enter the SFCP receive no protection from possible criminal prosecution if the non willful assertions are successfully challenged by the IRS (unlike the OVDP process where criminal prosecution will not result provided the taxpayer exhibits cooperation with the IRS civil Revenue Agents).
For those taxpayers who have started the disclosure process, a decision to complete the standard OVDP submission must be made before July 1, 2014. If the paperwork is not completed, the SFCP option is available, but the OVDPTR will not be allowed. If the OVDP submission is completed before July 1, 2014, the OVDPTR provisions will apply. The OVDPTR allows the application of the lower penalty regime, but it still requires that eight years of income tax returns be amended and filed with the IRS. Taxpayers who make a voluntary disclosure for the first time after July 1, 2014, can choose between the OVDP and SFCP. The decision is irrevocable. Importantly, the OVDP opt-out procedures are still available for those taxpayers who qualify under these provisions.
Another important change to the OVDP is an increase of the miscellaneous penalty imposed on the highest value of the foreign account from 27.5 percent to 50 percent. These new rules apply for taxpayers who make a preclearance request to enter the OVDP on or after August 4, 2014, if the financial institution where the account is held has been publicly identified by the Department of Justice as being under criminal investigation. The list of the 10 targeted financial institutions is now published on the IRS website. We fully expect the number of financial institutions on the list to increase over the next few months. Anyone holding an account at one of these institutions must make a voluntary disclosure before August 4, 2014, or face the mandatory higher penalties.
Lastly, the previous circumstances that would allow a 5 percent or 12.5 percent penalty under the prior version of OVDP will be removed and unavailable effective July 1, 2014.
The new IRS provisions impact our current active voluntary disclosure clients. For clients who engage the firm after July 1, 2014, whether residing in the U.S. or abroad, the decision to proceed with the SFCP, the OVDP, or other filing avenues will require a careful review of the requirements and the potential of criminal tax referral.