On June 18, 2014, the IRS announced new Streamlined Filing Compliance Procedures (Streamlined Programs) and changes to the existing Offshore Voluntary Disclosure Program (OVDP). These programs are intended to help taxpayers correct any failures to report foreign financial assets and income (and to fix other tax compliance issues). The following provides a summary of the key features of the new Streamlined Programs and the changes made to the existing OVDP.
Streamlined Programs — There are two different Streamlined Programs – one for U.S. taxpayers residing outside the United States, and one for U.S. taxpayers residing in the United States. These two programs have many of the same requirements. For example, both programs require (1) either an original or an amended U.S. tax return, depending on the circumstances, for the three most recent years for which the due date for the return has passed (including extensions); (2) payment of any tax shown as due on the returns submitted under the program plus interest; (3) Foreign Bank Account Reports FBARs electronically filed for the most recent six years for which the filing deadline has passed; and (4) a written statement (on the form required by the IRS) signed under penalties of perjury that certifies, among other things, that the taxpayer’s failure to report offshore accounts and income was due to non-willful conduct. For this purpose, the IRS has defined non-willful conduct as conduct that is due to negligence, inadvertence, mistake or a good faith misunderstanding of the law. On the other hand, willfulness is generally understood to mean a voluntary, intentional violation of a known legal duty.
In addition to the requirements mentioned above, U.S. taxpayers residing in the United States generally must pay an offshore penalty equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets during the past six years. The offshore penalty does not apply to U.S. taxpayers that (1) do not have a U.S. abode and (2) have been physically outside the U.S. for at least 330 days for any one or more of the most recent three years for which the due date for the return has passed. If a U.S. taxpayer successfully completes one of the Streamlined Programs, the IRS agrees to waive any failure-to-file and failure-to-pay penalties, accuracy-related penalties, information-return penalties, and FBAR penalties for the amounts reported under the one of the Streamlined Programs. This waiver does not apply if the taxpayer’s original noncompliance was the result of fraud or willful misconduct, however. In addition, the IRS does not provide any confirmation as to whether the taxpayer has successfully completed a Streamlined Program.
OVDP — For taxpayers who do not meet the eligibility requirements for the Streamlined Programs, the OVDP still may be an option. The change recently made by the IRS to the current OVDP was to increase the 27.5 percent offshore penalty to 50 percent in the case of taxpayers who had accounts with any bank or facilitator identified by the U.S. Department of Justice as being under investigation or as cooperating with a government investigation.
Warning — Once a taxpayer makes a submission under one of the Streamlined Programs, the taxpayer is no longer eligible for the OVDP. Similarly, a taxpayer who submits an OVDP disclosure letter after July 1, 2014, is disqualified from participating in the new Streamlined Programs. If the IRS has initiated a civil audit or criminal investigation of the taxpayer, regardless of whether the audit or investigation relates to undisclosed foreign financial assets, and regardless of whether the taxpayer knows about the audit or investigation, that taxpayer will not be eligible for any of the IRS’s disclosure programs mentioned above. Taxpayers should seek professional tax advice before entering into one of the IRS’s disclosure programs.