On June 18, 2014, the IRS announced that it will permit resident US taxpayers to participate in its streamline OVDP filing compliance program. Taxpayers currently participating in OVDP who meet certain eligibility requirements for the expanded Streamline Filing Compliance Procedures will benefit from a more favorable penalty structure under the Streamline Program – a 5 percent offshore penalty, rather than the current penalty of 27.5 percent.
In June 2012, effective September 1, 2012, the IRS announced the streamlined program (“Program”), which was limited to US taxpayers living abroad. Eligibility was limited to non-resident non-filer taxpayers who could demonstrate a low level of compliance risk and who did not owe more than $1,500 of tax for each of the three years covered by the Program. Resident US taxpayers were not eligible for the Program. Non-resident US taxpayers who utilized the Program were required to file delinquent tax returns for the past three years and to file delinquent FBARs for the past six years. To be eligible, the non-resident US taxpayer must have resided outside the US since January 1, 2009 and who did not file a US tax return during the same period, and who presented a low level of compliance risk. Low risk was predicated on simple returns with little or no US tax due. The IRS considered risk to be high if, in part, (i) the taxpayer demonstrated material activity in the United States; (ii) the taxpayer was under audit or investigation by the IRS, or (iii) if the taxpayer had US source income, or any indication of sophisticated US tax planning or avoidance.
For taxpayers who presented low compliance risk, the IRS agreed to expedite the review and no penalties were asserted. Non-resident US taxpayers who sought to file amended tax returns were not accepted into the program. Notably, the streamlined program did not provide protection from criminal prosecution if the IRS and the DOJ determined that the taxpayer’s particular circumstances warrant such prosecution.
Under the IRS’s recent announcement, US resident taxpayers living in the United States who qualify may apply to the streamlined program rather than the traditional Offshore Voluntary Disclosure Program (“OVDP”). The Program’s expansion also includes changes, which includes eliminating the cap on outstanding taxes owned (formerly $1,500 or less unpaid each year), doing away with the risk questionnaire, and adding a requirement that participants certify that their previous failure to comply with their obligations was due to non-willful conduct.
Returns submitted under the streamlined program will not automatically be subject to IRS audit, but may be selected for audit under existing audit selection applicable to any US tax return, and may be subject to verification procedures against information received from banks and other sources. The streamlined program is only available to taxpayers who actions did not result from willful conduct. The IRS has not provided a list of factors to demonstrate willful behavior, but prior actions brought by the IRS asserting willful conduct includes (i) opening foreign accounts in an entity or foundation name; (ii) providing false information to taxpayer’s tax accountant, or (iii) knowing at the time of filing the tax return that the taxpayer should have reported both the existence of the account and the income earned from it.13 A taxpayer could be subject to criminal liability and/or substantial monetary penalties if a taxpayer’s behavior was willful.
Resident US taxpayers who filed under the OVDP program prior to June 30, 2014, are eligible to seek to participate in the streamlined program if the eligibility requirements of the program are met. A taxpayer seeking such treatment does not need to opt out of OVDP. To participate in the streamlined program, the taxpayer must submit a written statement signed under penalty of perjury certifying their non-willfulness with respect to all foreign activities, and specifically describe the reasons for the failure to report all income and file timely FBARs. Upon IRS approval, US resident taxpayers currently participating in OVDP will not be required to pay the 27.5 percent offshore penalty at the OVDP rate, but will instead be subject to the streamlined penalty rate of 5 percent.
Taxpayers who have not entered OVDP by June 30, 2014 must decide whether to submit to OVDP or the streamlined program. Once a taxpayer makes a submission under the streamlined program, the taxpayer may not participate in OVDP. Similarly, a taxpayer who submits an OVDP voluntary disclosure letter pursuant to OVDP on or after July 1, 2014 is not eligible to participate in the streamlined procedures. Those taxpayers that enter OVDP after June 30, 2014 may face a civil penalty of 50 percent based on the highest balance of the foreign account during the past 8 years, if the account was held at a bank under investigation by the IRS or Department of Justice.
The streamlined program will continue to be offered to US taxpayers residing outside the United States. For nonresident US taxpayers, the IRS has eliminated the cap on outstanding taxes and no longer requires the risk questionnaire. To qualify as a nonresident, the taxpayer must not maintain a US abode and the individual must be physically present outside the United States for at least 330 full days. Nonresident taxpayers eligible for the streamlined program will not be subject to failure to file and failure to pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.