U.S. persons are allowed to maintain financial accounts anywhere in the world, but they must pay tax on all income and also file special reports alerting the IRS to the existence of the accounts. In recent years the IRS has put great pressure on foreign institutions to disclose the names of U.S. clients. The IRS has also created an Offshore Voluntary Disclosure Program ("OVDP") to allow U.S. persons with undisclosed accounts to regularize their situations. (It is not an amnesty, since it calls for significant penalties.) An alternative set of Streamlined Filing Compliance Procedures ("Streamlined") was more recently introduced for less egregious fact patterns. On June 18, the IRS introduced significant changes to both OVDP and Streamlined. These changes increase the amount of information required for OVDP and alter the penalties payable under OVDP in certain cases. The changes also broaden the availability of Streamlined and extend it for the first time to U.S.-resident taxpayers. These changes result from concerns that the penalties within OVDP were too expensive for certain taxpayers whose failures to disclose offshore accounts or assets were due to non-willful conduct. Now, such taxpayers can proceed under Streamlined and regularize their prior payment and reporting deficiencies while avoiding the large OVDP penalty. At the same time, taxpayers whose failures were not due to non-willful conduct may have their penalties substantially increased if they do not come forward promptly.  

  • New Streamlined Program. Taxpayers whose prior payment or reporting deficiencies were due to non-willful conduct may now disclose previously unreported foreign assets through Streamlined, whether or not they are U.S. residents. Non-willful conduct means conduct due to negligence, inadvertence, mistake or a good faith misunderstanding of the law. All taxpayers within Streamlined will have to file three years of original or amended tax returns and six years of original or amended Reports of Foreign Bank and Financial Accounts ("FBARs"). Taxpayers will have to pay any back tax for three years, plus interest. In addition, U.S.-resident taxpayers will have to pay a miscellaneous penalty of 5 percent of the value of all previously unreported accounts and assets, in the year within the prior three tax years that those assets had the highest value in the aggregate. Non-U.S.-resident taxpayers will not be subject to this miscellaneous penalty. No other penalties will be assessed against either U.S.-resident or non-U.S.-resident taxpayers. Finally, all taxpayers will be required to certify, under penalty of perjury, that their conduct was non-willful and to provide a brief description of the circumstances of the prior nondisclosures.
  • New OVDP. The basic structure of OVDP remains unchanged; however, more information now must be provided, and the timeline for paying the OVDP penalty is accelerated. To request "preclearance" to apply for OVDP, taxpayers must now provide identifying information on all banks or other financial institutions where undisclosed accounts were maintained, in addition to identifying themselves. Moreover, the narrative "OVDP Letter and Attachment" now requires more detailed information. In addition, whereas the miscellaneous 27.5 percent "OVDP Penalty" previously became due upon the closing of the OVDP case, that penalty is now due with the submission of the taxpayers' amended tax returns and payment of back taxes, applicable penalties and interest. (The OVDP Penalty equals 27.5 percent of the value of all previously unreported accounts and assets, in the year within the prior eight tax years that those assets had the highest value in the aggregate.) The taxpayer will still have to file amended tax returns and FBARs for the previous eight tax years, pay all tax, accuracy, failure-to-file, and failure-to-pay penalties, as applicable, interest, and the OVDP Penalty. Finally, the OVDP Penalty is increased to 50 percent if any bank or other entity managing the taxpayer's funds or accounts has been publicly disclosed as under investigation, cooperating with U.S. authorities or the subject of a U.S. court-approved summons. Taxpayers who submit a preclearance request or the OVDP Letter and Attachment before August 4, 2014, will not pay the increased OVDP Penalty of 50 percent, even if there has been such a public disclosure.
  • "Transitional Period." Taxpayers who are already participating in OVDP and whose prior non-disclosures resulted from non-willful conduct may request that the IRS reduce their 27.5 percent OVDP Penalty to the 5 percent Streamlined penalty (or eliminate their OVDP Penalty entirely if the taxpayer resides outside the U.S.). A taxpayer is "participating in OVDP" if he or she submitted the OVDP Letter and Attachment by July 1, 2014, and if the IRS and the taxpayer did not execute a closing agreement before that date. A taxpayer who only requested preclearance by July 1, 2014, but who had not by then submitted the OVDP Letter and Attachment would have to "opt out" of OVDP to take advantage of the Streamlined penalty structure; however, such action is irrevocable and after opting out, a taxpayer cannot later re-enter OVDP. Any taxpayer seeking this transitional period treatment must execute the non-willfulness certification required by the new Streamlined program, under penalty of perjury. Importantly, for taxpayers seeking this treatment, the other requirements of OVDP remain; the taxpayer must still file amended returns and FBARs for the prior eight tax years and pay all tax, penalties and interest otherwise required under OVDP.