On June 18, the IRS announced changes to two programs previously established to bring taxpayers into compliance with reporting and payment obligations related to offshore assets. Participation in either of the two programs – the 2012 Offshore Voluntary Disclosure Program, and the “streamlined filing compliance procedures” announced in 2012 – can secure treatment by the IRS that is much less onerous than treatment which could result if the taxpayer has not come forward before the IRS discovers the taxpayer’s past noncompliance. However, it is critical for taxpayers to consult counsel, and time is of the essence.
On June 18, 2014, the IRS announced “a number of important changes to its offshore account compliance programs.” The changes include reshaping the terms of the 2012 Offshore Voluntary Disclosure Program (OVDP) and expanding the streamlined filing procedures. The IRS believes that these important changes “will lead to a significant increase in the number of U.S. taxpayers coming forward to report on undisclosed foreign accounts.” The new information reporting regime from the Foreign Account Tax Compliance Act (FATCA) will go into effect on July 1, 2014, and many foreign financial institutions will start to report foreign accounts held by U.S. persons to the IRS.
The OVDP offers taxpayers who may be criminally liable and/or liable for civil penalties due to undisclosed income from offshore accounts the opportunity to comply with any unfulfilled obligations to the IRS and avoid prosecution while limiting their exposure to civil penalties. Taxpayers are generally eligible to participate in the OVDP if they are not under either civil examination or criminal investigation by the IRS.
Taxpayers participating in the existing OVDP must provide the IRS with a number of documents, cooperate in the voluntary disclosure process, and make all necessary payments (including 20% accuracy-related penalties, failure-to-file penalties, tax liabilities under Title 26, and an offshore penalty up to 27.5% of the highest aggregate value of OVDP assets, etc.). The OVDP also contained a reduced offshore penalty percentage for a very limited number of circumstances.
Under the announced modifications to the OVDP, which go into effect on July 1, 2014, the existing reduced penalty percentage for certain taxpayers has been eliminated. Therefore, all participants will generally be required to pay the 27.5% offshore penalty. However, if a foreign financial institution at which the taxpayer has or had an account has been publicly identified as being under investigation or as cooperating with a government investigation, the offshore penalty has been increased to 50%.
The IRS has now expanded the streamlined filing procedures to accommodate a broader group of U.S. taxpayers that were not previously eligible. These revised procedures are available to two types of taxpayers – those resident in the U.S. and those not resident in the U.S. (individuals who, in any one or more of the most recent three years, did not have a U.S. abode and were physically outside the U.S. for at least 330 full days) – who (1) previously filed a U.S. tax return, if required, for each of the most recent 3 years for which the U.S. tax return due date has passed; (2) failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR and/or one or more international information returns with respect to the foreign financial asset, and (3) such failures resulted from non-willful conduct, established by a new penalties of perjury statement detailing the circumstances of noncompliance and affirmatively stating non-willfulness. Eligible taxpayers who wish to use the streamlined procedures must (1) file original or amended tax returns, together with all required information returns, for each of the most recent 3 years for which the U.S. tax return due date has passed, with a designated IRS office for program participation (2) file any delinquent FBARs for each of the most recent 6 years for which the FBAR due date has passed, and (3) pay a Title 26 miscellaneous offshore penalty equal to 5% of the highest aggregate balance/value of the OVDP assets (but no penalty for non-resident taxpayers). The newly expanded streamlined procedures have eliminated the previous requirement that a taxpayer has no more than $1,500 of unpaid tax.
Taxpayers who applied to the OVDP prior to July 1, 2014, and have not resolved their case, can request that the new streamlined filing procedures be applied. The request must be in writing to the examiner of the case.
Taxpayers who have opted out of the penalty framework of the OVDP may still be eligible for the reduced 5% penalty, and should consult with their tax counsel immediately to determine any necessary actions. Taxpayers who may be eligible for the streamlined procedures and previously made payments to the IRS under the OVDP framework should also consult with tax counsel immediately to discuss potential protective measures – in sum, these changes to the programs provide a clear path for taxpayers whose failures result from non-willful conduct, but taxpayers should proceed down that path with the assistance of tax counsel, especially with respect to a “non-willfulness” determination.
Details and additional information regarding these changes can be located on the IRS’s OVDP website at