Early this month we reported on the IRS Commissioner’s remarks that the IRS was considering revising the current Offshore Voluntary Disclosure Program (OVDP) to reduce penalties for non-willful foreign account holders who failed to report their accounts to the IRS. Yesterday, the IRS rolled out these changes, reducing the 27.5% penalty applicable to all OVDP participants to only 5% for those foreign account holders whose failure to report the accounts was not willful. Those taxpayers will now submit all delinquent information returns and amended returns through the Streamlined Domestic Offshore Procedures rather than through the OVDP.
In its instructions, the IRS describes non-willful conduct as “conduct that is due to negligence, inadvertence or mistake or conduct that is the result of a good faith understanding of the requirements of the law.” Non-willful account holders may include new U.S. residents or citizens who never closed their foreign accounts, U.S. citizens or residents who inherited a foreign account overseas and non-resident U.S. citizens who have accounts overseas for use while living overseas. To be eligible for this program, the taxpayer must have filed returns for each of the most recent three years for which a return was required, failed to report income on that return that was earned in the foreign account and failed to file one or more international information returns, such as an FBAR or Form 3520.
This change in policy is great news for many innocent foreign account holders who were afraid to come forward under the previous program due to the excessive 27.5% penalty. In addition, the filing requirement for the new program is far less onerous than the requirements under the OVDP program, and taxpayers are not required to extend the statute of limitations on assessment. All taxpayers opting to use the Streamlined Domestic Offshore Procedures must submit a statement certifying that failure to report all income and submit all required information returns resulted from non-willful conduct.
In addition to relaxing penalties for non-willful account holders, the IRS has increased penalties for all willful account holders with accounts in a foreign bank that has been publicly identified as being under investigation by or cooperating with the IRS. The penalties applicable to those taxpayers go from 27.5% of the highest aggregate balance to 50% of the highest aggregate account balance. Taxpayers seeking to avoid this increase in penalties must submit a pre-clearance letter by August 4, 2014.