Determining Your Most Advantageous Route Is Imperative
- The IRS announced substantial changes to both the Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer Taxpayers and the Offshore Voluntary Disclosure Program (OVDP) on June 18, 2014.
- Effective July 1, 2014, the IRS is making it easier for individuals to qualify for the new Streamlined Procedures. Anyone affected by the Streamlined Procedures and the OVDP should have their individual situation reviewed to determine the most advantageous route in light of these new rules.
- This alert is not meant to be a thorough review of all the rules, but to alert taxpayers to the new procedures. Taxpayers should seek legal advice for their specific situation.
The IRS announced substantial changes to both the Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer Taxpayers and the Offshore Voluntary Disclosure Program (OVDP) on June 18, 2014. Before these changes, taxpayers had to either enter the OVDP or submit their disclosures through the much kinder $0 penalty Streamlined Procedure. However, taxpayers only qualified for submission through the Streamlined Procedure if they met all the following criteria:
- had lived overseas since January 1, 2009
- had not filed a U.S. tax return since January 1, 2009
- presented low compliance risk (based on a list of factors outlined on the IRS’s streamlined questionnaire; for example, owing less than $1,500 on each of their newly filed U.S. tax returns for each of the past three years, or only having financial accounts within their country of residence)
Qualifying for the New Streamlined Procedures
Because many taxpayers did not fall within these narrow rules, they had to enter the OVDP. Inside the OVDP, taxpayers had to decide whether to stay in the program and face penalties of 5 percent, 12.5 percent or 27.5 percent, or to opt-out of the program and face Foreign Bank Account Report (FBAR) penalties – willful or non-willful. These FBAR penalties ranged from $10,000 per account per year to 50 percent of the account value per year.
Effective July 1, 2014, the IRS is making it easier for individuals to qualify for the new Streamlined Procedures. Taxpayers may now qualify under two scenarios:
- U.S. citizens or permanent residents who reside outside the U.S. ($0 penalty)
This program is for U.S. citizens or permanent residents who have physically lived outside the U.S. for at least 330 full days for any one or more of the most recent three years. These taxpayers will qualify for the $0 penalty as long as these failures resulted from non-willful conduct.
- It no longer matters if they previously filed U.S. tax returns.
- It does not matter if they previously filed FBARs.
- It no longer matters if their additional tax, as computed on their new or amended U.S. tax returns, exceeds $1,500 per year.
- U.S. citizens or permanent residents who reside in the U.S. (5 percent penalty)
These taxpayers will qualify for a 5 percent penalty as long as they have filed U.S. tax returns for the previous years and their failures to properly report income on their tax returns, or foreign accounts on their FBARs, resulted from non-willful conduct.
- It does not matter if the foreign income was previously reported on the taxpayer’s U.S. tax returns.
- It does not matter if the foreign account was ever reported on an FBAR.
- It no longer matters if the additional tax due exceeds $1,500 per return.
- Taxpayers in either Streamlined Program only need to file the most recent 3 years of tax returns (e.g., 2011, 2012 and 2013) and 6 years of delinquent FBARs (e.g., 2008-2013).
How to Choose?
Taxpayers who have already entered the 2012 OVDP, meaning they submitted both their OVDP Letter and Letter Attachments to the IRS before July 1, 2014, may be eligible for transitional treatment from the 2012 OVDP. This would effectively apply the $0 or 5 percent penalty to their disclosure, depending on the new streamlined program to which they now qualify. Taxpayers considering transitional treatment should pay special attention to the technical requirements of their request and ultimate submission.
Taxpayers who have not yet entered the 2012 OVDP, or who have only pre-cleared to enter the 2012 OVDP, may proceed directly through one of the 2014 Streamlined Programs.
Still Ineligible for the New Streamlined Procedures?
Taxpayers who do not qualify for one of the new Streamlined Procedures, but still qualify for the 2014 OVDP, face a one-time 27.5 percent offshore penalty based on the highest balance year. In addition, according to the IRS, effective Aug. 4, 2014, the 27.5 percent offshore penalty will increase to 50 percent if "either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation." Taxpayers in the OVDP must file 8 years of income tax returns (or amended returns) and 8 years of FBARs.
Beware! Taxpayers must choose one or the other: either enter the 2014 OVDP or enter the 2014 Streamlined Programs. If rejected from the 2014 Streamlined Programs, taxpayers may not later enter the 2014 OVDP Program. Moreover the 2014 Streamlined Programs do not come with the guarantee that the IRS will not recommend criminal prosecution if rejected.
Determine Your Next Step in Light of These New IRS Changes
This alert discusses only some of the many changes made by the IRS. It is important to note that the IRS has the authority to change the terms (qualifications, penalties, etc.) whenever it chooses. Moreover, in certain situations the IRS is permitting taxpayers already in the OVDP to either adopt the rules of the new OVDP (Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers No. 1.3) or apply for transitional treatment to one of two more newly expanded streamlined programs – as long as the taxpayer has not completed the OVDP certification process where a Form 906 Closing Agreement has been fully executed by the IRS as of July 1, 2014, an agreement that is received at the conclusion of a taxpayer’s disclosure.
Anyone affected by the Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer Taxpayers and the Offshore Voluntary Disclosure Program should have their individual situation reviewed to determine the most advantageous route in light of these new rules. Holland & Knight lawyers can assist in determining the IRS filing needs as well as any other international financial planning for the short- and long-term.