The IRS has recently announced major changes in its offshore voluntary compliance programs that are anticipated to aid thousands of taxpayers in complying with their U.S. tax obligations. Changes to the program include expanding the Streamlined Filing Compliance Procedures (SFCP) that were first offered in September 2012 to accommodate a broader group of U.S. taxpayers who have unreported foreign financial accounts. Changes also include important modifications to the 2012 Offshore Voluntary Disclosure Program (OVDP).
OVDP is one of two major programs that the IRS offers to help U.S. taxpayers become compliant with their past-due obligations. Taxpayers holding undisclosed foreign financial assets, including those held through undisclosed foreign financial entities, can enter OVDP as it enables them to become compliant with tax filings, can help in avoiding substantial civil penalties, and generally eliminates the risk of criminal prosecution for matters relating to tax noncompliance. Entering OVDP also provides the opportunity to reasonably calculate the total cost of satisfying all tax issues. Under OVDP, taxpayers must provide all required documentation, pay applicable failure-to-file penalties, pay applicable accuracy-related penalties, submit full payment of any Title 26 liabilities, execute a closing agreement via Form 906, and fully cooperate with the IRS and DOJ with offshore enforcement efforts amongst other requirements. The voluntary disclosure period is the most recent eight tax years for which the due date has already passed.
The IRS has issued changes to its offshore compliance programs in coordination with the implementation of the FATCA regime, which began July 1, 2014. Important modifications to OVDP include the following:
- Elimination of the existing reduced penalty rate for certain taxpayers whose noncompliance is due to non-willful conduct (due to the expansion of the streamlined procedures)
- Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the initial OVDP application
- Enabling taxpayers to submit voluminous records electronically
- Increasing the offshore penalty percentage from 27.5% to 50% if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account is under investigation by the IRS or DOJ
Changes to OVDP also include requiring additional information from taxpayers applying to the program. Unlike the 2009 OVDP and the 2011 OVDI, the 2014 OVDP has no set deadline for taxpayers to apply.
The second major program that the IRS offers to individuals who hold undisclosed foreign financial assets is the Streamlined Filing Compliance Procedures program. This procedure is available to taxpayers certifying that their failure to report foreign financial assets and failure to pay any related tax on those assets is due to non-willful conduct on their part. Under SFCP, taxpayers should submit either delinquent or amended tax returns for the most recent three tax years where the filing deadline has already passed. Taxpayers are also required to submit FBARs for the most recent six tax years where the filing deadline has already passed. Taxpayers should also pay all tax liabilities as reflected on the submitted tax returns as well as sign and certify a statement that declares eligibility to participate in SFCP and that noncompliance was not due to willful conduct.
Previous submissions under SFCP were subject to different levels of review based on the amount of tax due and responses submitted with a “risk” questionnaire. However, modifications to SFCP implemented by the IRS will show a different basis of analysis. Important changes to SFCP include the following:
- Availability to a wider population of U.S. taxpayers including those living outside of the U.S. as well as certain U.S. taxpayers residing in the U.S. (U.S. taxpayers living in the U.S. were previously ineligible)
- Eliminating the requirement that the taxpayer have $1,500 or less of unpaid tax per year
- Elimination of the previously required risk questionnaire
- Requiring the taxpayer to certify that previous failures to comply with U.S. tax law was due to non-willful conduct
For eligible U.S. taxpayers living outside of the U.S. all penalties will be waived. A five percent penalty will be assessed on the foreign financial assets that give rise to a tax compliance issue for eligible U.S. taxpayers residing in the U.S. Tax returns submitted under SFCP will not automatically be selected for audit, however may be checked for accuracy and completeness of submissions.
It should be noted that once a taxpayer makes a submission under SFCP the taxpayer may not participate in OVDP. Similarly, a taxpayer that submits an OVDP voluntary disclosure letter on or after July 1, 2014, is ineligible to participate in the streamlined procedures. A taxpayer that previously submitted a voluntary disclosure letter under OVDP prior to July 1, 2014, and who does not yet have a fully executed OVDP closing agreement may request treatment under the applicable penalty terms that are offered under SFCP. The IRS will consider such requests to incorporate streamlined penalty terms on a case by case basis.
If you have undisclosed foreign financial assets and unreported income from such assets and are considering entering an IRS offshore disclosure program, you should consult your tax advisor regarding the available options to become tax compliant.
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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your individual facts and circumstances.
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