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IRS Revises Offshore Voluntary Disclosure Program

IRS Revises Offshore Voluntary Disclosure Program

On June 18, 2014, the Internal Revenue Service (“IRS”), in Information Release (“IR”) 2014-73, announced that it was updating its Offshore Voluntary Disclosure Program (“OVDP”) with respect to the reporting of offshore income. The IRS’s intent in revising the program is to broaden the scope of taxpayers that are able to participate and to increase their efforts at identifying those taxpayers who have failed to disclose foreign investment activity and bank accounts, but who did not completely evade their income tax obligations.

Offshore Voluntary Disclosure Program Background

As noted by the IRS, “The Offshore Voluntary Disclosure Program is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets. OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations.” The IRS has stated that they have purposely refrained from offering examples of what constitutes willful failure to disclose offshore assets, as every taxpayer has a unique set of circumstances. At this time, the definition of the term by the IRS was intentionally left broad. The OVDP has resulted in the remittance of approximately $6.5 billion in delinquent income taxes from more than 45,000 voluntary disclosures.

The current OVDP was launched in 2012 and is the successor to prior voluntary programs, as noted in our tax tip issued on August 8, 2012. The initial OVDP was opened in 2009 and afforded taxpayers the opportunity to voluntarily disclose unreported offshore income for the 2003 through 2008 years. In February of 2011, a second OVDP was offered which extended the voluntary disclosure period and allowed taxpayers to voluntarily report offshore income through 2010. This second initiative was originally set to expire on August 31, 2011; however, the IRS extended the program until September 9, 2011.

Current Revisions to Streamlined Procedures

The streamlined procedures were initially offered on September 1, 2012 and were only available to non-resident, non-filers. The streamlined procedures are designed to provide taxpayers with procedures for filing amended or delinquent returns. Also included in the streamlined procedures are processes relating to terms for resolving income tax and penalty obligations. With the publication of IR 2014-73 the IRS has issued revised procedures which assist taxpayers with their income tax filing obligations by making the OVDP less stringent.

The most significant revision to the program is the reduction in the maximum penalty of 27.5% of the highest year‘s aggregate value in foreign bank accounts or entities during the period covered by the voluntary disclosure. Under the revised OVDP, taxpayers that reside in the United States will pay a miscellaneous offshore penalty equal to 5% of the foreign financial assets that gave rise to the tax compliance issue as long as the failure to report was due to non-willful conduct. Eligible U.S. taxpayers residing outside the United States will have all penalties waived.

In addition to the reduction in the maximum penalty amount that may be charged to taxpayers, additional revisions as noted in IR 2014-73 include:

  • Eliminating a requirement that taxpayers have $1,500 or less of unpaid tax per year;
  • Eliminating the required risk questionnaire; and
  • Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

A full list of the streamlined procedures can be accessed at the following link: https://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures.

IR 2012-64

With the publication of IR 2012-64in June of 2012, the IRS announced that it had updated the frequently asked questions on its website with respect to the OVDP. Specifically, the IRS reminded taxpayers that the 2012 OVDP closed the “offshore loophole” by excluding from the initiative those taxpayers that fail to notify the U.S. Justice Department of their appeal of a foreign government’s disclosure of tax information as currently required under existing law. The IRS frequently asked questions can be accessed at the following link: https://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers.
Application Process

A request for a valid offshore voluntary compliance disclosure is made through the submission of an Offshore Voluntary Disclosure Letter and associated attachment to the IRS Voluntary Disclosure Coordinator at the address reflected below. The Criminal Investigation unit of the IRS will notify applicants of preliminary acceptance or refusal. If accepted, it is expected that the Criminal Investigation unit will complete its work within a 45 day period.

Internal Revenue Service
Offshore Voluntary Disclosure Coordinator
Philadelphia Lead Development Center
1-D04-100
2970 Market Street
Philadelphia, PA 19104

Conclusion

“This opens a new pathway for people with offshore assets to come into tax compliance,” said IRS Commissioner John Koskinen. “The new versions of our offshore programs reflect a carefully balanced approach to ensure everyone pays their fair share of taxes owed. Through the changes we are announcing today, we provide additional flexibility in key respects while maintaining the central components of our voluntary programs.” It is recommended that taxpayers review all of their foreign bank accounts to determine whether or not the OVDP would prove to be beneficial to them.

Click to view a copy of IR 2014-73.

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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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