By Dana Cade, CPA, manager
At the end of June 2014, the IRS released changes to its 2012 Offshore Voluntary Disclosure Program (OVDP) and its 2012 Streamlined Program for Non-US taxpayers. These changes became effective July 1, 2014. The good news is the IRS has recognized that many taxpayers who are out of compliance have not done so willfully. To assist these taxpayers, the IRS has expanded the streamlined program to accept non-willful taxpayers residing in the US. Penalties are greatly reduced, if not eliminated, for non-willful filers.
The new streamlined offshore procedures are limited to taxpayers who have been non-willfully out of compliance with US tax laws. The procedures are divided into two categories: one for non-resident US taxpayers, and the other for resident US taxpayers. Taxpayers in either category are required to file amended (US) or missing (non-resident) returns (including but not limited to Forms 3520A, 352A, 5471, 5472, 8938, 926 and 8621) for the past three years and foreign account forms for six years (FBAR and 8938, as applicable).
Taxpayers who qualify to file under the new streamlined procedures will need to sign a certification to that effect. The certification must also include a statement that all of the FBARS are now filed. The taxpayer must sign under penalty of perjury that his/her failure to meet US tax obligations was non-willful conduct and that the offshore penalties have been computed accurately. A worksheet providing these calculations must be attached.
Before discussing the new program and procedures, it’s important to distinguish between non-resident US taxpayers and resident US taxpayers. “Non-resident US taxpayer” means a US citizen or green card holder who, for any of the most recent three years for which a US tax return was due, didn’t have a US abode and was physically outside the country for (this purpose) at least 330 days, or a non-US citizen or non-green card holder who doesn’t meet the substantial presence test for that same period. There is no penalty for non-residents. “Resident US taxpayer” means a US citizen, lawful permanent resident, and those meeting the substantial presence test.
Qualifying for the Procedures
To qualify for the Domestic Offshore Procedures, the taxpayer must meet the following requirements:
- Depending on filing status, one (single) or both (married) must fail to meet the non-residency requirement.
- Have previously filed (in a timely manner) a US return, if required, for each of the most recent three years for which the US tax return due date or extended due date has passed.
- Failed to report gross income from a foreign financial asset and pay tax as required by law. If the taxpayer reported gross income from the foreign asset and paid all taxes related to that asset, this requirement maybe satisfied if the taxpayer failed to file an FBAR and/or other international informational return, such as IRS forms , 3520, 3520-A, 5471, 5472, 8938, 926, and 8621.
- The failures enumerated in number three above must have resulted from non-willful conduct, which includes negligence, inadvertence, mistake, or conduct that is the result of a good faith misunderstanding of the requirements.
Some things to note:
- A miscellaneous 5% penalty on the highest FBAR (FinCen) balance for the past six years will be assessed in most cases, plus tax and interest due with the returns.
- Failure to file foreign informational forms leaves the statute of limitations open until the forms are filed.
- If a taxpayer is already working on an OVPD under an older program, he/she might qualify for the miscellaneous 5% treatment under the new program but would still have to file additional tax returns and FBARS.
- There may be other factors that preclude a resident US taxpayer from getting the favorable 5% penalty.
Changes to the Offshore Voluntary Disclosure Program (OVDP)
The objective of the new Offshore Voluntary Disclosure Program remains the same as the original program: to bring taxpayers who have used undisclosed foreign accounts and assets (including those held through undisclosed foreign entities) to avoid or evade tax into compliance with US tax and related laws. Some of the changes that have been made to the OVDP are significant. For example, under the 2012 OVDP, the noncompliance penalty was 27.5% of the highest balance of noncompliant foreign assets. Under the 2014 OVDP, the penalty could increase to 50%, depending on which banks held the taxpayer’s account.
So why should a taxpayer make the voluntary disclosure? Taxpayers holding undisclosed foreign accounts and assets, including those held through undisclosed foreign entities, should do it because it enables them to become compliant, avoid substantial civil penalties, and generally eliminate the risk of criminal prosecution for all issues relating to tax noncompliance and failing to file FBARs. In contrast, taxpayers simply filing amended returns or filing through the Streamlined Filing Compliance Procedures risk criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit voluntary disclosure risk detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties. They also face an increased risk of criminal prosecution. The IRS remains actively engaged in identifying those with undisclosed foreign financial accounts and assets. This information is increasingly available to the IRS under tax treaties, through submissions by whistleblowers, and from other sources, and it will become more available under the FATCA and Foreign Financial Asset Reporting (IRC § 6038D). For more information on International Tax issues, contact Dana Cade, Senior Manager, by email or by phone at 406.442.1040.