By Dana Cade, Supervisor
Offshore Voluntary Disclosure Program
At the end of June, 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 bad news is the IRS has upped the ante on penalties for willful filers. 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(s). Fifty percent could still be a bargain, considering that recently the IRS assessed a 150% penalty on an undisclosed foreign account. Yes, the penalty was more than the total balance in the account.
The difficulty right now for practitioners is that the IRS hasn’t defined “willful.” New FAQs have been issued, but there are still more gray areas than black and white. We’re hopeful the IRS will clarify some issues in the coming weeks, but only time will tell.
Foreign Account Compliance Act
The IRS issued final Foreign Account Compliance Act (FATCA) regulations on January 17, 2013 that phase in the implementation of FATCA requirements over the period beginning January 1, 2014 and continuing through 2017. The Department of Treasury and the IRS subsequently provided revised timelines for implementing various requirements of FATCA.
The most recent phase of FATCA was rolled out in July 2014. FATCA requires foreign financial institutions to provide details of US citizens with accounts held internationally that have balances in excess of $50,000. Failure to provide the US Treasury Department and the IRS with this information creates serious complications for these financial institutions.
After foreign institutions identify US account holders, FATCA requires the institutions to impose a 30% tax on payments or transfers to any account holders who refuse to get into full US compliance. Foreign financial institutions (FFIs) must report account numbers, balances, names, addresses, and US taxpayer identification numbers. For US-owned foreign entities, they must report the name, address, and US taxpayer identification number of each substantial US owner.
To ease the burdens of FATCA implementation and compliance, two model intergovernmental agreements (Model 1 or Model 2 IGA) have been issued. These agreements are designed to increase reporting compliance by foreign financial institutions while addressing difficulties with implementation under the FATCA partner’s local law.
Here’s a link to a Treasury Department website that lists jurisdictions with signed agreements in place: . It’s expected that virtually all nations will eventually comply with FATCA requirements. Although there is opposition to these requirements, FATCA is almost surely here to stay.
Individual Tax Payer Identification Numbers
There has been a change in policy on Individual Taxpayer Identification Numbers (ITINs). Here are the old and new policies.
Old Policy: Under the old policy, ITINs issued after January 1, 2013 would have automatically expired after five years, even if used properly and regularly by taxpayers.
New Policy: Under the new policy, ITINs will be evaluated using a five-year look-back period. An ITIN not used on a federal income tax return for any year during a period of five consecutive years will be deactivated. In other words, the IRS will not deactivate an ITIN that has been used on at least one tax return in the past five years.
To provide all interested parties adequate time to adjust and to allow the IRS to reprogram its systems, the IRS will not begin deactivating ITINs until 2016.
For more information on these and other international tax planning issues, please contact our international tax professionals.