On Wednesday, the IRS announced significant changes to its offshore disclosure programs. The IRS claims the changes will ease burden on certain taxpayers who are seeking to come into compliance.
We’re talking about taxpayers who have failed to properly report to the U.S. government certain foreign financial accounts and pay U.S. tax on income associated with the noncompliance.
In general, if a U.S. taxpayer’s total maximum balances in foreign financial accounts exceed $10,000 at any point during a calendar year, she must file FinCEN Form 114 (“FBAR”), formerly known as TD F 90-22.1, with the U.S. Department of Treasury no later than June 30 of the following calendar year.
Penalties for failure to timely file the FBAR are significant. A non-willful penalty is $10,000 per account not reported per year. If the government establishes the taxpayer’s failure to file the FBAR was willful, the penalty is the 50 percent of the maximum account balance or $100,000, whichever is greater, per violation.
The FBAR penalties are separate from any penalties imposed on any additional tax due on income associated with the accounts.
As a result of Wednesday’s announcement, some taxpayers who are not in compliance with reporting their offshore accounts have more options than before to come forward to the IRS.
Streamlined Filing Compliance Procedures
The IRS has offered its streamlined filing compliance procedures since September 1, 2012. These procedures are designed to lessen the blow from noncompliance for taxpayers whose conduct was clearly not willful. As of Wednesday, the IRS expanded the groups of taxpayers who may be eligible for these procedures, and also relaxed the standards required to meet the procedure requirements.
The IRS defines non-willful as conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith understanding of the requirements of the law.
The IRS is now requiring taxpayers to certify that previous failures to comply were due to non-willful conduct.
One downside to the streamlined filing compliance procedures is that if the IRS determines that an applying taxpayer’s previous delinquencies were willful, then the taxpayer may be subject to, among other things, criminal liability. The IRS says taxpayers who are concerned their conduct was willful should consider participating in the Offshore Voluntary Disclosure Program, discussed below.
The streamlined filing compliance procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States. Previously, only taxpayers residing outside the U.S. were eligible. If the IRS has already initiated a civil examination of a taxpayer’s returns for any eligible year, however, then the taxpayer is not eligible.
A. Streamlined Foreign Offshore Procedures
For each of the three most recent years that the due date for filing a tax return has passed, taxpayers residing outside the United States must:
- File delinquent or amended tax returns for each of the last three years the U.S. tax return due date has passed;
- Pay the full amount of tax and interest due in connection with the tax return filings; and
- File any delinquent FBARs for each of the last six years the FBAR due date has passed.
Taxpayers who are eligible and comply with all instructions are not subject to the failure to file and failure to pay penalties, accuracy related penalties, information return penalties, or FBAR penalties. In other words, all penalties are waived!
Under the previous streamlined filing procedures, another eligibility requirement was that the taxpayer have $1,500 or less of unpaid tax per year. This requirement has been eliminated.
Go here for more details on the Streamlined Foreign Offshore Procedures.
This program is mostly “old” news for taxpayers outside the U.S. Are the requirements the same for taxpayers residing inside the United States?
B. Streamlined Domestic Offshore Procedures
The streamlined filing procedures for taxpayers residing in the U.S. are very similar to those for taxpayers outside the U.S., with one particularly notable difference: Taxpayers residing in the United States and seeking to enter the Streamlined Domestic Offshore Procedures must pay an offshore penalty equal to five percent of the highest aggregate balance of the taxpayer’s undisclosed foreign financial assets in the covered three year tax return period and the six year covered FBAR period.
The good news here is that taxpayers accepted into this program are paying at a much lower penalty rate than that from entering the Offshore Voluntary Disclosure Program, which is 27.5 percent. As noted above, however, the IRS is not guaranteeing taxpayers the protection from criminal liability.
Go here for more details on the Streamlined Domestic Offshore Procedures.
Offshore Voluntary Disclosure Program
The IRS Offshore Voluntary Disclosure Program is now tailored specifically for taxpayers who are concerned their failure to report foreign financial assets would be considered willful conduct by the IRS. The updated terms to the OVDP program apply to submissions made on or after July 1, 2014.
The general program requirements are that taxpayers seeking entry must file up to eight years of delinquent tax returns and FBARs, pay all tax, interest, and penalties associated with the previously unreported income on the disclosed foreign financial accounts, as well as a miscellaneous offshore penalty.
The general miscellaneous offshore penalty of 27.5 percent still applies, but now not across the board.
One significant change to this program is that the IRS will impose a 50 percent penalty “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.”
The updated FAQ for OVDP, here, is a good read for many more details.
Wednesday’s announcement should persuade more taxpayers not in compliance to come forward voluntarily through one of the programs. What remains to be seen, however, is how the IRS will generally review taxpayers’ applications for the new Streamlined Domestic Offshore Procedures.
How often will the IRS “flag” an application and require a more thorough review in order to determine whether the noncompliance was not willful? And how often will the IRS reject such applications?
Only time will tell.
Submitted by Brad Polizzano on Fri, 06/20/2014 – 11:17