Expanded streamlined procedures are now available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the U.S. The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was non-willful.
The changes to the Streamlined Procedure include:
- Eliminating a requirement that the taxpayer 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.
For eligible U.S. taxpayers residing outside the U.S., all penalties will be waived. For eligible U.S. taxpayers residing in the U.S., the only penalty will be a miscellaneous offshore penalty equal to 5% of the foreign financial assets that gave rise to the tax compliance issue.
2012 OVDP modified. The changes to the 2012 OVDP include:
- Requiring additional information from taxpayers applying to the program;
- Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
- •Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
- •Enabling taxpayers to submit voluminous records electronically rather than on paper; and
- Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request (essentially, a way to determine a taxpayer’s eligibility for OVDP before actually making a voluntary disclosure) is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by IRS or Department of Justice. The IRS recently clarified and modified this 50% penalty definition threshold and said it will apply if either a foreign financial institution (“FFI”) 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. In addition, the application of the increased penalty is expanded in situations beginning August 4, 2014. After August 4, 2014, the increased penalty will apply if, at the time that a pre-clearance letter is submitted, an event has already occurred that constitutes a public disclosure that the FFI where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement:
- is or has been under investigation by, or is cooperating with, IRS or the Department of Justice (DOJ) in connection with accounts that are beneficially owned by a U.S. person; or,
- has been identified in a court-approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts at the FFI or have accounts established or maintained by the facilitator.
This initiative can still be modified or terminated at the discretion of the IRS. Therefore, the time frame for determining whether to participate and arranging for the appropriate filing and payments is relatively short. Hence, prompt action is required if you intend to participate in the initiative.
The IRS is encouraging taxpayers who have already filed amended returns reporting income from OVDP assets without actually making voluntary disclosures, i.e. a quite disclosure, to participate in the OVDP by submitting an application with copies of the previously filed returns and all other required information. The IRS emphasizes that quiet disclosures provide no protection from criminal prosecution and may lead to civil examination and the imposition of all applicable penalties. Potential civil penalties for a non-discloser include, but are not limited to (many of which can run from $10,000 to $100,000) for failing to file a host of forms, including:
- Multiple FBAR civil penalties (previously discussed);
- Fraud penalties under Code Sec. 6651(f) or Code Sec. 6663;
- A penalty for failing to file a tax return under Code Sec. 6651(a)(1);
- A penalty for failing to pay the amount of tax shown on the return under Code Sec. 6651(a)(2);
- An accuracy-related penalty under Code Sec. 6662;
- Possible criminal charges related to tax matters including, but not limited to:
- Tax evasion under Code Sec. 7201;
- Filing a false return under Code Sec. 7206(1);
- Failure to file an income tax return under Code Sec. 7203;
- Willfully failing to file an FBAR;
- Willfully filing a false FBAR (31 USC 5322);
- Conspiracy to defraud the government with respect to claims (18 USC 286); and ,
- Conspiracy to commit offense or to defraud the U.S. (18 USC 371)
It is also important to note that Taxpayers accepted into the Streamlined Procedure or OVDP must also agree to surrender certain defenses in order to participate in the initiative. The surrender of these defenses could result in a significant reduction in the above monetary penalties. Accordingly, the decision regarding whether to participate in either the Streamlined Procedure or OVDP ultimately turns on a participant’s facts and circumstances as well as the participant’s risk tolerance with the IRS. Other procedures may be available to reduce criminal exposure yet retain any defenses you may be entitled to; however, such procedures do not provide the same level of certainty that can be obtained from participating in the initiative. Ultimately disclosure to the IRS involves a number of strategic decisions that can have broad implications. Disclosure should not be undertaken without qualified professional assistance.
Lastly, Form 8938, Statement of Specified Foreign Financial Assets, (“Form 8938”) is a newer reporting form. Form 8938 will be used to report certain foreign financial assets as required as part of the Hiring Incentives to Restore Employment Act (“HIRE Act”), which was signed into law on March 18, 2010 by President Obama. Form 8938 is effective for 2011 and subsequent tax years. The form will typically be attached to your annual federal income tax return if you have a filing requirement. Please keep in mind the Form 8938 a is separate and distinct reporting form from the Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, commonly referred to as FBAR. Individuals may be required to file both reports, depending on their specific facts for each particular year. If you have any concerns or issues as your tax returns become due, please do not hesitate to contact our office for more information.