On June 18th, the IRS implemented new changes to the requirements for both the Offshore Voluntary Disclosure Program (OVDP) as well as the Streamlined Filing Compliance Procedures (SFCP). These process changes are relevant to taxpayers who participate in these programs with undisclosed foreign financial accounts and/or foreign assets. Under the 2012 OVDP, the IRS offered people with undisclosed income from their foreign assets to voluntarily join the program in order to become current with their tax returns while paying a one-time penalty of 27.5% (12.5% if maximum aggregate balance was less than $75,000). The Streamlined Filing Compliance Procedures were implemented in order to certify taxpayers’ failure to report their foreign financial accounts and to pay all taxes due. These procedures allow taxpayers the ability to file amended/delinquent returns while providing terms to rectify their tax and penalty obligations. The following changes occurred to OVDP and SFCP, effective as of July 1st.
NOTE: The 2014 OVDP is a continuation of the 2012 OVDP, not a new program
The penalty is still 27.5% in most cases; however, it is raised to 50% (beginning August 4th) if the taxpayer has an account with a foreign bank or facilitator that is under public investigation. Additionally, there are no longer any reduced penalties of 12.5% or 5%. Taxpayers are now required to pay offshore penalties up front and are able to opt out of penalties if they are disproportionate to the taxpayer’s situation.
Another change to OVDP is the removal of frequently asked questions (FAQ’s) 17 and 18. Under the 2012 OVDP, FAQ’s 17 and 18 related to taxpayers who failed to file some FBARs and/or information reports, but did report all of their worldwide taxable income on their annual US income tax returns. Since the purpose of the voluntary disclosure program is to provide taxpayers a way to come forward regarding unreported taxable income from the past, the program does not apply to these two questions. Thus, they were removed from the FAQ’s.
A final change to the OVDP is the expansion of preclearance. A request now has to include the identities of all foreign financial institutions where the taxpayers’ accounts were or where their assets were being held. This information is needed in addition to account statements and taxpayers’ identifying information.
With the SFCP changes, there are several general requirements that apply to both Foreign and Domestic taxpayers. All taxpayers must certify that prior US tax and reporting noncompliance was non-willful. Non-willful conduct is conduct that is due to negligence or conduct that is the result of a good faith misunderstanding of the requirements of the law. Additional SFCP requirements include that the procedures are only available for individual taxpayers and their estates, and they are not available if the IRS has started a civil or criminal investigation in regards to the taxpayer. A taxpayer must also choose either OVDP or SFCP; they cannot switch between the two programs (unless they entered OVDP before 7/1/14 and request a transition to SFCP).
Foreign requirements include all of the listed general requirements in addition to a non-residency requirement. US citizens and green-card holders meet this requirement if for any one of the last three years for which the US tax return due date has passed, they did not have a US abode and were physically outside the US for more than 330 days. Individuals who are not citizens or green-card holders meet the requirement if in any one of the last three years they did not meet the substantial presence test. Finally, taxpayers must have failed to report income from a foreign financial asset, and this noncompliance must be due to non-willful conduct.
Domestic requirements include all of the listed general requirements as well as failing to meet any of the non-residency requirements. Taxpayers must have previously filed a US tax return (if required) for the last three years in addition to having failed to report gross income from any foreign account. Finally, noncompliance must again be non-willful.
The Wolf Group has assisted several hundred clients with coming into U.S. tax compliance and avoiding the draconian penalties that the IRS may impose on U.S. persons with undisclosed accounts. Please contact us at (703) 502-9500 with any questions or to set up a consultation.