The IRS recently overhauled its offshore voluntary disclosure program, making changes to the 2012 Offshore Voluntary Disclosure Program (OVDP) and expanding the 2012 Streamlined Filing Compliance Procedures. This blog focuses on the changes made to the streamlined filing compliance procedures and some of the factors that should be considered when evaluating your options.

Now more than ever, the new streamlined filing compliance procedures make it easier for U.S. taxpayers with undisclosed offshore accounts to come into compliance with their U.S. tax obligations. Taxpayers may now qualify under one of the following streamlined programs:

1. U.S. citizens or permanent residents who reside in the U.S. (5 percent penalty)

The Streamlined Domestic Offshore Procedures are designed for U.S. citizens or permanent residents who live in the United States. Eligible taxpayers who comply with all of the instructions qualify for a 5 percent miscellaneous offshore penalty. In addition, all other penalties, from failure to file and failure to pay to accuracy-related penalties and information return penalties are deemed waived.

With such favorable terms, you are more than likely on the edge of your seat eagerly waiting to see if you meet the requirements. So let’s get right to it. The two primary requirements for eligibility are the following: (1) the taxpayer must have filed U.S. tax returns for the last three tax years and (2) the failure to report foreign financial assets and pay any tax due related to those assets must not have been the result of willful conduct.

Taxpayers must complete and submit the “non-willful” certification statement available at http://www.irs.gov/pub/irs-utl/CertUSResidents.pdf. 

Nothing short of zealous advocacy is required to affirmatively and persuasively demonstrate legal grounds for non-willfulness. Taxpayers should not make elaborate statements in their certification. Instead, you should be succinct and get right to the point. Indeed, the more detail that you provide, the easier it is for the IRS to follow the trail, or perhaps the all-too-familiar scent of what it has more experience and training to detect than a narcotics-sniffing dog — the badges of fraud. For more information, see IRS IRM 4.26.16.4.5.

Assuming you satisfy the threshold requirements, you need only file the most recent three years of tax returns (e.g., 2011, 2012 and 2013) and six years of delinquent FBARs (e.g., 2008-2013).

2. U.S. citizens or permanent residents who reside outside the U.S. ($ 0 penalty)

The Streamlined Foreign Offshore Procedures (SFOP) are designed for U.S. citizens or permanent residents who reside outside the United States. Eligible taxpayers qualify for a $ 0 offshore penalty. Sound too good to be true? Like everything with the IRS, you probably think that there is a catch. Guess what? You’re wrong. And this might be the first time in your life that being wrong never felt so good.

Notwithstanding all this, you may still be skeptical, wondering what other penalties lie in wait for you after being lured, in a devious and conniving way, into a program that guarantees a $ 0 offshore penalty. This conjures up images of a twelve-foot long python waiting to squeeze the life out of a poor, helpless rodent who is oblivious to what awaits him behind a thick bush. How about the failure to file penalty? Or the failure to pay penalty? Or the accuracy-related penalty? Or the information return penalty? All are deemed waived.

However, there is a caveat. Immunity from penalties comes with a few exceptions. If you were beginning to doze off, now is a good time to pay special attention because in the right circumstances, these exceptions could swallow up the rule.

As a preliminary matter, returns filed under these procedures could be selected for audit under existing audit selection processes. And if they are, taxpayers could be subject to any one (or more) of the following scenarios:

First, any previously assessed penalties relating to the years that are selected for audit will not be abated. Second, to the extent that the IRS determines an additional tax deficiency for a return submitted under these procedures, it can assert additional tax and penalties relating to that additional deficiency. Finally, the IRS will unleash the full arsenal of penalties if the examination results in a determination that the original tax noncompliance was due to fraud and/or that the FBAR violation was willful.

What requirements must be satisfied in order to qualify for the SFOP? There are two. The first is what the IRS refers to as the non-residency requirement. The non-residency requirement is satisfied if the taxpayer, in at least one of the most recent three years for which a U.S. tax return due date (or extended due date) has passed: (1) did not have a U.S. abode and (2) was physically outside the United States for at least 330 full days.

Second, the failure to report foreign financial assets and pay any tax due related to those assets must not have been the result of willful conduct. Taxpayers must complete and submit the “non-willful” certification statement available at http://www.irs.gov/pub/irs-utl/CertNonResidents.pdf. Just as in the case of the non-willful certification statement for the Streamlined Domestic Offshore Procedures (SDOP), advocacy is required to affirmatively and persuasively demonstrate legal grounds for non-willfulness.

Taxpayers in the Streamlined Foreign Offshore Program need only file the most recent three years of tax returns (e.g., 2011, 2012 and 2013) and six years of delinquent FBARs (e.g., 2008-2013).

Taxpayers Now Have Two Choices

Taxpayers who have undisclosed offshore accounts now have two choices: either enter the 2014 OVDP or enter the 2014 Streamlined Programs. One question that comes up with great frequency is whether a taxpayer may still apply to the OVDP program if he or she has been rejected from one of the 2014 streamlined programs. In other words, is it too late? The answer is “yes,” it’s too late. Taxpayers may not later apply to the OVDP program if they have been rejected from one of the 2014 streamlined programs.

Taxpayers who are deciding which program to enter should also be aware that neither streamlined program immunizes them from (1) a referral to CI for investigation or (2) a recommendation being made for criminal prosecution. In other words, to the extent that the IRS detects badges of fraud when reviewing the taxpayer’s submission, it reserves the right to make a referral to CI for investigation. And that investigation could result in a recommendation being made to the Department of Justice for criminal prosecution.

What Should Be Your Next Step?

Anyone affected by the Streamlined Filing Compliance Procedures and the Offshore Voluntary Disclosure Program should seek professional assistance from a tax attorney to determine the best option. Indeed, with such high stakes and so much riding on the accuracy of a submission, the margin of error is simply too slim to attempt to do this on your own.

As FATCA continues to go fully online, the cost and risk of doing nothing seems to have gone up dramatically. Very simply, taxpayers with undisclosed offshore accounts should fully explore some form of voluntary disclosure before it is too late.