Hold on to your seats! The IRS just recently announced changes to its offshore voluntary compliance programs and it more than likely will affect you! The changes that were announced on June 18, 2014 are expected to help both taxpayers living abroad and those living within the United States come into compliance with their U.S. tax obligations.
The changes are two-fold and affect two classifications of taxpayers: those that have willfully failed to disclose foreign accounts and those who have done so innocently or without their conduct rising to the “willful” level. Specifically, the changes include an expansion of the streamlined filing compliance procedures announced in 2012. And second, they include important modifications to the 2012 Offshore Voluntary Disclosure Program (OVDP). The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclosure their offshore accounts was non-willful.
In a news release, IRS Commissioner John Koskinen stated,
“The new versions of our offshore programs reflect a carefully balanced approach to ensure everyone pays their fair share of taxes owed. Through the changes we are announcing today, we provide additional flexibility in key respects while maintaining the central components of our voluntary programs.”
Willful Non-Compliance
Those who thought that the government was going to go easy on taxpayers whose failure to report foreign accounts was deemed willful got a wake up call. Under the new terms of the OVDP, taxpayers who are “willfully” non-compliant face a 50% offshore penalty – up from 27.5% — if it becomes public that their foreign financial institution is under investigation by the IRS or Department of Justice before they have submitted a request for pre-clearance. This is nearly double the previous “one-size-fits-all” penalty of 27.5%.
Non-Willful Taxpayers
In the weeks leading up to this announcement, the IRS and Commissioner Koskinen hinted that the terms of the OVDP would be tweaked in an attempt to bring more taxpayers with undisclosed foreign accounts into the tent, specifically those who fell out of compliance with their reporting requirements through no fault of their own (i.e., by mistake).
Taxpayers whose failure to disclose does not rise to the level of willfulness can breathe a sigh of relief. The offshore penalty under OVDP has been reduced to only 5% of the balance of the foreign account(s) at issue. This is a substantial decrease from the terms of the 2012 OVDP program that required taxpayers to pay a 27.5% penalty of the highest aggregate balance of the foreign account(s) during the disclosure period.
And there is even better news for eligible U.S. taxpayers living abroad: all penalties will be waived. Additional changes to the streamlined procedures include the following:
- Eliminating a cap on the amount of tax owed – i.e., that the taxpayer have $ 1,500 or less of unpaid tax per year. That was a huge obstacle that for years had prevented many taxpayers from participating.
- Eliminating the required risk questionnaire that needed to be completed prior to acceptance into the program.
- There is a new requirement: Taxpayers must now certify that previous failures to comply were due to non-willful conduct.
Extolling the benefits of these changes, Commissioner Koskinen said that they will “help focus this program on people seeking certainty and relief from criminal prosecution.” In exchange for such certainty, taxpayers must provide much more information up-front than was previously required. For example, all account statements must be submitted at the time of application. And before saying to yourself, “No problem. Piece of cake,” you might want to sit down before hearing the rest. This is perhaps the most onerous modification to the OVDP, at least as it applies to the non-willful taxpayer. In what is sure to make many taxpayers cringe, taxpayers must write a check to Uncle Sam for the offshore penalty on the same day that the OVDP application is submitted.
If there is any consolation to this demand for information up-front, it’s that the IRS now allows taxpayers to submit records electronically rather than on paper.
What is the takeaway? The IRS has made the OVDP more accessible to taxpayers who want to participate. However, their message for those who are still sitting on the fence is stronger than it has ever been: “We want everyone to know that we are continuing our efforts to track down people still out there who are hiding assets overseas. More information on these accounts is coming in every day,” explained Commissioner Koskinen.
Each day, foreign banks are signing on to the international FATCA agreement. In doing so, they have agreed to turn over lists of American account holders to the IRS beginning on July 1, 2014. If you have an overseas account that hasn’t been reported to the IRS, what are you waiting for?
Each day that you procrastinate, you are getting closer and closer to a crisis situation – that time when it is too late to opt-in to the program. So let this news inspire you to take action. Start by contacting an attorney who specializes in OVDP to walk you through the steps of the OVDP, answer your questions, and provide you with sound and practical advice. You’ll be happy that you did.
2 Responses
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