The IRS recently made changes to the 2012 Offshore Voluntary Disclosure Program (OVDP) and expanded the 2012 Streamlined Filing Compliance Procedures. The changes are as follows:

(1) OVDP

• Taxpayers must submit all account statements and pay the offshore penalty at the time application to OVDP is made.

• The offshore penalty will increase from 27.5% to 50% if, prior to the time the taxpayer submits a request for pre-clearance to OVDP, it becomes public that the financial institution where the financial account is maintained is being investigated by the IRS or the Department of Justice.

• Beginning on August 4, 2014, any taxpayer who has an undisclosed offshore account with a financial institution that is listed at irs.gov and who submits a request for pre-clearance to CI will be subject to a 50% miscellaneous offshore penalty.

(2) Streamlined Filing Compliance Procedures

Under the revised Streamlined Filing Compliance Procedures, eligible taxpayers residing outside the U.S. do not pay any penalties. Eligible taxpayers residing in the U.S. need only pay a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the compliance issue.

An extensive amount of information has been published on the IRS website to assist taxpayers in navigating these new programs. A special shout out needs to go out to Charles Rettig, Esq. for doing all of the grunt work associated with locating the relevant documents and forms on the IRS website and providing links back to their respective pages. Mr. Rettig’s article, entitled “Important Links To Latest IRS OVDP Procedures,” was featured in Forbes back on June 23, 2014. Below is a summary:

IRS Offshore Voluntary Disclosure Efforts Produce $6.5 Billion; 45,000 Taxpayers Participate (FS-2014-6, June 2014). The purpose of the IRS offshore voluntary disclosure programs is to enable taxpayers with undisclosed offshore assets to become fully compliant with their tax liabilities. The first OVDP program was launched in 2009. These programs have resulted in more than 45,000 voluntary disclosures from individuals who have paid close to $6.5 billion in back taxes, interest, and penalties. With results this impressive, OVDP isn’t going anywhere for a long time. Highlights of the different variations of the program are discussed at http://www.irs.gov/uac/Newsroom/IRS-Offshore-Voluntary-Disclosure-Efforts-Produce-$6.5-Billion;-45,000-Taxpayers-Participate

IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance (IR-2014-73, June 18, 2014). On June 18, 2014, the IRS overhauled OVDP, providing new options for taxpayers who live overseas and for taxpayers living in the United States. The cornerstone of these changes was the expansion of the streamlined filing compliance procedures and important changes to the 2012 OVDP. The expanded streamlined procedures are intended for U.S. taxpayers who can legitimately certify that their failure to disclosure their offshore account was the result of “non-willful” conduct. http://www.irs.gov/uac/Newsroom/IRS-Makes-Changes-to-Offshore-Programs;-Revisions-Ease-Burden-and-Help-More-Taxpayers-Come-into-Compliance

Offshore Income and Filing Information for Taxpayers with Offshore Accounts (FS-2014-7, June 2014). The U.S. government taxes all of its citizens, resident aliens, and certain nonresident aliens on their worldwide income from all sources, including the interest generated by the assets in their foreign accounts. Taxpayers with undisclosed offshore accounts have three options to come into compliance with their tax obligations: (1) File amended and/or delinquent returns and FBARs (i.e., make a “quiet disclosure”); (2) Apply to one of the streamlined programs; or (3) apply to the Offshore Voluntary Disclosure program. Filing and reporting requirements are discussed at http://www.irs.gov/uac/Newsroom/Offshore-Income-and-Filing-Information-for-Taxpayers-with-Offshore-Accounts

Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets. This link provides options for U.S. taxpayers with non-U.S. investments. http://www.irs.gov/Individuals/International-Taxpayers/Options-Available-For-U-S–Taxpayers-with-Undisclosed-Foreign-Financial-Assets

1. STREAMLINED FILING COMPLIANCE PROCEDURES

Streamlined Filing Compliance Procedures. These procedures are available to U.S. taxpayers whose failure to report their foreign financial assets and to pay all taxes due on those assets was non-willful. They are designed to provide taxpayers with (1) an efficient procedure for filing amended or delinquent returns and (2) special terms for resolving their tax and penalties. They will remain available until otherwise announced. http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures

U.S. Taxpayers Residing Outside the United States. Streamlined procedures for U.S. taxpayers who reside outside of the U.S. are referred to as the Streamlined Foreign Offshore Procedures. Eligibility and submission instructions can be found at the following link: http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States

Certification by U.S. Person Residing Outside of the U.S. Such persons must complete and submit a “non-willful” certification statement available at http://www.irs.gov/pub/irs-utl/CertNonResidents.pdf

U.S. Taxpayers Residing in the United States. Streamlined procedures for U.S. taxpayers who reside in the U.S. are referred to as the Streamlined Domestic Offshore Procedures. Eligibility and submission instructions can be found at the following link: http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States

Certification by U.S. Person Residing in the U.S. Such persons must complete and submit a “non-willful” certification statement available at http://www.irs.gov/pub/irs-utl/CertUSResidents.pdf

2. STREAMLINED FILING COMPLIANCE SUBMISSION PROCEDURES

Delinquent FBAR Submission Procedures. Certain taxpayers may elect not to use either the OVDP or the Streamlined Filing Compliance Procedures, instead preferring to make a “quiet disclosure.” This necessarily consists of filing delinquent or amended tax returns to report and pay additional tax. Such taxpayers should think long and hard before adopting this strategy due to the risks inherent in making a quiet disclosure. At the very least, taxpayers considering a quiet disclosure should satisfy the following conditions: (1) are not under a civil examination or a criminal investigation by the IRS; (2) have not previously been contacted by the IRS about their failure to submit FBARs; and (3) have reasonable cause for not timely filing their FBARs. The procedures described here should be followed: http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-FBAR-Submission-Procedures

Delinquent International (entity) Information Return Submission Procedures. Taxpayers who elect to make a quiet disclosure should submit their delinquent or amended returns with a reasonable cause statement, explaining why they didn’t file when they were supposed to. To the extent that the undisclosed foreign account is owned by an entity, such as a controlled foreign corporation or a partnership, the reasonable cause statement must be accompanied by a certification that the entity was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent return, penalties may be assessed. Further information can be found at http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-International-Information-Return-Submission-Procedures

3. FREQUENTLY ASKED QUESTIONS – OVDP and Transition Guidance for Eligible Taxpayers Wishing to “Jump Ship” for the Streamlined Procedures

Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers. FAQs pertaining to post-July 1, 2014 OVDP submission can be found at http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised

Transition Rules Frequently Asked Questions. Taxpayers who were considered participants of OVDP prior to July 1, 2014 and who wish to apply for the new streamlined procedures can learn how to transition to the streamlined program at http://irs.gov/Individuals/International-Taxpayers/Transition-Rules-Frequently-Asked-Questions-FAQs

4. REVISED OVDP VOLUNTARY DISCLOSURE LETTER

Offshore Voluntary Disclosure Letter. Taxpayers participating in the OVDP must submit an Offshore Voluntary Disclosure letter. It can be found at http://www.irs.gov/pub/irs-utl/OVDIntakeLtr.pdf

Offshore Voluntary Disclosure Letter Attachment. Taxpayers participating in the OVDP must also submit an attachment to the Offshore Voluntary Disclosure letter. It can be found at http://www.irs.gov/pub/irs-utl/OVDIntakeLtrAttach.pdf

5. UPDATED INFORMATION REGARDING ONGOING GOVERNMENT INVESTIGATIONS OF FOREIGN FINANCIAL INSTITUTIONS

List of Foreign Financial Institutions or Facilitators. Beginning on August 4, 2014, the onerous 50% offshore penalty kicks in. Any taxpayer who has an undisclosed offshore financial account will be subject to a 50-percent offshore penalty if, at the time the pre-clearance letter is submitted, any one of the following events has occurred that constitutes a public disclosure:

1. Your foreign financial institution has become a target of investigation by the IRS or the Department of Justice; or

2. Your foreign financial institution is cooperating with the IRS or the Department of Justice to help them locate tax evaders; or

3. Your foreign financial institution has been identified in a court-approved summons seeking information about U.S. taxpayers who may hold financial accounts at that institution.

Of course, if any of the events listed above occurred but were not disclosed to the public, then it would be impossible for the public to know about it. Or would it? It’s kind of like the philosophical question regarding observation and knowledge of reality that has stifled even the greatest philosophers: “If a tree falls in a forest and no one is around to hear it, does it make a sound?”

In addition to the mighty philosophers who have toiled endlessly to find meaning to this profound question, we now have the privilege of hearing the IRS’s. For those who were anticipating a radical interpretation, you may be surprised to hear that the IRS takes a “middle of the road view,” acknowledging the obvious – i.e., that it’s impossible for the public to know about an event that has not been publicized.

At the same time, the IRS does not interpret public disclosure so broadly as to mean that every U.S. citizen must receive a postcard sealed with a kiss from the IRS and publicizing one or more of these events. In other words, the IRS does not subscribe to the idea that it has to mail out the equivalent of a weekly circular to every man, woman, and child like it was PathMark promoting a “can-can” sale. Nor must this information be plastered on billboards of the most heavily traveled freeways in the United States.

Instead, the IRS seems to interpret “public disclosure” in much the same way as a law school property professor describes “inquiry notice” during a lecture on recording deeds. According to the IRS, examples of a public disclosure include the following: (1) a public filing in a judicial proceeding by any party or judicial officer or (2) public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.

A list of foreign financial institutions or facilitators satisfying this criteria is available at http://www.irs.gov/Businesses/International-Businesses/Foreign-Financial-Institutions-or-Facilitators

6. REVISED FREQUENTLY ASKED QUESTIONS REGARDING THE MODIFIED OVDP

The Disclosure Period. For calendar year taxpayers, the voluntary disclosure period is the most recent eight tax years for which the due date has already passed. It is commonly referred to as the disclosure period. However, that period does not include current years for which there has not yet been non-compliance. The years involved in an OVDP disclosure are identified in FAQ # 9 and can be found at http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers

Requesting Pre-Clearance into the OVDP. As a preliminary matter, pre-clearance must be requested before making an offshore voluntary disclosure. Pre-clearance may be requested as follows: First, taxpayers or their representatives send a fax to the IRS – Criminal Investigation Lead Development Center (LDC) with the following information: (a) identifying information (i.e., name, date of birth, social security number, and address) and (b) an executed power of attorney (if represented). Criminal Investigation then notifies taxpayers or their representatives via fax whether or not they have been cleared to make an offshore voluntary disclosure.

Taxpayers who have been cleared must follow the steps outlined in FAQ 24 within 45 days from receipt of the faxed notification. Note that pre-clearance does not automatically means that the taxpayer has been accepted into the OVDP. Taxpayers must truthfully, timely, and completely comply with all of the requirements. Additional information can be found at FAQ #23 http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers

FBAR Form to use for the OVDP. Taxpayers must now file FBARs electronically. Taxpayers should use the most current version of Form TD F 90-22.1, for filing delinquent FBARs to report foreign accounts maintained in prior years. The most current version is the one that was revised in January 2012. Taxpayers may rely on FBAR guidance that was applicable for the calendar year that is being reported in determining their FBAR reporting obligations. For additional information, refer to FAQ # 44 http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers

Special Requirements for the OVDP Power of Attorney. In addition to being authorized to represent the taxpayer for tax years within the voluntary disclosure period, the power of attorney must specifically authorize the tax practitioner to provide representation for income tax, civil penalties, and FBARs. A sample can be found at http://www.irs.gov/pub/irs-utl/f2848-ovdp.pdf