The Internal Revenue Service (IRS) has announced a number of changes that it is making to its offshore account compliance program, including an expansion of the streamlined filing procedures first introduced in 2012 and modifications to its Offshore Voluntary Disclosure Program (OVDP). The revisions are intended to allow more taxpayers to participate and to better account for taxpayers who have failed to disclose foreign accounts but did not willfully evade their tax obligations.
U.S. citizens, resident aliens and certain nonresident aliens are required to report worldwide income from all sources, including foreign accounts, and pay taxes on income from those accounts at their individual rates. In Fact Sheet 2014-7, the IRS emphasized that, while there are many legitimate reasons for holding offshore accounts, taxpayers are not permitted to use them to avoid paying tax. In most cases, taxpayers with offshore accounts need to fill out and attach Schedule B to their tax returns. Part III of Schedule B asks about the existence of foreign accounts and usually requires U.S. citizens to report the country in which each account is located. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets, if the aggregate value of those assets exceeds certain thresholds that vary depending on filing status and whether the taxpayer lives abroad. Additional filing requirements apply to those with foreign trusts. Certain taxpayers with foreign accounts whose aggregate value exceeds $10,000 at any time during the year must also file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR), with the Treasury Department. Failure to report the existence of offshore accounts or pay taxes on these accounts can lead to civil and criminal penalties.
The new changes are set out in Internal Revenue Code Section 2014-73. They make key expansions in the streamlined procedures to accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts. The original streamlined procedures announced in 2012 were available only to non-resident non-filers, and taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a “risk” questionnaire. The 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 changes 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.
The changes to the 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 also provided newly revised frequently asked questions (FAQs) on the OVDP, effective for submissions made on or after July 1, 2014. In addition, the IRS provided FAQs on transition rules that will apply for taxpayers who are currently participating in OVDP who meet the eligibility requirements for the newly expanded streamlined filing compliance procedures.
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