IRS Makes Significant Changes to the Offshore Voluntary Disclosure Program and Streamlined Voluntary Disclosure Program
By: Michael J. Tedesco
On June 18, 2014, the Internal Revenue Service (“IRS”) announced significant changes to the offshore voluntary disclosure programs. As part of the announcement, the IRS has expanded the 2012 Streamlined voluntary disclosure program to allow U.S. residents to participate in a version of that program. Additionally, the IRS has made several changes to the 2012 Offshore Voluntary Disclosure Program (“OVDP”).
The 2012 Streamlined voluntary disclosure procedures were originally announced in June 2012 and only applied to non-resident U.S. taxpayers who had not resided in the U.S. or filed a tax return with the U.S. since 2009. The 2012 Streamlined program also included a risk assessment. In order to make the risk assessment, the IRS set a $1,500 threshold for tax owed in any year and required the taxpayer to submit a questionnaire through the program. Under the prior Streamlined program, if the IRS perceived the submission as being “high risk” (as elevated by the amount of tax due in any year or factors in the questionnaire), the IRS reserved the right to apply penalties.
In addition to the expansion of the Streamlined procedures to U.S. residents, the IRS amended other significant provisions of the Streamlined procedures. The IRS has eliminated the previous risk assessment aspect of the program. Thus, both the $1,500 threshold for the tax owed in any year and the risk questionnaire will no longer be considered under the Streamlined procedures. This change applies to submissions for both U.S. resident participants and non-resident participants. However, the IRS does reserve the right to audit the FBARs and tax returns under their normal audit selection procedures. The IRS has also relaxed the provisions used to determine whether an individual qualifies for the non-resident form of the Streamlined procedures and added a certification that the failure to report was not willful.
In addition to the changes noted above, the IRS has announced special rules for U.S. residents seeking to disclose under the Streamlined procedures. While the Streamlined disclosure process for non-residents offers no penalty, the version for U.S. residents has a 5% penalty associated with the aggregate foreign asset values. Individuals disclosing under the domestic (i.e. U.S. resident) version of the Streamlined procedures will be required to sign a more detailed certification than those disclosing under the non-resident procedures.
The IRS also announced major changes for the OVDP through the new Frequently Asked Questions and Answers effective July 1, 2014. Under the OVDP, the penalty will be increased from 27.5 % to 50% for individuals requesting pre-clearance after their financial institution has been publicly disclosed as a target of an investigation or as cooperating with the U.S. government. Once the 50% penalty has been triggered, it would apply to all foreign financial assets to which a penalty applies under the OVDP, not just those held at the publicly identified institution.
The requirements for IRS Criminal Investigation pre-clearance have also been enhanced. Pre-clearance will now require personal identifying information, information regarding all institutions in which foreign financial assets are held and information regarding any entity which the taxpayer has used to hold undisclosed foreign financial assets. As the Streamlined procedures now have provisions for U.S. residents, the reduced penalty structure under the OVDP has been eliminated. Further, the miscellaneous penalty (27.5% or 50%) must now be paid at the time of submission.
It is important to note that the changes to the voluntary disclosure programs coincide with the beginning of the enhanced information reporting regime implemented under the Foreign Account Tax Compliance Act (“FATCA”). As the information reporting under FATCA begins and grows, the opportunity for individuals to make voluntary disclosures will be greatly limited.
Taxpayers wishing to participate in these initiatives should contact a tax professional immediately in order to determine whether disclosure is necessary, ensure that they meet the voluntary disclosure deadlines, and to protect the taxpayer’s rights. Andreozzi Bluestein LLP can provide legal counsel regarding these foreign account reporting obligations and the voluntary disclosure initiatives.
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