Taxpayers with undisclosed offshore financial assets or income may be interested to learn of changes to the IRS's Offshore Voluntary Disclosure Program ("OVDP") - an initiative designed to encourage people to bring offshore assets into the U.S. tax system. Since its inception in 2009, more than 45,000 OVDP participants have paid about $6.5 billion in taxes, interest and penalties. The recent changes in the OVDP expand eligibility for the streamlined filing compliance procedures instituted in 2012 for certain U.S. taxpayers whose failure to disclose their offshore assets was non-willful - and also make other important modifications.
What has changed?
The original streamlined compliance procedures announced in 2012 were available only to non-filers who were non-residents of the U.S. Submissions by these taxpayers were subject to different degrees of review based on the amounts of tax due and the taxpayers' responses to a "risk" questionnaire. Eligibility for the streamlined procedures now has been expanded to include individual U.S. taxpayers (including estates of individual taxpayers) who (1) do not meet the specified criteria for being deemed non-resident; (2) have previously filed a U.S. tax return (if required) for each of the most recent three years for which the due date (including extensions) has passed; and (3) have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file a Foreign Bank Account Report (FBAR) on FinCEN Form 114 (previously Form TD F 90-22.1) and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926 and 8621) regarding the foreign financial asset - and such failures resulted from "non-willful" conduct (negligence, inadvertence or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law).
For both U.S. residents and taxpayers residing abroad, the recent changes (1) eliminate the requirement that eligible taxpayers have $1,500 or less of unpaid tax per year; and (2) eliminate the requirement to complete and submit the "risk" questionnaire. As was the case for taxpayers using the original streamlined compliance procedures, taxpayers using the new streamlined compliance procedures are required to certify that their prior failures to comply were due to non-willful conduct. For eligible U.S. taxpayers residing outside the U.S., all penalties will be waived, and for eligible U.S. taxpayers residing in the U.S., the only penalty will be a miscellaneous offshore penalty equal to 5% of the amount of the previously undisclosed foreign financial assets, which is a substantially lower penalty than the penalty generally applicable under the OVDP.
The other modifications of the OVDP include:
- requiring additional information from taxpayers seeking to participate in the OVDP (For example, OVDP submissions now will require more extensive information regarding the foreign financial institutions at which undisclosed assets were held and the establishment, maintenance and use of undisclosed accounts.);
- 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 offshore account statements and pay the offshore penalty at the time of their OVDP application;
- allowing taxpayers to submit voluminous records electronically rather than on paper;
- increasing a taxpayer's offshore penalty from 27.5% to 50% if, before the taxpayer submits his OVDP pre-clearance request, either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation.
In light of these changes, the U.S. Government's ongoing successful efforts to obtain U.S. account holder information from foreign financial institutions, and the benefits of the new streamlined compliance procedures, individual U.S. taxpayers who have failed to disclose their foreign financial assets or income may wish to consult their accountant or lawyer about participating in the new OVDP.
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