A Guide to the IRS's New Streamlined Offshore Compliance Procedures
- Steven L. Walker PLC
- Aug 13, 2014
- 2 min read
On June 18, the IRS announced major changes to its offshore voluntary compliance programs, providing new options to help taxpayers residing both overseas and in the United States. The changes are intended to give thousands of people a new avenue to comply with their U.S. tax obligations (IR-2014-73). Modifications were made in response to public comments that the existing program lacked a path to compliance for individuals whose failure to report offshore accounts was not willful.
Because taxpayers’ non-U.S. investments vary widely, the IRS offers the following options for addressing previous failures to comply with U.S. tax and information return obligations:
1. The Offshore Voluntary Disclosure Program (OVDP);
2. Streamlined filing compliance procedures; and
3. Delinquent Report of Foreign Bank and Financial Accounts (FBAR) and delinquent international information return submission procedures.
Practitioners should be familiar with each of these options to effectively counsel clients as to which compliance path best fits the particular facts and circumstances of the case. Not every case is the same.
A key aspect is an expansion of the nonwillful certification program, referred to as the IRS streamlined filing compliance procedures. Under the expansion of the program, taxpayers residing in the United States whose failure to report foreign financial assets and pay all tax due on those assets was not the result of willful conduct are subject to only a 5% miscellaneous offshore penalty.
At the other end of the spectrum, taxpayers whose conduct was willful are directed to another path—the OVDP—where they pay a much higher 27.5% miscellaneous offshore penalty.
Notably, both paths are a one-way street. Once a taxpayer makes a submission under the streamlined program, the taxpayer may not participate in the OVDP (click here for further details). Likewise, a taxpayer who submits an OVDP voluntary disclosure letter on or after July 1, 2014, is not eligible to participate in the streamlined program.
To avoid creating a bigger problem, taxpayers should choose their path to compliance wisely with the advice of competent tax counsel.
The IRS also made changes to its existing OVDP, which are highlighted below. In some cases, these modifications may make it more costly for certain taxpayers to become tax compliant.
Against this backdrop, the IRS states that it is continuing to work closely with the U.S. Department of Justice (DOJ) to investigate foreign financial institutions that may have assisted U.S. taxpayers in avoiding their tax filing and payment obligations (see IR-2014-73). U.S. taxpayers who fail to report their interest in financial accounts run the risk of substantial civil penalties and possibly criminal investigations. In addition, on July 1, when the new information reporting regime under the Foreign Account Tax Compliance Act (FATCA) went into effect, thousands of foreign financial institutions began to report to the IRS the foreign accounts U.S. persons held.
For further information, please see the article below.
