IRS Streamlined Offshore Compliance Expanded
On June 18, 2014, the IRS announced the expansion of its streamlined filing compliance procedures announced back in 2012, and certain changes to its Offshore Voluntary Disclosure Program (“OVDP”). For the eligible taxpayer, the expanded IRS Streamlined Offshore Compliance procedure provides the ability to become compliant on their U.S. international tax filing obligations, with a reduced penalty exposure compared to the OVDP.
Is the Streamline Offshore Compliance Program the same as the Offshore Voluntary Disclosure Program (“OVDP”?
NO. The Streamline program is a separate program, and an individual who has entered the OVDP is generally not eligible to enter the Streamline program, and vice versa.
Are individuals living within the United States eligible for benefits under the Streamlined Foreign Offshore Compliance Procedure?
Individuals living both within the U.S. and abroad are eligible for the new Streamlined Offshore Compliance procedure. This is in contrast to the prior version of the program, where only individuals living oustside the U.S. were eligible.
What are the penalties associated with the new Streamline Offshore Program?
For eligible taxpayers living outside of the U.S., all penalties may be waived under the new Streamlined progam. For taxpayers living within the U.S., the penalty under the Streamline program equals 5% of the foreign financial assets. This is much lower than the 27.5% as required by the current version of the OVDP.
What is required under the new Streamlined program?
Besides requiring the taxpayer to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), Form 5471, Form 8938, Form 3520, Form 8621, etc., the taxpayer is also required to certify that the failure to fully comply was due to non-willful conduct.
What changes were announced with regard to the OVDP?
Several changes were also announced with regard to the current OVDP program. Certain changes include: (1) Requiring additional information from taxpayers applying to the program; (2) Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;(3) Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application; (4) Enabling taxpayers to submit voluminous records electronically rather than on paper;
The biggest change on the OVDP is the potential change in penalty exposure. The IRS announced that the offshore penalty percentage will be increased from 27.5% to 50% if, before the taxpayer’s OVDP pre-clearance request 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 the IRS or Department of Justice.
Can a taxpayer become compliant without penalty exposure if the taxpayer did not file an FBAR, but properly reported all income earned on their U.S. income tax returns?
Taxpayers who do not need to use either the OVDP (described in section 1 above) or the Streamlined Filing Compliance Procedures (set forth in section 2 above) to file delinquent or amended tax returns to report and pay additional tax, but who: (1) have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1), (2) are not under a civil examination or a criminal investigation by the IRS, and (3) have not already been contacted by the IRS about the delinquent FBARs, can file the delinquent FBARs according to the FBAR instructions and include a statement explaining why the FBARs are filed late.
The IRS announced that it will not impose a penalty for the failure to file the delinquent FBARs if the taxpayer properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs and the taxpayer was not previously contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.
This guidance by the IRS is similar to previous guidance on this subject provided under FAQ 17 of the Offshore Voluntary Disclosure Program.
Can a taxpayer become compliant without penalty exposure if the taxpayer did not file IRS foreign information returns other than FBARs , but properly reported all income earned on their U.S. income tax returns?
Similar to guidance provided under FAQ 18 of the Offshore Voluntary Disclosure Program, the IRS announced that if a taxpayers who do not need to use the OVDP (described in section 1 above) or the Streamlined Filing Compliance Procedures (set forth in section 2 above) to file delinquent or amended tax returns to report and pay additional tax, but who: (1) have not filed one or more required international information returns, (2) have reasonable cause for not timely filing the information returns, (3) are not under a civil examination or a criminal investigation by the IRS, and (4) have not already been contacted by the IRS about the delinquent information returns should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file. As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.
The latest version of the Streamlined Offshore Compliance Program provides a taxpayer to become compliant missed prior IRS filings, with a greatly reduced penalty structure than existed under the OVDP. With the role out of FATCA (see more on FATCA & Offshore Voluntary Disclsoure at http://www.internationaltaxseattle.com/#!offshore-accounts-fatca--the-offshore-/c1zu), now is the time to become compliant. The key to entering the Streamline Procedure is showing that noncompliance was “non-willful”. A taxpayer unable to make this showing will be better served moving forward under the OVDP program.
Attorneys at Harlowe & Falk, based in the greater Seattle area, can assist you in determining what information filings you may have missed and the potential tax exposure. If you have previously unreported foreign accounts, our budget sound based firm (including Seattle and Tacoma) can help you come up with a strategy to become compliant.
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Mehrdad is a partner at the law firm of Harlowe & Falk LLP. Based in the greater Seattle area, but with clients internationally, Mehrdad's practice includes international tax consulting. This includes consulting with clients on inbound transactions, outbound transactions, mergers & acquisitions, and IC-DISC....