INITIAL THOUGHTS ON IRS CHANGES TO OFFSHORE VOLUNTARY DISCLOSURE PROGRAM AND STREAMLINED PROCESS FOR NON-WILLFUL TAXPAYERS

Yesterday, June 18, 2014, IRS announced and posted to the Offshore Voluntary Disclosure page on its website (www.irs.gov) significant changes to the 2012 OVDP reflected in revised Frequently Asked Questions; and, new Streamlined Filing Compliance Procedures for non-willful, out-of-compliance taxpayers, whether living abroad or here in the states. These new FAQs and procedures apply generally to OVDP submissions made after June 30, 2014.

OVDP CHANGES

The major changes to the 2012 OVDP are:

    • The 27.5% Offshore Penalty generally remains in place for participants but a 50% Offshore Penalty may apply, beginning with names submissions made on or after August 4, 2014, to those participants with foreign accounts at foreign financial institutions (FFI) about which public disclosure has been made of:
      • An IRS or DOJ investigation.
      • That the FFI is cooperating with IRS and DOJ, or,
      • A John Doe summons being served on the FFI.
      • FAQ 7.2 defines public disclosure and provides a link to a list of FFIs for which IRS has already made public disclosure.
      • Some comments:
        • Unlike the former 2012 FAQS, an IRS or DOJ FFI investigation that is disclosed will not disqualify a taxpayer from entering the OVDP but will increase the penalty from 27.5% to 50% of the highest value during the OVDP period. On the other hand, an audit of the taxpayer commenced before submitting names still disqualifies a taxpayer from the OVDP.
        • Once a single account is subject to the 50% penalty, all foreign accounts, and included assets in the penalty base, are subject to the 50% rate. This harsh result assumes equal culpability for all accounts not reported which may not accord with the reality of often complex motivations for opening and maintaining offshore accounts.
    • Former FAQs 17 and 18 are deleted and taxpayers who reported their foreign bank account income but did not file an FBAR or who merely neglected to file certain foreign reporting forms such as Forms 5471 and 3520, will now use the Streamlined Filing Compliance Procedures, which are separate and apart from the OVDP process.
    • The 5% and 12.5% reduced penalty rates under the deleted former FAQs 52 and 53 are no longer applicable and taxpayers with inherited accounts or small balance accounts will now use the Streamlined Filing Compliance Procedures for foreign or domestic taxpayers as the case may be.
    • FAQs 31 through 41 have been modified to promote clarity and consistency of application. I haven’t yet compared the old and new versions but noted is that bank account transfers will not be counted twice but assets acquired with unreported income or assets, sold and reinvested with an FFI, will still be double counted in the OVDP penalty base. The presence of such facts would be a major consideration in deciding whether to opt-out of the OVDP.
    • FAQ 23 describes the preclearance process and now requires that additional information be submitted with the preclearance fax.
    • The Offshore Voluntary Disclosure letter and attachment have been modified and the revised formats will have to be used for submissions after 6/30/14.
    • FAQ 25 now requires that all foreign financial accounts be submitted with the OVDP package of amended returns and other required documents regardless of the account balances. FAQ 25 also permits voluminous documents not requiring a signature to be submitted on CD or DVD. These would mainly include the account statements and summaries of income and trading activity, original filed returns, but would not include amended returns, consent to extend the FBAR statute of limitations, Forms 872, the penalty calculation worksheet or any other signed document.
    • Delinquent and amended FBARs (FinCEN Form 114) must now be e-filed with FinCEN. Formerly, all FBARS under the OVDP were submitted to the OVDP with the amended income tax returns.
    • Former FAQs 19, 51.1 and 51.2 are also deleted as moot.
    • Previously, only the tax, accuracy related penalty and interest had to be remitted with submission of the OVDP amended returns. FAQ 25 now requires that the calculated Offshore Penalty be remitted along with the income tax related balance due. Also, the payment is to be mailed separately from the Amended returns to a different address.
      • Comment: This requirement will have an impact on the timing of opt-out considerations. For submissions made before July 1, 2014, the Offshore Penalty was remitted with the signed closing agreement at the end of the OVDP process (which usually was at least 6 months to a year from submission of the amended returns.
        • If a taxpayers pays the OVDP penalty and later opts-out with a lower penalty ultimately determined, will IRS automatically refund the overpaid Offshore Penalty? Will interest be paid? I have not yet examined these issues.
    • Taxpayers who’ve made their OVDP submission before July 1, 2014 can opt-in to the updated rules under separately stated transition rules posted on www.irs.gov.
  • Under the transition rules, submission means submitting the Voluntary Disclosure letter to IRS CI. Thus, submitting names for pre-clearance is not a submission. Thus, an oddity, one might submit names before June 30, 2014 using the former 2012 OVDP FAQ 25 skeleton format, while the OVDP submission itself would have to comply with the revised FAQ 25 rules, as revised on June 18, 2014, for submission of the OVDP Letter and amended returns

 

 

STREAMLINED FILING COMPLIANCE PROCEDURES

Separate Streamlined Filing Compliance Procedures (SFCP) apply for:

  • Taxpayers residing in the U.S., and,
  • Taxpayers residing outside of the U.S. (expatriates)

Taxpayers residing outside of the U.S.

Very briefly, the SFCP:

  • Eliminates the arbitrary requirement that unreported income be $1,500 or less per year
  • Eliminates the previously required risk questionnaire and does away with the entire “low risk” analysis.
  • No longer makes ineligible expatriates who have filed U.S. returns but not reported income correctly or failed to file FBARS.
  • But, requires eligible taxpayers to certify under penalties of perjury that the failure to timely file or report income was due to non-willful conduct.
  • Waives all penalties including late filing, late payment, accuracy related penalty information return penalties and FBAR penalty.
  • Still requires filing up to three years of delinquent income tax returns and information reports and up to 6 years of delinquent FBARS.
    • Comment: SFCP does away with some of the hoops expatriates had to jump through to come into compliance but still imposes a substantial burden and expense on many, in high tax jurisdictions, who will likely owe none or little tax to the U.S. Perhaps congress should amend the code to allow expats in high tax countries to elect to suspend U.S. filing by signing a declaration of foreign residency.

Taxpayers residing in the U.S.

Here is the big change. The SFCP

  • Also must file up to 3 years of amended return and accurately report and pay the tax due.
  • Must have filed returns for the SFCP 3 year period
  • Must file up to 6 years of delinquent or amended FBARS.
  • Waives all income tax penalties and accuracy related penalty on any later audit, unless fraud or willfulness found.
  • Requires payment of a 5% Offshore Penalty in lieu of all FBAR penalties.
  • Taxpayers who’ve made so-called “Quiet Disclosures” may request application of the SFCP. But, penalty assessments made with respect to the previously filed returns or amended returns will not be refunded.
  • Taxpayers under audit, for domestic or foreign items, are ineligible for the SFCP.
  • Returns filed under the SFCP will be processed like normal returns and there will be no automatic audit. Of course, returns may be selected for audit later on under normal IRS procedures.
  • Taxpayers using the SFCP must certify under penalties of perjury that prior non-filings or unreported income were the result of non- willful conduct. Non-willful conduct means “due to negligence, inadvertence or mistake or conduct that is the result of a good faith misunderstanding of the requirements of law.”
  • No closing agreement will be executed between the taxpayer and IRS.
  • Once an SFCP submission is made, whether by a non-U.S. resident or resident, the taxpayer is no longer eligible for the OVDP.

CONCLUSIONS:

What does all this mean to taxpayers?

  • Those with criminal concerns or fearing the maximum FBAR penalties for willful conduct will enter the OVDP, see it though, or opt-out if they want to gamble on obtaining a lower penalty outside of the OVDP.
  • Expatriates not wishing to renounce citizenship will find it a little easier to navigate the SFCP but the process will still feel burdensome and unnecessary.
  • U.S. citizens, Green Card holders and those treated as U.S. tax residents under the substantial presence test with clearly non-willful (to the extent willfulness or non-willfulness is ever clear) violations may enter the FSCP and certify that their conduct was non-willful and pay the reduced 5% FBAR Offshore Penalty.
  • Although not mentioned in the new procedures, taxpayers with reasonable cause for non-filing presumably can still file amended returns with the service center (quiet disclosure) attaching a reasonable cause statement and argue the issue on audit. But they’d better be sure before going out on this limb because IRS has instructed its auditors to be harsh with quiet disclosers. .
  • U.S. residents with facts that could point towards or away from willfulness will have to be more cautious about the SFCP versus the OVDP because of the required certification under penalties of perjury that their conduct was non-willful and the nebulous definition of willfulness.
  • Those with only signature authority over accounts for which FBARs have not been filed can continue to file the delinquent FBARs without fear of being penalized under the Delinquent FBAR Submission Procedures found on http://www.irs.gov.
  • Those who’ve reported all income but have failed to file foreign reporting forms like Form 5471 or Form 3520, and feel they have reasonable cause for the non-filing can follow the Delinquent International Information Return Submission Procedures found at www.irs.gov.

What remains unchanged is the need to consider each non-reporting case individually, based on its peculiar facts and circumstances, and, chart the least risky course to a safe harbor.  This is why experienced professionals with sound judgment must advise clients on these complex and delicate issues.

© 2014 by Robert S. Steinberg, Esquire
All rights reserved

 

This entry was posted in 2012 OVDP, COMPLIANCE, FBARS, NEW OVDP, TAX, VOLUNTARY DISCLOSURE and tagged , , , , , , , , , , , , . Bookmark the permalink.

11 Responses to INITIAL THOUGHTS ON IRS CHANGES TO OFFSHORE VOLUNTARY DISCLOSURE PROGRAM AND STREAMLINED PROCESS FOR NON-WILLFUL TAXPAYERS

  1. JT says:

    A couple of your facts are incorrect. June 18, 2014 was the date of change not August 14. Also where you have August 14 as the deadline for the 27.5% penalty to increase to 50% is incorrect. The date is August 4.

    • Thanks for pointing out the typo regarding the date of change. August 4 was the cut-off for submitting an OVDP letter to avoid the increased penalty for accounts with banks under investigation.

  2. Roger Marple says:

    Could I just use IRS Form 8938 and avoid any penalties?

    • Generally not likely. But, not knowing your facts I cannot respond to your situation and not being retained I cannot provide legal advice. You should consult with an experienced offshore tax attorney.

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  4. taxwalla says:

    You have summarized it very well for those of us pondering whether to go streamlined or not. Many of us who just discovered about FBAR and foreign account reporting are waiting on the sidelines unsure whether examiners would be too strict in absence of proper guidance since the streamlined program is so new. Any thoughts?

    • See my later post on Will-O-the-Wisp Non-willfulness. It will take quite a while to have anecdotal evidence of how IRS is administering the Streamlined Process because the agency will not acknowledge tax return filings under the Streamlined Program. Thus, filers under the program must wait out the statute of limitations. IRS has indicated it will not give guidance of the willful / non-willful analysis. Thus, it is up to your tax attorney to advise and help your resolve how to proceed. Waiting is not likely to prove helpful and may be harmful if IRS obtains your name or commences an exam.

  5. Manish says:

    Moved to USA on 23 Sept 2012. Tax Returns filed under Dual Residency. For 2013 normal tax returns filed
    Did not declare foreign income and file fbar in 2012 and 2013
    Current CPA filed my amended tax returns for 2012 and 2013 and filed FBAR for 2012 and 2013.
    Is this correct ?

    • Filing the amended returns may or may not have been the best advice. I cannot evaluate your situation without knowing all of the facts and circumstances that led you not to file FBARS or include foreign income in the original returns. In any event, I could not offer specific legal advice to you through this blog. I can only respond to general questions with general answers that should not be relief upon for taking action in a specific situation. Decision making about how to correct not having filed FBARS or reported offshore income is very fact intensive and also involves a number of complex legal issues. One in your position should seek counsel of an experienced tax lawyer in such matters and not rely on a CPA for sole guidance in this area.

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