On June 18, 2014, the IRS announced major changes to its offshore voluntary compliance programs (OVDPs) that provide new, presumably easier and more lenient, options for taxpayers that have not willfully avoided compliance responsibilities. While the rules for non-willful non-filers have eased, the new rules for taxpayers that have willfully avoided reporting responsibilities will be tougher. The new rules apply to taxpayers that reside both inside and outside of the United States that may owe more than $1,500 of unpaid tax per year. The key requirement in the new program is that the taxpayer must certify that previous failures to comply were due to non-willful conduct to file. Taxpayers meeting these conditions will have penalties reduced to 5 percent (if residing in the United States) or waived (if not residing in the United States).
Background
On June 18, 2014, the IRS announced major changes to its (OVDP), with a stated goal of expanding the voluntary disclosure program to resident and nonresident taxpayers that have not disclose “specified foreign assets” and whose failure to disclose their offshore assets was due to non-willful conduct. While the program makes it easier for those non compliant taxpayers due to non-willful conduct, it also makes it clear that significant penalties will apply to those taxpayers that willfully did not comply. IRS Commissioner John Koskinen indicated that “we [are] provid[ing] additional flexibility in key respects [of the program] while maintaining the central components of our voluntary programs.”
The IRS announced its first OVDP in 2009 and has modified it in 2011 and 2012 with a mix of both higher penalties and streamlining the process. The previous programs have resulted in 45,000 taxpayers disclosing offshore assets, the collection of $6.5 billion in taxes and penalties. The voluntary disclosure program, with new reporting requirements for specified foreign assets (Form 8938, Statement of Specified Foreign Financial Assets) starting in 2012 (see this alert >>) and new FATCA reporting requirements starting on July 1, 2014 (see this alert >>), has given the IRS significant insight into the offshore assets held by U.S. persons. U.S. persons include not only resident citizens, but also resident aliens and U.S. citizens living outside of the United States. Since all U.S. persons have the responsibility to report on worldwide income, the reporting requirements apply to all U.S. persons, even those permanently living outside of the United States, and to foreign citizens residing in the United States.
In IRS instructions, non-willful conduct is described as “conduct that is due to negligence, inadvertence or mistake or conduct that is the result of a good faith understanding of the requirements of the law.”
Key changes
While the 2012 changes streamlined the OVDP process for many taxpayers (see this alert >>), the changes were limited to U.S. citizens living outside of the United States at all times since January 1, 2009. The new streamlined changes will:
- Include all U.S. persons;
- Eliminate a requirement that the taxpayer have less than $1,500 of unpaid tax per year;
- Eliminate the required risk questionnaire;
- Reduce the penalties to 5 percent of the highest balance in the foreign financial accounts for residents and waive them for non residents.
In exchange for the streamlined procedures, the following modifications have been made to the OVDP:
- Additional information will be required from taxpayers applying to the program.
- Foreign account statements must be included in the filing,
- Taxpayers must provide a statement that previous failures to comply were due to non-willful conduct, and
- Records may be submitted electronically.
- The penalty must be paid at the time of the OVDP application.
The IRS has announced that taxpayers currently in an OVDP may apply for the new OVDP with an application that meets the new requirements. It has not provided its opinion on how taxpayers who have completed the process and paid higher penalties, will be handled.
While the program benefits taxpayers who have not willfully uncomplied, the new procedures are harsher on those taxpayers that are found to have willfully uncomplied. The program increases the penalty from 27.5 percent to 50.0 percent for taxpayers with accounts in a financial institution that is under investigation by the IRS or the Department of Justice for assisting U.S. persons in avoiding tax reporting requirements.
While the changes are generally favorable for taxpayers, the previous filing which expedited filing exceptions for information returns (such as Forms 5471, 5472, 8865, and 926) that resulted in additional taxes, has been eliminated (see revised IRS FAQ here >>).
The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC, is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.
This Alert was authored by Jerry Jonckheere from the Praxity affiliate Plante & Moran,PLLC. Jerry is a partner in the Grand Rapids office of Plante & Moran, PLLC. This Alert has been provided to the North American member firms of Praxity as part of the group’s collaborative efforts and initiatives and illustrates how Praxity members share a common desire to deliver professional excellence and high-service standards. Praxity AISBL is the largest global alliance of independent accounting firms and is the world’s largest association of accounting firms. Praxity’s website can be found at www.praxity.com >>
