Non-Compliant Taxpayers With Foreign Accounts or Assets Should Consider Voluntary Disclosure as Soon as Possible

Title:
Non-Compliant Taxpayers With Foreign Accounts or Assets Should Consider Voluntary Disclosure as Soon as Possible
Publication:
Riker Danzig Tax, Trusts & Estates UPDATE February 2016
Attorneys:
Practice:

The IRS remains committed to identifying taxpayers that fail to report their worldwide income and/or foreign accounts or assets and now has increased capabilities to identify non-compliant taxpayers with undisclosed foreign accounts and assets. A non-compliant taxpayer identified by the IRS could be subject to the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution. The Offshore Voluntary Disclosure Program (“OVDP”) and the Streamlined Filing Compliance Procedures (“Streamlined Procedures”) offer such non-compliant taxpayers the ability to voluntarily come forward, benefit from reduced penalties and avoid criminal prosecution.  The OVDP and Streamlined Procedures, however, are only eligible to taxpayers that the IRS (or Department of Justice) is not aware of. 

The risk of discovery by the IRS has increased due to aggressive enforcement and the Foreign Account Tax Compliance Act (FATCA), which requires foreign banking institutions to report the holdings of U.S. citizens.  In addition, the IRS could change the terms of the OVDP and Streamlined Procedures or decide to end the programs at any time.  In fact, Commissioner Koskinen  recently warned taxpayers that the Streamlined Procedures will not be available forever.  As a result, any taxpayer holding undisclosed foreign accounts or assets, including those held through undisclosed foreign entities, should consider making a voluntary disclosure and becoming compliant as soon as possible. 

OVDP and Streamlined Procedures Eligibility and Terms

The OVDP and Streamlined Procedures differ significantly.  The OVDP is available for taxpayers with possible exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in connection with the same.  On the other hand, the Streamlined Procedures offer significantly reduced penalties compared to the OVDP, but are only available to taxpayers who were not willful in failing to report foreign financial assets and income and pay all tax due in connection with the same.  Consequently, if a taxpayer is concerned that the IRS may determine their non-compliance was the result of willful activity, the taxpayer may only make an application under the OVDP.

The terms of the OVDP that a taxpayer must meet to obtain its benefits, include, but are not limited to:

The Streamlined Procedures require, in part, that a taxpayer:

Conclusion

With significantly increased chances of detection and the ability of the IRS to terminate the benefits of voluntary disclosure at any time, non-compliant taxpayers should immediately consider coming forward through one of the two voluntary disclosure programs – the Offshore Voluntary Disclosure Program and Streamlined Filing Compliance Procedures – to bring themselves into compliance with their foreign asset and income related reporting and tax payment requirements.  

1 Individual taxpayers residing outside the U.S. are also eligible for Streamlined Procedures pursuant to substantially similar terms as individual taxpayers residing within the U.S. However, eligible taxpayers residing outside the U.S. do not face the 5% penalty required of taxpayers residing within the U.S.