Non-Compliant Taxpayers With Foreign Accounts or Assets Should Consider Voluntary Disclosure as Soon as Possible
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:
- Submitting complete and accurate amended tax returns together with any required information returns, detailing the amount and type of previously unreported income and assets for the most recent eight tax years for which the due date (or properly applied for extended due date) has already passed;
- Submitting payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts;
- Cooperating in the voluntary disclosure process, including providing information on foreign accounts and assets, institutions and facilitators, and signing agreements to extend the period of time for assessing Title 26 liabilities and Report of Foreign Bank and Financial Accounts (FBAR) penalties;
- Paying 20-percent accuracy-related penalties on the full amount of the taxpayer’s offshore-related underpayments;
- Paying failure-to-file penalties, if applicable;
- Paying failure-to-pay penalties, if applicable;
- Paying, in lieu of all other penalties that may apply to the undisclosed foreign accounts and assets, a miscellaneous Title 26 offshore penalty equal to 27.5 percent (or 50 percent in circumstances where certain institutions designated by the IRS are involved) of the highest aggregate value of OVDP assets during the eight-year period covered by the voluntary disclosure;
- Executing a Closing Agreement on Final Determination Covering Specific Matters, Form 906; and
- Agreeing to cooperate with IRS and Department of Justice offshore enforcement efforts, if requested, by providing information about financial institutions and other facilitators who helped the taxpayer establish or maintain an offshore arrangement.
The Streamlined Procedures require, in part, that a taxpayer:
- Submit a complete and accurate amended tax return together with any required information returns, for each of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed.
- Complete and sign a statement on the Certification by U.S. Person Residing in the U.S. certifying: (1) that the taxpayer is eligible for the Streamlined Domestic Offshore Procedures; (2) that all required FBARs have now been filed; (3) that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct; and (4) that the miscellaneous offshore penalty amount is accurate.
- Submit payment of all tax due as reflected on the tax returns and all applicable statutory interest with respect to each of the late payment amounts.
- For each of the most recent six years for which the FBAR due date has passed, file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures.
- Submit payment of the Title 26 miscellaneous offshore penalty, which is equal to 5 percent of the highest aggregate balance/value of the taxpayer’s undisclosed foreign accounts and assets included during the three-year period for which U.S. tax returns must be filed and the covered six-year period for which FBARs must be filed. 1
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.