U.S. citizens and residents, whether living in the United States or abroad, are obligated to report to the Internal Revenue Service (IRS), and pay any taxes owed on, financial accounts and other assets held outside of the United States. The IRS and Justice Department have not been shy about finding, penalizing and prosecuting non-compliant taxpayers. At the same time, the IRS has since 2009 offered various voluntary disclosure programs to allow non-compliant taxpayers to come clean, pay reduced penalties and avoid prosecution. While the current voluntary disclosure programs are open-ended, the government may terminate them in its sole discretion at any time.
In June 2014, the IRS announced changes to its existing voluntary disclosure programs. The Streamlined Filing Compliance Procedures were expanded to allow those with more than $1,500 in unpaid taxes and those residing in the United States to take advantage of them. The Streamlined Procedures allow taxpayers to provide three years of corrected or previously unfiled tax returns and six years of foreign account disclosures and thereby avoid numerous penalties (other than a penalty equal to 5% of the highest aggregate value of the previously undisclosed foreign assets, in the case of taxpayers residing in the United States).
However, if the taxpayer’s failure to comply was willful, he or she is ineligible to take advantage of the Streamlined Procedures. Instead, the taxpayer must participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP), providing eight years of corrected tax returns and paying unpaid taxes, interest and a penalty of 27.5% (or in some cases 50%) of the highest aggregate value of the previously undisclosed foreign assets, in order to avoid potential criminal prosecution and possibly steeper civil penalties.
We will continue to follow developments in these and related IRS and state programs, and to assist clients in determining their need and eligibility for these programs.
