Soon after my vacation leave from Dubai on June 8th, the IRS announced new procedures that will help many Americans with overseas accounts and assets. Many of you may already know that the IRS sent the good news on June 18th by announcing far more practical methods of achieving tax compliance for US persons with regard to their offshore accounts or assets. I am still away from Dubai on vacation but wanted to alert my readers of the new developments.
While the new “Streamlined” procedures may sound somewhat simple, I caution readers to be very careful and to obtain sound advice with regard to using these new “Streamlined” procedures.
Tax compliance failures must be the result of “non-willful” conduct and statements must be provided explaining the reasons for any compliance failures. You should look carefully at any and all factors that may influence such a finding – for example, if you had a foreign account but checked “NO” in the box on Part III of Schedule B asking if you had such a foreign account, you need to be prepared to explain this in the event the IRS questions you. Other factors should be scrupulously examined – Did you seek professional tax advice? Did you reveal the foreign assets to your advisor? What did you write in any tax organizers and so on.
Ms. Kathleen Keneally, former head of the Department of Justice (DOJ) recently warned that taxpayers should be very cautious before signing a certification of non-willfulness and entering the IRS’s new Streamlined Program. The certification must be signed under penalties of perjury, which if found to be false can itself result in prosecution for submitting a false sworn statement. Significantly, the Streamlined procedures provide no protection from criminal prosecution if the IRS determines that the failure to disclose a foreign account was “willful”. Ms. Keneally admonished that signing the certification without undertaking a complete and thorough analysis of the “willfulness” issue is “a very dangerous approach.” All certifications will be reviewed, and a senior IRS official has commented that the IRS’ review of the certifications will encompass a cross-check of information it receives from taxpayers already in OVDP, from whistleblowers, foreign financial institutions that are cooperating with the IRS and DOJ, as well as other sources.
My able colleague, Steve Mopsick, an attorney in California has written some very interesting posts that highlight the issue of “willfulness” and discuss the pitfalls for taxpayers who may blindly rush into the new Streamlined Program. Please see Steve’s tax blog posts of June 20 and June 25 here.
Certain taxpayers who have already entered the OVDP may also transition into the Streamlined Program. There is no need to opt out of the OVDP. IRS has issued a detailed FAQ outlining the transition rules.
Different Rules for Taxpayers Residing in the US and Offshore the US
For those taxpayers residing outside the US who are eligible for the program, all penalties will be waived (including, for example, the failure to file and/or failure to pay penalties, the accuracy-related penalty, FBAR penalties and other penalties for non-filing of information returns with regard to foreign assets). For eligible taxpayers residing within the US, the only penalty that will be imposed is the so-called “miscellaneous offshore penalty”. Generally this is equal to 5% of the highest year-end value of the foreign financial assets that resulted in the tax noncompliance.
I will return from vacation on July 8th and hope to be able to write a more detailed blog post soon. Meanwhile, here are the relevant links to the new programs.
Please click here for general information regarding the new Streamlined Procedures.
New Streamlined Procedure for taxpayers who are residing OUTSIDE the USA – details here
EXCERPT HERE –
The following streamlined procedures are referred to as the Streamlined Foreign Offshore Procedures.
Eligibility for the Streamlined Foreign Offshore Procedures
In addition to having to meet the general eligibility criteria described above, individual U.S. taxpayers, or estates of individual U.S. taxpayers, seeking to use the Streamlined Foreign Offshore Procedures described in this section must: (1) meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement described below) and (2) have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, and such failures resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
A taxpayer who is eligible to use these Streamlined Foreign Offshore Procedures and who complies with all of the instructions outlined below will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties. Even if returns properly filed under these procedures are subsequently selected for audit under existing audit selection processes, the taxpayer will not be subject to failure-to-file and failure-to-pay penalties or accuracy-related penalties with respect to amounts reported on those returns, or to information return penalties or FBAR penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or that the FBAR violation was willful. Any previously assessed penalties with respect to those years, however, will not be abated. Further, as with any U.S. tax return filed in the normal course, if the IRS determines an additional tax deficiency for a return submitted under these procedures, the IRS may assert applicable additions to tax and penalties relating to that additional deficiency.
New Streamlined Procedure for taxpayers who are residing INSIDE the USA are here.
IRS Has Also Modified the OVDP
The IRS also modified the OVDP – summarized below are some of the major changes. The complete version of the modified FAQs is here.
Commencing on August 4, 2014, under the new OVDP rules, the “in lieu” or so-called “offshore penalty” percentage can increase from 27.5 percent to 50 percent in certain cases. Remember, this increase will occur effective August 4, 2014 so, there is still time to obtain the lower penalty percentage if relevant to your particular case. The increased percentage will apply only if before the taxpayer submits his OVDP pre-clearance request, it becomes public that a financial institution where the taxpayer has or had an account or another party facilitating the taxpayer’s offshore arrangement is (1) under IRS Or Department of Justice investigation, (2) cooperating with the IRS or Department of Justice in connection with accounts beneficially owned by a US person, or (3) has been identified in a court-approved issuance of a summons to a financial institution seeking information about US persons who possibly have or had financial accounts there (this is what is known as a “John Doe summons”). A current list of the foreign financial institutions or facilitators that fall within the above categories can be found here. The reasoning behind the increased penalty percentage, according to the IRS Commissioner is to force any taxpayer who is willfully and aggressively evading tax by hiding assets overseas to pay a higher price for the tax noncompliance.
In addition to the increase in the offshore penalty, the new OVDP made some other significant changes. Taxpayers entering the new OVDP will now be required to provide more detailed and exacting information regarding their offshore financial accounts and will be required to submit all financial account statements in the 8 year OVDP period, regardless of the amount that is in the offshore accounts. Furthermore, when applying to the program and submitting the full OVDP package, taxpayers must now pay the full amount of the 27.5 percent or 50 percent “offshore penalty”. This is in addition to the back taxes and interest owed, and the applicable failure to file/failure to pay and/or accuracy-related penalties.
The new 2014 OVDP no longer retains the possibility to obtain the previous program’s lower “offshore penalty” percentages for certain non-willful taxpayers (e.g., the prior OVDP 5% penalty with regard to inherited accounts, for example). Instead a new Streamlined Program covers these kinds of cases. The new Streamlined Program is the subject of a separate FAQ. In addition, the latest IRS announcement adopts new procedures for taxpayers who simply failed to file an FBAR and/or other information returns (e.g., Form 5471 for ownership of foreign corporations).
This blog post was updated July 2015
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