The offshore voluntary disclosure program ("OVDP"), available in various forms since 2009, allows taxpayers who have not properly filed their offshore bank account reports ("FBARs") to rectify these delinquencies. The biggest hurdle for many taxpayers entering the program has been the severe offshore penalty, which is currently 27.5% of the highest value of their aggregate foreign financial assets related to non-compliance.
On June 18, the IRS announced changes to the program that will have the following effects:
•US taxpayers who reside in the US and failed to file FBARs, but whose actions are not considered willful, may qualify for an offshore penalty equal to 5% of the highest value of their foreign financial assets related to non-compliance and enjoy a streamlined reporting program which will be limited to three years income tax filings and six years of FBAR reporting.
•Beginning August 4, 2014, taxpayers entering into the OVDP to disclose an offshore account with a financial institution that is under investigation or cooperating with the IRS or Department of Justice, will suffer an offshore penalty equal to 50% of the highest value of their aggregate foreign financial assets related to non-compliance.
For taxpayers who do not qualify for the streamlined program, and are not subject to the new 50% offshore penalty regime, the OVDP is still available with the 27.5% offshore penalty.
Taxpayers with offshore bank accounts that have not been properly disclosed have a limited time to assess their options to ensure that they are not subject to the new, harsher 50% offshore penalty.
Time Sensitive Opportunity 1
As part of this recent announcement, the IRS has announced a transition rule which creates an opportunity for taxpayers in or considering entering the OVDP. One of the benefits of the OVDP is to provide protection from criminal penalties and limits on civil penalties. The streamlined program does not protect taxpayers from subsequent reexamination by the IRS. It is possible that the IRS could reexamine the relevant filings and conclude that further penalties, including criminal penalties, are appropriate. Once a taxpayer has entered the streamline program, they are typically not eligible to enter into the OVDP.
However, a taxpayer eligible for treatment under the streamlined procedure who submits, or has submitted, a voluntary disclosure letter under the OVDP prior to July 1, 2014, but who does not yet have a fully executed OVDP closing agreement, may request treatment under the applicable penalty terms available under the streamlined procedures. A taxpayer seeking such treatment does not need to opt out of OVDP, but will be required to certify that failure to report all income, pay all taxes, and submit all required information returns, including FBARs, was due to non-willful conduct. The IRS will then consider this request and determine whether to allow the reduced 5% penalty in the OVDP closing agreement.
Time Sensitive Opportunity 2
The new 50% offshore penalty regime does not take effect until August 4, 2014. Taxpayers considering entering the OVDP should confirm whether any of their offshore financial institutions are under investigation or cooperating with the IRS. If they are, taxpayers need to act before August 4, 2014 to enter the OVDP and limit their penalty exposure to 27.5%.
Time Sensitivity Opportunity 3
FATCA becomes effective July 1, 2014. FATCA will create a new reporting system for foreign financial institutions to report to the IRS in relation to the accounts of US taxpayers. This will create a high risk environment for non-compliant US filers. In order to avoid exposure to FATCA reporting, US taxpayers should act as soon as possible to rectify any delinquent foreign filings, especially FBARs.
The rules and their practical applications are quite lengthy and complex. The above description is very brief and should not be viewed as comprehensive. We would be happy to provide clients facing these challenges with a more comprehensive analysis of their exposure to offshore penalties.
If you would like to discuss any of the above matters, please do not hesitate to contact Ryan Dudley (firstname.lastname@example.org) or Oleg Shliperman (email@example.com) from Friedman's International Tax Services Group or your relationship partner at Friedman for assistance.