On June 18, 2014, IRS Commissioner John Koskinen announced important modifications to the IRS 2012 Offshore Voluntary Disclosure Program (OVDP), including the expansion of the favorable Streamlined Filing Compliance Procedures but also increased penalties for taxpayers who finally decide to enter the program with accounts at a foreign financial institution already on the IRS radar.
The revised program is now known as the “2014 OVDP”. The 2014 OVDP is a continuation of the 2012 OVDP with several significant changes, including revisions to the OVDP disclosure letter and attachment, and the issuance and update of important FAQs and related notices and other forms. The 2014 OVDP seeks to balance the need for taxpayer fairness with the government’s continuing efforts to discontinue the abuse of foreign accounts. The 2014 OVDP rules are effective for all new submissions made by taxpayers on or after July 1, 2014.
The IRS first launched the OVDP in March of 2009. Since that time, the IRS made several revisions to the OVDP in 2011 and 2012. More than 45,000 taxpayers have voluntarily entered the 2009, 2011, and 2012 OVDPs, and the IRS has collected more than $6.5 billion in income taxes, interest, and penalties through the program.
The key changes to the 2014 OVDP are:
- At the time of pre-clearance letter submission to IRS Criminal Investigation, individual taxpayers must identity all foreign financial institutions at which undisclosed offshore assets are held;
- Beginning August 4, 2014, the offshore penalty increases from 27.5% to 50% if the foreign financial institution where the taxpayer’s account is located is publicly identified as being under investigation or cooperating with the IRS or the Department of Justice before a taxpayer submits a request for pre-clearance into the OVDP;
- The existing reduced penalty computation in the 2012 OVDP is eliminated for non-willful taxpayers due to the expansion of the Streamlined Filing Compliance Procedures; and
- At the time of submitting the full offshore disclosure, taxpayers are now required to pay the 27.5% or 50% offshore penalty and submit all foreign account statements, which may be submitted electronically.
In connection with the announcement of the 2014 OVDP, the IRS also announced important revisions to its Streamlined Filing Compliance Procedures (SFCP). Prior to this revision, the SFCP were only available to U.S. taxpayers living abroad who had not filed their income tax returns or the Report of Foreign Bank and Financial Accounts (commonly known as an FBAR) and who owed a relatively small amount of tax. Now, the SFCP have been modified to allow potentially many more taxpayers, including those persons residing in the U.S., to report foreign financial accounts and to come within its provisions.
The significant changes to the SFCP include:
- Elimination of the requirement that taxpayers must have $1,500 or less of unpaid taxes for the tax period to elect the SFCP;
- Elimination of the required risk questionnaire; and
- Taxpayers will be required to certify that their previous failures to file income tax returns, FBARs, and other informational returns, to report foreign bank account income, pay income taxes, and otherwise to comply with their U.S. tax obligations, was due to “non-will” conduct.
The 2014 OVDP revisions now provide more taxpayers in the U.S. and abroad with the opportunity to come into compliance with their U.S. tax obligations for foreign accounts. The IRS will continue to work in concert with the Department of Justice to investigate foreign financial institutions which may have assisted U.S. taxpayers in concealing these foreign accounts. Taxpayers who fail to come forward and disclose offshore financial accounts may be subject to criminal prosecution for tax evasion, filing false tax returns, failing to file income tax returns and FBARs, and/or conspiracy to commit other criminal offenses. However, taxpayers who successfully submit a voluntary disclosure with the IRS will be able to pay a calculated civil tax liability, including penalties and interest, minimize or eliminate the risk of criminal prosecution, and move on with this lives.
Beginning July 1, 2014, the new and separate foreign account information reporting requirements from the Foreign Account Tax Compliance Act (FATCA) also become effective. Many foreign financial institutions will now begin providing the IRS and the Department of Justice with the names of U.S. persons holding foreign accounts. In the press release announcing the 2014 OVDP, IRS Commissioner Koskinen stated that “the days of hiding assets in accounts overseas are coming to an end.” Now is the time for taxpayers to come into compliance with U.S. tax laws. Taxpayers who own foreign accounts and have failed to submit a voluntary disclosure need to act by August 3, 2014 in order to avoid the imposition of the increased 50% offshore penalty.