The Internal Revenue Service recently announced changes to the Offshore Voluntary Disclosure Programme effective July 1, 2014. IRS Commissioner Koskinen stated: “Through our enforcement efforts and implementation of Fatca, taxpayers are more aware of their obligations, and we believe want to come into compliance.

“In this rapidly changing environment, we listened to feedback from the tax community as well as the National Taxpayer Advocate about our voluntary programs. We have made important adjustments to provide opportunities for all US taxpayers to come in, including those who are not wilfully hiding assets.”

Because the circumstances of taxpayers with non-US investments vary widely, the IRS offers the following options for addressing previous failures to comply with US tax and information return obligations with respect to those investments:

Offshore Voluntary Disclosure Program

The Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure programme specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a wilful failure to report foreign financial assets and pay all tax due in respect of those assets. OVDP is designed to provide to taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax and penalty obligations. The major changes to the OVDP are:

The Offshore Voluntary Disclosures Letter and attachments have been modified.

The 27.5% offshore penalty must now be paid at the time of the OVDP submission.

Actual account statements must now be provided for all foreign financial accounts regardless of account balance and to provide that voluminous documents not requiring original signatures may be submitted on CD or DVD

A 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation.

Streamlined Filing Compliance Procedures

The streamlined filing procedures that were first offered on September 1, 2012 have been expanded and modified to accommodate a broader group of US taxpayers. Major changes to the streamlined procedures include: (1) extension of eligibility to US taxpayers residing in the United States, (2) elimination of the $1,500 tax threshold, and (3) elimination of the risk assessment process associated with the streamlined filing compliance procedure announced in 2012.

In its place taxpayers using the Streamlined Foreign Offshore Procedures will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-wilful conduct.

US taxpayers eligible to use the Streamlined Foreign Offshore Procedures must (1) for each of the most recent three years for which the US tax return due date (or properly applied for extended due date) has passed, file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938) and (two) for each of the most recent six years for which the FBAR due date has passed, file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1). The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.

Delinquent FBAR Submission Procedures

Taxpayers who do not need to use either the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

(1) have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1),

(2) are not under a civil examination or a criminal investigation by the IRS, and

(3) have not already been contacted by the IRS about the delinquent FBARs

should file the delinquent FBARs according to the FBAR instructions and include a statement explaining why the FBARs are filed late. All FBARs are required to be filed electronically at FinCEN. On the cover page of the electronic form, select the reason for filing late. The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your US tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

Delinquent International Information Return Submission Procedures

Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

(1) have not filed one or more required international information returns,

(2) have reasonable cause for not timely filing the information returns,

(3) are not under a civil examination or a criminal investigation by the IRS, and

(4) have not already been contacted by the IRS about the delinquent information returns

should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file. As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.

All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return. All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms. A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested.

Comment

The changes will make it easier for individuals residing abroad whose income is lower than $110,000 or so and who have not filed their US Federal income tax return for prior years to come into compliance with the US tax laws.

The changes will also be more punitive for US citizens who have tried to hide their assets outside the United States. One interesting remark that has been made is that more US citizens have not come forward because the 27.5 percent penalty “was too expensive.” That penalty is now 50 percent if the bank that these individuals used is now under investigation or cooperating with the IRS.

The IRS has an example on their website wherein a US taxpayer had $1 million in a foreign account and received $50,000 in interest income each year and at the end of eight years the individual had $1.4 million in the foreign account. The interest income was not reported on Schedule B, the box at the bottom of Schedule B asking if one had a foreign account was checked “no” and FBAR’s had not been filed.

The taxpayer “saved” $140,000 in US income tax over eight years by not reporting the interest income. If the individual now applies for the Offshore Voluntary Disclosure Programme they will owe the IRS $553,000 plus interest. If the taxpayer does nothing and the IRS finds out the details of the foreign account they will owe the IRS $3.825 million and will likely go to jail.

Why so much? Under OVDP the penalty is 27.5 percent of the maximum amount in the foreign account ($1.4 million in the preceding example). When you continue to hope that you will not get caught the new 50 percent penalty is imposed on the highest amount in the foreign account annually.

With some 80,000 foreign financial institutions sending account information to the Internal Revenue Service on July 1, 2014, if you are in a non-disclosure state of affairs it is likely the time to panic.

Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (I) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.

The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.

James Paul Sabo, CPA, is president of ETS Ltd, PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com