As reported in last month’s column, the Internal Revenue Service announced changes to the Offshore Voluntary Disclosure programme effective July 1, 2014. What has been overlooked by individuals who have failed to report foreign financial assets is an August 4, 2014 deadline for minimising the penalty for non-disclosure.

August 4, 2014 Deadline

The Offshore Voluntary Disclosure Program (OVDP) is 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.

Taxpayers entering the programme agree to pay, in lieu of all other penalties that may apply to the undisclosed foreign accounts, a miscellaneous offshore penalty equal to 27.5 percent of the highest aggregate value of OVDP assets during the period covered by the voluntary disclosure.

Effective August 4, 2014 a 50 percent 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.

Included in the list of foreign financial institutions or facilitators meeting this criteria are the Bank of NT Butterfield & Son Ltd, UBS AG, Credit Suisse AG, CIBC First Caribbean and HSBC India. A complete list can be found on the IRS website.

Consequently, if you had an account at one of the foreign financial institutions on the list and have failed to report your foreign financial assets in the past you should immediately apply to the OVDP if you want to minimise the offshore penalty.

Revocation of US Individual Tax Identification Numbers (ITIN)

Designed specifically for tax administration purposes, Individual Taxpayer Identification Numbers (ITINs) are issued by the Internal Revenue Service to foreign nationals who are not eligible to receive a Social Security Number. An ITIN is usually needed by a foreign national to file a US tax return and to open a US bank or brokerage account.

The Internal Revenue Service recently announced that Individual Taxpayer Identification Numbers (ITINs) will expire if not used on a federal income tax return for five consecutive years. Only about a quarter of the 21 million ITINs issued since the programme began in 1996 are being used on tax returns. The new policy will ensure that anyone who legitimately uses an ITIN for tax purposes can continue to do so, while at the same time resulting in the likely eventual expiration of millions of unused ITINs. To give all interested parties time to adjust and allow the IRS to reprogramme its systems, the IRS will not begin deactivating ITINs until 2016.

This new policy will result in a quandary for foreign nationals who have US brokerage accounts but who do not file US tax returns to report their US source investment income. For example, suppose a foreign national has a US brokerage account with a US bank. During the year the brokerage account realises interest income, dividend income and capital gains. At year end the US bank sends the foreign national a Form 1042-S detailing the income received and withholding a 30 percent income tax, where applicable. While the foreign national, by law, should file a Form 1040NR to report this income, by practice the IRS does not follow up on foreign nationals who fail to file an annual tax return assuming that the 30 percent withholding tax covers their US income tax obligations.

Under this policy change, if a foreign national has not filed a U.S tax return for calendar years 2011, 2012, 2013, 2014 and 2015 their ITIN will be revoked in 2016.

If your ITIN is revoked it is likely that any financial account you have in the US will likely be closed. A taxpayer whose ITIN has been deactivated and needs to file a US return can reapply using Form W-7. As with any ITIN application, original documents, such as passports, or copies of documents certified by the issuing agency must be submitted with the form.

Consequently, if you are a foreign national with an ITIN and US source income who has not filed a US tax return in the past, you should consider immediately filing a US income tax return for 2011, 2012 and 2013 and then timely filing a US tax return for 2014 and 2015 if you want to retain your ITIN.

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 the President of ETS Ltd., PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: jsabo@expatriatetaxservices.com