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IRS Continues Program for Disclosing Offshore Accounts

February 24, 2015

Greg Cabral, CPA, MST
Providence Office Managing Partner

The IRS continues to provide programs for U.S. taxpayers who have failed to disclose offshore assets and pay taxes due. Recently the IRS provided guidance and clarifications that apply to taxpayers who apply for relief under the streamlined filing compliance procedures. These new instructions are effective for applications submitted on or after July 1, 2014. The streamlined program is available to all U.S. taxpayers, including resident aliens living in the United States and U.S. citizens living abroad.

Reduced Penalties
U.S taxpayers meeting the eligibility of the streamlined program will be able to take advantage of reduced penalties—five percent for taxpayers in the U.S.; zero for taxpayers living outside the U.S. The program is available only to taxpayers who can demonstrate that their failure to disclose the accounts was not willful. Taxpayers who are concerned that their conduct may be willful can pursue relief through the IRS’s Offshore Voluntary Disclosure Program (OVDP). The OVDP imposes a penalty of 27.5 percent, but protects participants from potential criminal liability. The program also provides for reduced penalty relief under the OVDP transition program for taxpayers who previously applied under the OVDP, but who have not entered into a closing agreement.

Although the additional guidance is welcomed, there continues to be a lack of IRS guidance on the facts and analysis that will be treated as willful conduct. Taxpayers cannot participate in both the streamlined program and the OVDP. Additionally if a taxpayer applies under the streamlined program and is rejected due to the determination that his/her failure to report is not willful, the taxpayer cannot then reapply for relief under the OVDP program.

Necessary filing requirements
U.S. taxpayers are required to report all of their worldwide income and pay taxes on such income, including income from foreign sources. In addition to reporting income for foreign sources, U.S. taxpayers who own foreign assets may be required to make the following annual filings with the U.S. government:

  • Form 1040, Schedule B (Part III) – foreign accounts;
  • Form 8938, Statement of Foreign Financial Accounts – overseas assets, the value of which exceeds certain thresholds; and
  • Form 114, Report of Foreign Bank and Financial Accounts (FBAR) – foreign accounts above $10,000.

While Form 1040 and 8938 are required to be filed with the IRS, the FBARs must be submitted to the Treasury’s Financial Crimes Enforcement Network (FinCEN). Although submitted to FinCEN, IRS has enforcement authority over FBARs.

In addition to paying U.S. income taxes on income generated by foreign assets, there can be significant penalties related to the mere failure to file or the incorrect filing of any of the above forms.

Guidance
The IRS provided guidance related to the above programs.  This guidance includes the streamlined program procedures, OVDP procedures and frequently asked questions (FAQs)—for U.S. taxpayers residing in the U.S. and U.S. taxpayers residing outside the U.S.  The IRS has also provided guidance for those taxpayers who have reported all of the taxable income from their foreign assets but have failed to satisfy one or more of the above disclosure requirements.

For more information, please contact Greg Cabral at gcabral@blumshapiro.com or 401.330.2734.

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof, and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

 

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