IRS Offshore Voluntary Compliance ProgramJuly 16, 2014
Stan Baranski, CPA
Since 2009, the IRS has operated an Offshore Voluntary Disclosure Program (OVDP) for U.S. taxpayers who have failed to disclose foreign assets or report foreign income from those assets to the IRS or the Treasury. The program provides reduced penalties and other benefits, giving taxpayers an opportunity to address their past non-compliance and "become right" with the government.
The IRS reports that 45,000 taxpayers have made voluntary disclosures since 2009 and have paid $6.5 billion in back taxes, interest and penalties. In 2014, the IRS made important changes to the OVDP, with the expectation that the revised program will lead to a significant increase in the number of U.S. taxpayers who participate in the OVDP and report their undisclosed foreign financial assets.
U.S. taxpayers, including U.S. citizens living abroad, must report and pay taxes on their worldwide income, including income from foreign assets. Taxpayers must report foreign accounts on Form 1040, Schedule B. If the value of their foreign financial assets exceeds certain thresholds, they must also file Form 8938, Statement of Foreign Financial Accounts. In addition, taxpayers with foreign accounts worth $10,000 or more must report the accounts on the Report of Foreign Bank and Financial Accounts (FBAR), which is filed with the Treasury (not the IRS). The reports must be received by the Treasury no later than June 30 of the year following the reporting year. No extension of time to file is available.
The IRS provided temporary OVDPs in 2009 and 2011. In 2012, it opened another OVDP that it continues to offer. Under the 2012 program, taxpayers must enter into a closing agreement with the IRS, file FBARs and updated tax returns for the prior eight years, and pay a penalty as high as 27.5%. In return, the IRS agrees not to pursue criminal penalties against taxpayers who may have willfully failed to report their foreign assets and/or income. In 2012, the IRS also unveiled a "streamlined procedures" program, with lighter penalties for U.S. taxpayers residing abroad who were non-willful evaders. To qualify the taxpayers’ unpaid tax balance could not exceed $1,500 in any tax year.
The revised streamlined procedures program was expanded in June of 2014 to taxpayers living in the United States. Participants are no longer required to have an unpaid tax balance of $1,500 or less per year. Participants self-certify that their non-compliance was not willful; the IRS will review their circumstances. Taxpayers must pay taxes on any unreported income from the past three years and must file required FBAR reports for the previous six years. Participants living abroad pay no penalty, while U.S. residents pay a miscellaneous offshore penalty of 5%.
The OVDP program for potentially willful evaders has been tightened. Taxpayers must provide increased information and must pay the 27.5% penalty at the time of application. In light of the expanded streamlined program, the IRS eliminated reduced penalties (5 and 12.5%) that had been offered to non-willful OVDP participants. To increase the pressure on non-filers, the IRS increased the penalty from 27.5% to 50% for taxpayers who used a foreign financial institution or a facilitator that the IRS or Justice Department publicly acknowledges to be under investigation.
Taxpayers are advised to consult with their tax adviser about these programs and choose carefully. A taxpayer cannot participate in both the streamlined and the OVDP programs; it is an either/or proposition. If a taxpayer is confident that his or her noncompliance was not willful, the streamlined program is a reasonable choice. However, this program provides no protection from criminal prosecution, further audits or proposed tax increases if the IRS decides that the taxpayer acted willfully.
For more information, please contact Stan Baranski at firstname.lastname@example.org or 860.561.6898.
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