The IRS announced on June 18, 2014 widely anticipated changes to the 2012 Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. taxpayers (the “Streamlined Procedures”) and the 2012 Offshore Voluntary Disclosure Program (OVDP).
The June 18, 2014 IRS announcement may mark the last time foreign or U.S. individuals can protect themselves from draconian IRS penalties. The IRS believes that there are still many individuals both inside and outside of the U.S. who are delinquent in complying with their U.S. tax reporting requirements. Thus, for these taxpayers this is the last opportunity to get into compliance.
These changes affect a significant number of U.S. taxpayers who may have unreported foreign income or assets. For example, the following taxpayers may benefit from the OVDP:
- U.S. citizens with foreign-sourced income and accounts.
- U.S. taxpayers with foreign trusts.
- U.S. businesses with foreign filing obligations.
- Taxpayers who have received a letter from a foreign financial institution.
In general, these changes relax the rules for non-willful filers and at the same time potentially increase the penalties for willful non-compliance. The changes appear to give some recognition to the many complaints that the OVDP penalties were too harsh and provide an official path forward to come into compliance on a penalty free or penalty limited basis.
The major changes to the OVDP include the following:
- Additional information will be required from taxpayers applying to the program;
- The existing reduced penalty percentage for non-willful taxpayers will be eliminated;
- All account statements, as well as payment of the offshore penalty, must be submitted at the time of the OVDP application;
- Taxpayers will be able to submit important amounts of records electronically; and
- The offshore penalty will be increased from 27.5% to 50% if, prior to the taxpayer’s pre-clearance submission, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by IRS or the Department of Justice.
- The availability of the program is extended to certain U.S. taxpayers residing in the U.S.;
- The requirement that the taxpayer have $1,500 or less of unpaid tax per year is eliminated;
- The Streamlined risk questionnaire is eliminated; and
- The taxpayer is now required to certify that previous failures to comply were due to non-willful conduct.
- All penalties will be waived for eligible U.S. taxpayers living outside the U.S. Eligible taxpayers living in the U.S. will only incur a 5% miscellaneous offshore penalty on the foreign financial assets that gave rise to the tax compliance issue.
It should be noted that taxpayers who, prior to July 1, 2014, submitted their intake letter and attachments, can benefit from the new reduced penalty structure if they are eligible for the new program.