Major Changes in Offshore Voluntary Disclosure Program

Last week the IRS announced major changes to the Offshore Voluntary Disclosure Program (OVDP).   These changes include some good news for taxpayers who non-willfully failed to comply with Foreign Bank Account Reporting (FBAR), but also include a higher penalty (50% of the account value) for those taxpayers who have or had bank accounts with foreign financial institutions, which have been identified by the IRS and the Department of Justice as under criminal investigation or cooperating with U.S. government.

Expansion of Streamlined Procedure

The IRS has expanded is Streamlined Procedure, which was put in effect in 2012, to include a wider group of U.S. taxpayers who have non-willfully failed to report foreign financial accounts.  The original streamlined procedure was available only to non-resident, non-filer taxpayers: those U.S. taxpayers who were residing abroad and have failed to meet their U.S. filing obligations. For those taxpayers who presented a “low risk” of non-compliance, the IRS waived all the penalties associated with the failure to file an FBAR.

The expanded Streamlined Procedure is now available, effective as of July 1, 2014, not only to U.S. taxpayers living outside the country but also to certain U.S. taxpayers residing in the United States. The changes include:

• Eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year;
• Eliminating the required risk questionnaire;
• Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, who certify under the penalty of perjury that their failure to comply was non-willful, the only penalty will be a miscellaneous offshore penalty equal to 5% of the highest value of foreign financial assets that gave rise to the tax non-compliance.  The taxpayers will have to submit three years of income tax returns, reflecting their correct income, and six years of FBARs.  Other than the 5% penalty, the IRS will not assess any other penalties.

Those taxpayers who are currently participating in the OVDP, but who do not have their closing agreements countersigned by the IRS, may be eligible for the Streamlined Procedure and the reduced penalty.  Those taxpayers who have fully signed closing agreements, will not be able to reopen the case.

Changes to OVDP

The IRS also made major modifications to the existing Offshore Voluntary Disclosure Program.  These changes involve the amount of the offshore penalty that may apply in the OVDP, and put additional requirements with respect to submissions.

The changes include:

* Requiring additional information from taxpayers applying to the program.

Taxpayers who make a clearance submission to the IRS Criminal Investigation division now have to include the name and address of the financial institution subject to disclosure, and names of any entities through which the offshore bank account was held.  Also, the taxpayers will now have to submit copies of bank statements regardless of the amount in the account.  Previously, under the terms of the 2012 OVDP, only accounts with more than $500,000 required bank statements.

*  Eliminating the reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures.

Under the terms of the 2012 OVDP, certain taxpayers qualified for the 5% offshore penalty.  Now, it appears that the taxpayers will have to

choose between OVDP and Streamlined Procedure.