The Internal Revenue Service said Wednesday it would make major changes in its offshore voluntary compliance programs to provide new options to help both taxpayers residing overseas and those residing in the United States.
The changes announced Wednesday make key expansions in the streamlined procedures to accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts.
The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. Taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a “risk” questionnaire.
The expanded streamlined procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, 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, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.
The changes announced today also make important modifications to the OVDP. The changes include:
- Requiring additional information from taxpayers applying to the program;
- Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
- Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
- Enabling taxpayers to submit voluminous records electronically rather than on paper;
- Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, 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 the IRS or Department of Justice.
The changes are expected to provide thousands of people a new way to come into compliance with U.S. tax obligations. The changes include an expansion of the streamlined filing compliance procedures that were announced in 2012 and important modifications to the 2012 Offshore Voluntary Disclosure Program, or OVDP. The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was non-willful.
“This opens a new pathway for people with offshore assets to come into tax compliance,” said IRS commissioner John Koskinen in a statement. “The new versions of our offshore programs reflect a carefully balanced approach to ensure everyone pays their fair share of taxes owed. Through the changes we are announcing today, we provide additional flexibility in key respects while maintaining the central components of our voluntary programs.”
He noted that the goal is to build on the success the IRS has already had in reducing offshore tax evasion through the OVDP, which allows individuals to avoid criminal prosecution if they disclose their foreign accounts and pay a substantial penalty.
The IRS believes the changes will encourage many more taxpayers with foreign income to come forward of their own accord.
The two sets of actions announced by the IRS on Wednesday involve technical issues, but carry great importance for thousands of taxpayers and the agencys’s continuing efforts in the offshore arena.
First, the IRS is expanding the streamlined procedures to cover a much broader group of U.S. taxpayers we believe are out there who have failed to disclose their foreign accounts but who aren’t willfully evading their tax obligations. The IRS in an effort to encourage these taxpayers to come forward, is expanding the eligibility criteria, eliminating a cap on the amount of tax owed to qualify for the program, and doing away with a questionnaire that applicants were required to complete.
Second, the IRS is reshaping the terms for taxpayers to participate in the OVDP. This is designed to cover those whose failure to comply with reporting requirements is considered willful in nature, and who therefore don’t qualify for the streamlined procedures.. These changes will help focus this program on people seeking certainty and relief from criminal prosecution. From now on, people who want to participate in this program will have to provide more information than in the past, submit all account statements at the time they apply for the program, and in some cases pay more in penalties than they would have done had they entered this program earlier.
Both programs have been around for about two years, but the IRS is making substantial changes in them, in part due to feedback from tax practitioners.
The OVDP is a program that is in its third generation. The first offshore voluntary disclosure program was launched in 2009. It had a limited term that ended in 2009 as well. There was a second iteration for offshore assets in 2011. That one also began and ended later in 2011. Then in 2012 the IRS opened a 2012 OVDP program. In opening that program, IRS promised that it wouldn’t sunset at a particular point in time. Instead it would be evergreen until a point in time when they decided that closing the program down was appropriate. The IRS has not reached that point yet and is making a set of modifications for that 2012 OVDP. The second program that is the subject of change is the program IRS referred to as streamlined filing compliance procedures and this too is not brand new. It’s a program that was also initiated in 2012, and that program was designed in particular for individuals that reside outside the United States to come into compliance and file their returns and get right with the system.
In addition, the IRS wants to send a message to anyone who continues to willfully and aggressively evade the tax laws by hiding money overseas that they will pay a higher price for that noncompliance.
The IRS is encouraging taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50 percent – nearly double the regular 27.5 percent.
The expansion of the streamlined procedures and modifications to OVDP reflect the thoughtful input of the tax community given the growing awareness among U.S. taxpayers of their offshore tax obligations.