IRS Announces New Efforts to Help Offshore Taxpayers Be in Compliance
By Alan Olsen, CPA, MBA (tax)
Greenstein Rogoff Olsen & Co. LLP
For years the IRS has been trying to track down U.S. citizens’ offshore assets in order to ensure that taxpayers are paying every penny they owe. However, these efforts have often affected many people who had no intention of ever skipping out on their taxes. Many taxpayers have been deemed non-compliant simply because they didn’t understand all the tax rules. There could now be some relief for many of those taxpayers.
That’s because the IRS recently announced some major changes to its 2012 Offshore Voluntary Disclosure Program OVDP. The most significant changes include an expansion of the streamlined filing compliance procedures that were originally announced in 2012, as well as some very important modifications to the 2012 OVDP. The expanded streamlined procedures are intended for any U.S. taxpayer who failed to disclosure his or her offshore assets non-willfully. The penalty in such a case has now been reduced to 5% on non-compliance of form 8938. Originally it was 27.5%. Other changes include:
- No requirement that taxpayers have $1,500 or less of unpaid tax per year
- Eliminating the required risk questionnaire
- Taxpayers no longer have to certify that previous failures to comply were due to non-willful conduct
What Is Non-Willful Conduct?
The main requirement to be consider non-willful compliance is: “Failure to report gross income from a foreign financial asset and pay tax as required by U.S. law and failure to file an FBAR and/or one or more international information returns with respect to the foreign financial asset resulted from non-willful conduct.” So what is non-willful conduct? According to the IRS, “non-willful conduct is conduct that is due to negligence, inadvertence or mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law.”
What Does it Mean?
Because of these changes, any taxpayer who is eligible for treatment under the streamlined procedures who submits, or has already submitted, a voluntary disclosure letter under the OVDP prior to July 1, 2014, but who does not yet have a fully executed OVDP closing agreement, may now request treatment under the applicable penalty terms available under the streamlined procedures. That means the IRS will now consider this request as it weighs all the facts and circumstances of each taxpayer’s case. The IRS will then determine whether or not to incorporate the streamlined penalty terms in the OVDP closing agreement.
However, be aware that this is not a “get-out-of-jail-free” card by any means. Just because you participate in Streamlined Offshore Procedure that does not mean that you can skirt the system. If the IRS later examines your return and determines that the non-filing occurred due to willful noncompliance then you may be hit with both civil penalties and criminal prosecution. On the other hand, the amended returns that are submitted will not automatically trigger the IRS examination.
Other Important Modifications
There were several other important modifications that were announced. They include:
- Requiring additional information from taxpayers applying to the program
- Eliminating the existing reduced penalty percentage for certain non-willful taxpayers
- Taxpayers must now pay the offshore penalty and submit all account statements at the time of the OVDP application
- Taxpayers can now submit voluminous records electronically rather than on paper
- If 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, before the taxpayer’s OVDP pre-clearance request is submitted, then the offshore penalty percentage can be increased from 27.5 percent to 50 percent.