Taxation Law Section
Welcome back! We are currently in the process of finalizing our fall schedule and will be sending out e-mails through the listserv regarding our fall meetings and CLE events.
Recently, the IRS announced sweeping changes to its offshore voluntary disclosure program. The changes include a significantly expanded streamlined program, potentially increased penalties for taxpayers seeking to apply to the offshore voluntary disclosure program on or after August 4, 2014 and transitional rules for taxpayers who are currently participating in the OVDP program but who have yet to receive a fully executed closing agreement (Form 906) from the Service. Each of these changes is discussed in finer detail below.
Expanded Streamlined Program. For qualifying taxpayers, the revised streamlined program is a tremendous opportunity to get into compliance without facing exceedingly high taxes, penalties and professional fees. Some of the key features include:
- As revised, the streamlined program is now available to domestic taxpayers as well as taxpayers residing overseas (previously, the streamlined program was available only to those taxpayers residing overseas).
- The requirement that the taxpayer have a tax liability of $1,500 or less has been eliminated. Thus, the program is available to all taxpayers, even if they have a significant amount of unreported income, provided that the taxpayer’s failure to file foreign information reports (FBARs, Form 5471, Form 8938, etc.) and report foreign source income was not willful.
- Taxpayers must certify, under the penalties of perjury, that their non-compliance was not willful. The IRS has indicated that all certifications will be thoroughly reviewed.
- Taxpayers must file three years’ worth of tax returns (or amended tax returns, as the case may be), reporting all income and six years’ worth of FBARs.
- Taxpayers must pay their income tax liability in full (plus interest) and a penalty of five percent (5%) of the highest year-end balance of all foreign accounts over the six year period covered by the FBARs.
Revised OVDP. The OVDP remains an option for taxpayers who do not qualify for the streamlined program. Some of the key changes to the program include:
- The offshore penalty (27.5% previously) increases to 50% in cases where either (i) the financial institution where the account was held or; (ii) a “facilitator” who helped establish the account has been publicly identified as being under investigation or as cooperating with a government investigation.
- The offshore penalty is now due at the time the OVDP is submitted.
- The reduced penalty structure for taxpayers with inherited and dormant accounts has been eliminated (those taxpayers are encouraged to consider the streamlined program).
- Taxpayers must now submit accountant statements for all accounts, regardless of account balance. Previously, copies of account statements were only required when the asset values reached $500,000 or more.
Transition Relief. Taxpayers who entered the OVDP prior to the announcement of the revised procedures discussed above may be eligible to have their disclosure examined under the guidelines of the expanded streamlined program and, if they qualify, the offshore penalty will be reduced to 5% from 27.5%. The important transition rules include:
- To be considered, a taxpayer must have submitted a voluntary disclosure letter prior to July 1, 2014. Importantly, submission of preclearance documentation to IRS Criminal Investigations does not count for this purpose.
- The taxpayer must be a current participant in the OVDP. A taxpayer is a current participant if he or she has not received a fully executed closing agreement (Form 906) from the IRS. Thus, even taxpayers who have signed a closing agreement and submitted all payments are eligible for consideration provided that the IRS has not countersigned the From 906. Taxpayers who have received a fully-executed closing agreement are not eligible for the transition relief.
- The taxpayer must submit a certification of non-willful conduct, similar to that discussed above. The IRS will review each certification in detail.
- If the IRS agrees that the taxpayer’s conduct qualifies as non-willful, the lower 5% penalty will apply. If the IRS does not agree, the taxpayer remains eligible to participate in the OVDP under the original terms (i.e. there is no threat of removal).
- The taxpayer must abide by all other terms of the OVDP, including filing amended tax returns required under the program and pay all tax, penalties and interest due thereon. The taxpayer must also execute a closing agreement at the conclusion of the matter.
John S. Pontius, Jr.
Mark W. Schweighofer
None currently scheduled
None currently scheduled