On June 18, 2014, the IRS announced major changes in the 2012 offshore account compliance programs, providing new options to help taxpayers residing in the United States and overseas. The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations.
The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide to taxpayers in such situations (1) a streamlined procedure for filing amended or delinquent returns and (2) terms for resolving their tax and penalty obligations.
Taxpayers will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.
If the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.
Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called “quiet disclosures” made outside of the Offshore Voluntary Disclosure Program (“OVDP”) or its predecessor programs) may still use the streamlined procedures.
The Streamlined Procedures are classified between U.S. Taxpayers Residing Outside the United States and U.S. Taxpayers Residing in the United States.
Both versions require that taxpayers:
a. Certify that the failure to report the income from a foreign financial asset and pay tax as required by U.S. law, and failure to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, resulted from non-willful conduct. 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.
b. File 3 years of back tax returns reflecting unreported foreign source income;
c. File 6 years of back FBAR’s reporting the foreign financial accounts; and
d. Calculate interest each year on unpaid tax.
In return for entering the streamlined offshore voluntary disclosure program, the IRS has agreed:
a. Possible waiver of charges of criminal tax evasion which would have resulted in jail time or a felony on your record;
b. Possible waiver of other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance); and
c. Possible waiver of the 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651.
For U.S. Taxpayers Residing Outside the United States who apply to the streamlined program, the IRS is waiving the OVDP penalty.
For U.S. Taxpayers Residing in the United States who apply to the streamlined program, the IRS is imposing a 5% OVDP penalty (applied against the value of the undisclosed foreign income producing accounts/assets).
Disadvantages Of The 2014 OVDP Streamlined Procedures.
While the lower penalty rate is attractive, you need to consider whether this benefit outweighs the possible risks.
Closing Letter Not Issued. Under the traditional Voluntary Disclosure Program, a civil Revenue Agent will be assigned to review the amended income tax returns and delinquent FBAR’s. Upon the completion of the agent’s review a Closing Package will be issued and the case closed. Under the streamlined program, the IRS will set aside your submission and reserve up to three years to assign it to and agent for review. Only if the submission is not pulled for review in the next three years, could you consider the case to be closed.
Submissions Never Receive Final Clearance For The Criminal Investigation Division. Under the traditional Voluntary Disclosure Program, a taxpayer first registers and seeks clearance from the Criminal Investigation Division before amended income tax returns and delinquent FBAR’s are filed. Under the streamlined program, CID is completely bypassed so if IRS were to later determine that a criminal investigation is warranted, your case can be referred to CID.
Certification Of Non-Willfulness Could Be Used Against Taxpayer. Under the traditional Voluntary Disclosure Program, a taxpayer does not sign under penalties of perjury that he or she did not act willfully. Under the streamlined program, this Certification must be submitted before the IRS ever evaluates the submission. If the IRS later determines that this Certification is false, you can also be charged with making a false statement to the IRS.
Work Product Produced By Non-Attorneys Is Not Privileged. Under the traditional Voluntary Disclosure Program, the IRS early on determines whether the case is to be administered by the Criminal Investigation Division or the Civil Division. Under the streamlined program, this decision is deferred until sometime after the full submission of documents is filed. By then it would be too late if your case is instead referred for criminal investigation to prevent disclosure of work product by non-attorneys or your communications with non-attorneys. By engaging a tax attorney experienced in voluntary disclosures of offshore accounts at the beginning, can you insure that this work product and these communications remain privileged and are unavailable to IRS.
What Should You Do?
We encourage 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 maximum rate of 27.5%.
Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or you are in the 2012 Offshore Voluntary Disclosure Initiative (“OVDI”), you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.
Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.
Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.