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William Byrnes (Texas A&M) tax & compliance articles

new Offshore Voluntary Disclosure Program (OVDP) announced with carrot of reduced penalties or stick of 50% penalty

Posted by William Byrnes on June 18, 2014


As an update to my article – https://profwilliambyrnes.com/2014/06/11/why-is-the-irs-softening-the-offshore-voluntary-compliance-program/  – the IRS today formally announced the new, softer approach.

IRS Commissioner John Koskinen disclosed that the 2009, 2011, and ongoing 2012 OVDPs have generated more than 45,000 disclosures and the collection of about $6.5 billion in taxes, interest and penalties.  The substantial majority of this collection is FBAR penalty (see my previous articles on the OVDP and FBAR within this blog),

Commissioner Koskinen stated that in 2012 the IRS added the streamlined filing compliance procedures for a limited group of U.S. taxpayers living abroad who were not aware that they were out of compliance.  The streamlined process allows this group to catch up on their U.S. filing requirements without paying steep penalties.

He then announced two sets of actions:

“First, we’re 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. To encourage these taxpayers to come forward, we’re 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, we will be 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.”

Thus, in the first case, the IRS is removing the $1,500 cap for tax owed to be able to enter the non willful OVDP, and eliminating the submission of the extensive questionnaire.

But in the second case, the penalty will be increased from 27.5% to 50% if the bank that holds (held) the taxpayer’s account has come under investigation by the IRS before the taxpayer receives the IRS OVDP clearance letter.  The questionnaire will be expanded.

The formal new Streamlined Procedures program has been published as a set of FAQs with relevant links.   The 2012 program is as per the below.  An analysis of the new 2014 program will be published on this blog June 26, 2014.

50% Penalty

Beginning on August 4, 2014 (see Q&A 7.2), any taxpayer who has an undisclosed foreign financial account will be subject to a 50% miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation, an event has already occurred that constitutes a public disclosure that either

(a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person;

(b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person or

(c) the foreign financial institution or other facilitator has been identified in a court- approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a “John Doe summons”) at the foreign financial institution or have accounts established or maintained by the facilitator.

Examples of a public disclosure include, without limitation:  a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.   A list of foreign financial institutions or facilitators meeting this criteria is available.

Description of the Streamlined Procedure

This streamlined procedure is designed for taxpayers that present a low compliance risk. All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions.  Submissions that present higher compliance risk are not eligible for the streamlined processing procedures and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.

Taxpayers utilizing this procedure will be required to file delinquent tax returns, with appropriate related information returns (e.g. Form 3520 or 5471), for the past three years and to file delinquent FBARs for the past six years. Payment for the tax and interest, if applicable, must be remitted along with delinquent tax returns. For a summary of information about federal income tax return and FBAR filing requirements and potential penalties, see IRS Fact Sheet FS-2011-13. (December 2011).

In addition, retroactive relief for failure to timely elect income deferral on certain retirement and savings plans where deferral is permitted by relevant treaty is available through this process. The proper deferral elections with respect to such arrangements must be made with the submission. See instructions below.

Eligibility

This procedure is available for non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009, and who have not filed a U.S. tax return during the same period. These taxpayers must present a low level of compliance risk as described below

Amended returns submitted through this program will be treated as high risk returns and subject to examination, except for those filed for the sole purpose of submitting late-filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty. It should be noted that this relief is also available under the Offshore Voluntary Disclosure Program.  See below for the information required to be submitted with such requests. (If you need to file an amended return to correct previously reported or unreported income, deductions, credits, tax etc, you should not use this streamlined procedure. Depending on your circumstances, you may want to consider participating in the Offshore Voluntary Disclosure Program.)

All tax returns submitted under this procedure must have a valid Taxpayer Identification Number (TIN). For U.S. citizens, a TIN is a Social Security Number (SSN). For individuals that are not eligible for an SSN, an Individual Taxpayer Identification Number (ITIN) is a valid TIN. Tax returns filed without a valid SSN or ITIN will not be processed. For those who are ineligible for an SSN, but who do not have an ITIN, a submission may be made through this program if accompanied by a complete ITIN application. For information on obtaining an SSN, see http://www.ssa.gov. For information on obtaining an ITIN, see the ITIN page.

Compliance Risk Determination

The IRS will determine the level of compliance risk presented by the submission based on information provided on the returns filed and based on additional information provided in response to a Questionnaire required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent any high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk and processed in a streamlined manner.

The risk level may rise if any of the following are present:

  • If any of the returns submitted through this program claim a refund;
  • If there is material economic activity in the United States;
  • If the taxpayer has not declared all of his/her income in his/her country of residence;
  • If the taxpayer is under audit or investigation by the IRS;
  • If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
  • If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
  • If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
  • If there is U.S. source income; or
  • If there are indications of sophisticated tax planning or avoidance.

For additional information about what information will be requested to evaluate risk, please see the Questionnaire.

Instructions for Using This Procedure

Taxpayers wishing to use these streamlined procedures must:

1. Submit complete and accurate delinquent tax returns, with appropriate related information returns, for the last three years for which a U.S. tax return is due.

  • Please note that all delinquent information returns being filed under this procedure should be sent to the address below with the rest of the submission.

2. Include at the top of the first page of each tax return “Streamlined” to indicate that the returns are being submitted under this procedure. This is very important to ensure that your returns get processed through these procedures.

3. Submit payment of all tax due and owing as reflected on the returns and statutory interest due and owing.

  • For returns determined to be high risk, failure to file and failure to pay penalties may be imposed in accordance with U.S. federal tax laws and FBAR penalties may be imposed in accordance with U.S. law. Reasonable cause statements may be requested during review or examination of the returns determined to be high risk. For a summary of information about federal income tax return and FBAR filing requirements and potential penalties, see IRS Fact Sheet FS-2011-13(December 2011).

4. Submit copies of filed FBARs for the last six years for which an FBAR is due. (You should file delinquent FBARs according to the FBAR instructions and include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers. Through June 30, 2013, you may file electronically (http://bsaefiling.fincen.treas.gov) or by sending paper forms to Department of Treasury, Post Office Box 32621, Detroit, MI 48232-0621. After June 30, 2013, you must file electronically (http://bsaefiling.fincen.treas.gov.)) If you are unable to file electronically, you may contact FinCEN’s Regulatory Helpline at 1-800-949-2732 or (if calling from outside the United States) 1-703-905-3975 to determine possible alternatives for timely reporting.

NOTE: Taxpayers filing FBARs electronically do not currently have the technological ability to include a statement explaining that the FBARs are being filed as part of the Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers. Until such time that they have the ability, it is not necessary to include the statement. (July 18, 2013)

5. Submit a complete, accurate and signed Questionnaire.

6. If the taxpayer must apply for an ITIN in order to file delinquent returns under this procedure, the application and other documents required for applying for an ITIN must be attached to the the required forms, information and documentation required under this streamlined procedure. See the ITIN page for more.

7. Any taxpayer seeking relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty will be required to submit:

  • a statement requesting an extension of time to make an election to defer income tax and identifying the pertinent treaty provision;
  • for relevant Canadian plans, a Form 8891 for each tax year and each plan and a description of the type of plan covered by the submission; and
  • a dated statement signed by the taxpayer under penalties of perjury describing:
    • the events that led to the failure to make the election,
    • the events that led to the discovery of the failure, and
    • if the taxpayer relied on a professional advisor, the nature of the advisor’s engagement and responsibilities.

8. This program has been established for non-resident non-filers. Generally, amended returns will not be accepted in this program. The only amended returns accepted through this program are those being filed for the sole purpose of submitting late-filed Forms 8891 to seek relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant treaty. Non-resident taxpayers who have previously filed returns but wish to request deferral provisions will be required to submit:

  • an amended return reflecting no adjustments to income deductions, or credits; and
  • all documents required in item 7 above.

9. The documents listed above must be sent to:

Internal Revenue Service
3651 South I-H 35
Stop 6063 AUSC
Attn: Streamlined
Austin, TX 78741

Other Considerations

Taxpayers who are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution. Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the Offshore Voluntary Disclosure Program (OVDP), announced on Jan. 9, 2012, which offers another means by which taxpayers with undisclosed offshore accounts may become compliant. For additional information go to the OVDP page. It should be noted, however, that once a taxpayer makes a submission under the new procedure described in this document, OVDP is no longer available. It should also be noted that taxpayers who are ineligible to use OVDP are also ineligible to participate in this procedure.

2 Responses to “new Offshore Voluntary Disclosure Program (OVDP) announced with carrot of reduced penalties or stick of 50% penalty”

  1. […] new Offshore Voluntary Disclosure Program (OVDP) announced with potential 50% penalty. […]

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  2. […] See my previous article https://profwilliambyrnes.com/2014/06/18/new-offshore-voluntary-disclosure-program-ovdp-announced-wit… […]

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