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IRS Announces Changes to Offshore Programs

Subject: US Tax Filings Number: 14-09 Date: 6/27/2014

the voluntary compliance window is closing

On June 18, 2014, the IRS announced changes to both the Streamlined Filing Compliance Procedures ("Streamlined Method" — see Tax Tips 12-28 and 12-18) and to the 2012 Offshore Voluntary Disclosure Program (OVDP — see Tax Tips 12-02, 11-09, 11-06 and 11-05).  For most U.S. citizens or green-card holders living in Canada, the revisions to the Streamlined Filing Compliance Procedures are a welcome relief.

The previous Streamlined Compliance Filing Procedures were intended to provide low-risk non-compliant non-resident U.S. individuals with an alternative to the more penalty-laden OVDP for bringing their filings up to date.  “Low risk” was defined as a simple return with less than US$1,500 tax due per year.  Risk level increased as the taxpayer’s income and assets rose, if there were indications of sophisticated tax planning or avoidance, or if there was material economic activity in the United States.

Until the new Streamlined Method was announced it was not clear whether "simple" returns where the tax balance exceeded US$1,500 would be accepted under this program.  In addition, taxpayers who owned private companies and had U.S. foreign-reporting issues may not have qualified and were forced into the highly penalized OVDP.

The new changes appear to have resolved these issues and allow "innocent" non-filers to become fully compliant without the threat of IRS penalties.  The changes are as follows:

1. The requirement that the taxpayer have US$1,500 or less of unpaid tax per year is eliminated.
2. The required risk questionnaire is eliminated.
3. The taxpayer must certify that previous failures to comply were not due to willful conduct.

For eligible taxpayers living outside the U.S., all penalties (including FBAR) will be waived.  As before, any taxes and interest will be required to be paid at time of filing.

In addition, taxpayers who now live in the U.S. may also file under this procedure.  For these taxpayers, the only penalty will be a miscellaneous offshore penalty equal to 5% of the foreign financial assets that give rise to the tax compliance issue.

Changes were also made to the OVDP as follows:

1. Additional information will be requested from taxpayers applying to the program.
2. The reduced penalty percentage (12% or 5%) for certain non-willful taxpayers will be eliminated, in light of the expansion of the Streamlined Compliance Filing Procedures.
3. Taxpayers will be required to submit all account statements and pay the offshore penalty at the time of the OVDP application.
4. Taxpayers will be able to submit voluminous records electronically rather than on paper.
5. The penalty will be increased from 27.5% to 50% of the highest aggregate value of the OVDP assets during the period covered, if the taxpayer does not request clearance under the OVDP before an entity involved in the taxpayer's unreported income is investigated by the IRS or Department of Justice. 

With these changes, the IRS is making it easier for innocent non-filers to bring their U.S. filings up to date, while at the same time increasing the risk and penalties for those taxpayers who knowingly hid assets outside the U.S., and did not report the assets and the associated income to the IRS.

With intergovernmental information exchange under the Foreign Account Compliance Tax Act (FATCA - see Tax Tip 14-03) scheduled to begin in 2015, the voluntary compliance window is closing on non-compliant U.S. taxpayers.  We urge you to act sooner rather than later to take advantage of these programs while they exist.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.