On June 18, 2014, the Internal Revenue Service (IRS) significantly modified the Offshore Voluntary Disclosure Program (OVDP). The various changes to the program generally take effect for any submissions made after July 1, 2014. It is important to note that while many refer to the recent changes as the 2014 OVDP Program, this is in fact a continuation of the 2012 OVDP program with modified terms and not an entirely new program implemented by the IRS.
The OVDP is specifically designed for taxpayers with exposure to potential civil and/or criminal penalties such as the result of willful neglect, the failure to report foreign financial assets or paying all the tax due with respect to those accounts. The OVDP is designed to offer protection from criminal liability and a set of fixed terms to resolve civil tax and penalty obligations.
As a result of the modifications, taxpayers now generally have four options in which to alleviate tax exposure and cure prior years’ delinquent tax filings. The four options are:
- Enrollment in the formal process of the OVDP
- Streamline Filing Compliance Procedure
- Delinquent FBAR submission procedures
- Delinquent international information return submission procedures
Some of the more significant changes to the OVDP include:
Offshore Penalty Increases to 50%
Beginning August 4, 2014, taxpayers in certain cases who have undisclosed foreign financial accounts will be subject to a 50% penalty (previously 27.5%) if a “public disclosure event” has already occurred. Examples of “public event disclosures” include events in which the foreign financial institution or facilitator of the offshore arrangement is either under investigation, cooperating or served a summons by the U.S. Department of Justice.
Streamlined Filing Compliance Procedures
The IRS has expanded the Streamline Filing Compliance Procedure to cover a much broader group of U.S. taxpayers who have failed to disclose foreign accounts but who have not done so as the result of willful neglect. For the first time, certain taxpayers residing within the U.S. can now take advantage of this procedure. The procedures provide an expedited process to file amended and delinquent returns as well as terms of resolving tax and penalty obligations.
Generally, a taxpayer must file three years of prior income tax returns and six years of prior FBAR returns; calculate and pay all tax, interest and certain penalties due; and certify that the failure to file did not result from willful neglect. In exchange, the IRS may potentially waive various civil and criminal penalties for noncompliance that could amount to significant monetary savings.
Taxpayers should be aware that certain limitations apply to qualify under this procedure. In addition, there are certain risks and other considerations that must be considered with your tax advisor or attorney as to whether the Streamlined Filing Compliance Procedure is the appropriate course of action to take.
Delinquent FBAR Returns
The IRS has deleted and replaced FAQ #17 with a new option called, “Delinquent FBAR Submission Procedures.” These changes deal with the failure to file Foreign Bank and Financial Account Reports (FBAR). In general, the option is available for taxpayers who do not fall under formal OVDP process or Streamlined Filing Compliance Procedure to still file amended or delinquent tax returns.
In order to qualify for this option, the taxpayer must not have been under an ongoing civil or criminal investigation or have been contacted by the IRS regarding the delinquent FBAR filings. If the taxpayer qualifies, then all prior filings should be filed with a statement attached explaining the reason for late filing.
The IRS has stated that penalties will not be imposed under this procedure provided that all income associated with such foreign financial accounts have been reported on the taxpayer’s tax return.
Note that as of July 1, 2013, all FBARs, whether past or present, must now be filed electronically using the FinCEN website.
Delinquent International Information Returns
Similar to above, the IRS has deleted and replaced FAQ #18 with the option titled, “Delinquent International Information Return Submission Procedures.” In general, the option is available for taxpayers who do not fall under formal OVDP process or Streamlined Filing Compliance Procedure to still file amended or delinquent tax returns.
In general, a taxpayer must have reported and paid tax on all foreign income associated with their investment but failed to have filed the appropriate international information filing with his/her return. Furthermore, the taxpayer must not presently be under a civil or criminal investigation, not have been contacted by the IRS regarding the delinquent return (i.e., IRS notice) and must have reasonable cause for not timely filing such returns. As part the reasonable cause statement, the taxpayer must certify that the entity or individual for which the information filing relates to was not engaged in tax evasion.
The IRS instructs that any delinquent informational filings should be filed in accordance with the form instructions, attach a reasonable cause statement and clearly indicate at the top of the filing that it is being filed under the IRS OVDI program.
The IRS has updated the OVDP Frequently Asked Questions and Answers section on their webpage and more information can be found there regarding the above changes as well as numerous other updates.
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