In 2009, the IRS introduced the Offshore Voluntary Disclosure Program (“OVDP”), which was a settlement offer program for taxpayers to voluntarily and timely disclose unreported offshore income. The IRS subsequently introduced similar Programs in 2011 and 2012. Since the launch of the Program in 2009, more than 45,000 taxpayers have voluntarily complied with the OVDI’s and paid approximately $6.5 billion in taxes, interest, and penalties. However, the National Taxpayer Advocate has criticized the Programs as a “one-size-fits-all” approach that fails to draw any meaningful distinction between taxpayers who willfully fail to report foreign accounts and those who inadvertently fail to report foreign accounts. As a result, the IRS has recently introduced new streamlined procedures for certain taxpayers.
The new streamlined procedures are designed to accommodate U.S. taxpayers living outside the U.S. and certain taxpayers residing in the U.S. The new procedures eliminate the requirement that a taxpayer have $1,500 or less of unpaid tax per year, eliminate the risk questionnaire required of some taxpayers, and require the taxpayer to certify that previous failures to comply were due to non-willful conduct.
For eligible U.S. taxpayers residing outside the U.S., all penalties will be waived. For eligible U.S. taxpayers residing in the U.S., there will be a penalty equal to 5% of the foreign financial assets that gave rise to the tax compliance issue. Additional modifications to the Program include:
- Requiring additional information from taxpayers applying to the Program;
- Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
- Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the Program application;
- Enabling taxpayers to submit voluminous records electronically rather than on paper;
- Increasing the offshore penalty percentage to 50% if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.
The IRS has provided updated FAQ’s regarding the new streamlined process, which will apply to all new submissions beginning on July 1, 2014 and to taxpayers who are currently participating in an OVDP and meet certain eligibility requirements. If you would like more information, please contact your MarksNelson professional.