IRS program changes for taxpayers with undisclosed offshore assets

The IRS has instituted major changes to its offshore voluntary compliance programs to provide new reporting options for taxpayers residing overseas and those residing in the US.  The changes include an expansion of the Streamlined Filing Compliance Procedures for nonresident, nonfiler US taxpayers, and a tightening of the Offshore Voluntary Disclosure Program (OVDP) rules.  The expanded streamlined procedures are intended for US taxpayers whose failure to disclose their offshore assets was nonwillful.  Nonwillful is defined as 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.

The expanded streamlined procedures are available to a wider population of US taxpayers living outside the country (individuals and their estates) and, for the first time, to certain US taxpayers residing in the US (individuals and their estates).  The changes include:

  1. Eliminating the requirement that the taxpayer have $1,500 or less of unpaid tax per year;
  2. Eliminating the required risk questionnaire; and
  3. Requiring the taxpayer to certify that previous failures to comply were due to nonwillful conduct (the certification requires taxpayers to identify the name and address of any prior tax advisor that the taxpayer identifies as having provided advice on which the taxpayer relied).

For eligible US taxpayers residing outside the US, all penalties will be waived.  For eligible US taxpayers residing in the US, the only penalty will be a miscellaneous penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

Changes to the OVDP Rules

The changes to the OVDP rules include:

  1. Eliminating the existing reduced penalty percentage for certain nonwillful taxpayers in light of the expansion of the streamlined procedures1;
  2. Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
  3. Enabling taxpayers to submit voluminous records electronically;
  4. Increasing the offshore penalty provision to 50 percent from 27.5 percent if, before the taxpayer’s OVDP submission, it becomes public that the financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or the Department of Justice.

For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.

1Note that the prior OVDP rules had reduced penalties of 12.5% of all foreign assets for noncompliant taxpayers with aggregate foreign assets that were less than $75,000 in each of the past eight years; and a 5% penalty for those noncompliant taxpayers that did not open the account, had minimal contact with the account, had not withdrawn more than $1,000 from the account in any year, and who could establish that all applicable US taxes were paid on the deposits to the account.  The new streamlined compliance rules do not, however, explicitly equate the factors in the 2012 12.5% and 5% rules to nonwillful conduct.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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