IMPORTANT UPDATE: IRS ANNOUNCES BETTER ‘AMNESTY’ PROGRAM
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On June 18, the Internal Revenue Service announced new Voluntary Disclosure Procedures which include major changes for taxpayers living both outside and now inside the United States and who have failed to properly report their income and foreign financial accounts. With FATCA beginning on July 1, it is clear that full compliance with your income tax reporting requirements is a must. These changes are expected to give thousands of US persons a new way to come into compliance with their US tax filing obligations.
Through a coordinated set of announcements, the IRS has unveiled new Procedures and Forms, updated and released new FAQs and changed the face of its voluntary disclosure practice. We provide highlights of the new procedures below.
Streamline Procedures for taxpayers living outside the United States
The “risk assessment” and $1,500 maximum US tax liability requirements under the Original Streamline Procedure have now been eliminated.
Under the New Procedure the taxpayer must certify that the failure to report all income, pay all tax, and submit all required information returns (including the FBAR) was due to “non-willful conduct”, and must meet a “non-residency” requirement.
- Non-willful conduct is 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 non-residency requirement is met if, in any one or more of the most recent three years for which the US tax return due date (or properly applied for extended due date) has passed, the individual did not have a US abode and the individual was physically outside the United States for at least 330 full days.
Under the new Foreign Offshore Procedure the taxpayer must:
- For each of the most recent 3 years for which the US tax return due date (or properly applied for extended due date) has passed, file delinquent or amended tax returns, together with all required information returns (e.g., Forms 3520, 5471, and 8938), and
- For each of the most recent 6 years for which the FBAR due date has passed, file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1).
- The full amount of the tax and interest due in connection with these filings must be remitted with the delinquent or amended returns.
Under these new procedures eligible taxpayers who comply with the procedures will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties unless the returns are selected for audit and upon audit a determination is made that the original tax noncompliance was fraudulent or that the FBAR violation was willful.
This dramatic change by the IRS in making the voluntary program broader, comes after Americans abroad have shown that their foreign accounts are legitimate and should not be penalized in the extreme for a technical reporting failure.
Streamline Procedures for taxpayers living inside the United States
Taxpayers qualify under the domestic procedure if they have previously filed a US tax return (if required) for each of the most recent 3 years for which the US tax return due date (or properly applied for extended due date) has passed; have failed to report gross income from a foreign financial asset and pay tax as required by US law, and may have failed to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset, and such failures resulted from non-willful conduct.
Under the new Domestic Offshore Procedure the taxpayer must:
- For each of the most recent 3 years for which the US tax return due date (or properly applied for extended due date) has passed (the “covered tax return period”), file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621),
- For each of the most recent 6 years for which the FBAR due date has passed (the “covered FBAR period”), file any delinquent FBARs (FinCEN Form 114, previously Form TD F 90-22.1), and
- Pay a Title 26 miscellaneous offshore penalty
- The full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns.
The Title 26 miscellaneous offshore penalty is equal to 5% of the highest aggregate balance/value of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. For this purpose, the highest aggregate balance/value is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance/value from among those years.
There are two key differences between the Foreign Offshore and Domestic Offshore procedures. The Domestic Offshore procedure requires that the taxpayer has actually filed a tax return during the prior three year period; secondly there is a 5% penalty imposed. Neither the return filing requirement nor the penalty is imposed for the Foreign Offshore procedure.
The IRS also announced a tightening of the current Offshore Voluntary Disclosure Program
An increase from the 27.5% penalty to 50% if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation if a pre-clearance letter has not been submitted by the 4th of August;
- The reduced penalty structure is no longer available in light of the expanded Streamline Procedure;
- The offshore penalties must now be paid at the time of the OVDP submissions; and voluminous records can now be submitted electronically.
The IRS has also provided guidance on transitional treatment to allow a taxpayer currently participating in an OVDP process to transition to the expanded Streamlined Filing Compliance Procedures where this taxpayer meets specified eligibility requirements.
Since 2009 the IRS has implemented three Offshore Voluntary Disclosure programs. These programs have resulted in more than 45,000 voluntary disclosures and the collection of over $6.5 billion in back taxes, interest and penalties.
Tax compliance is now a must. There is no longer any place to hide. Contact us to discuss voluntary disclosure or any other US tax issues.
IRS Makes Changes to Offshore Programs (IRS website)