New 2014 Offshore Voluntary Disclosure Program Announced
June 18, 2014
On Wednesday, June 18, 2014 the Internal Revenue Service posted to its website Frequently Asked Questions and Answers regarding the 2014 Offshore Voluntary Disclosure Program (“OVDP”). In addition, the Internal Revenue Service posted revised Streamlined Filing Compliance Procedures (the “SFCP Program”) which (a) revise the SFCP Program for non-resident U.S. taxpayers and (b) extend the SFCP Program to U.S. residents.
Background. The OVDP is the fourth iteration of initiatives going back to 2009 intended to encourage U.S. citizens and residents (“U.S. Persons”) to disclose the existence of foreign accounts and other assets and report income attributable to those assets. Prior initiatives have resulted in 45,000 submissions and collection of $6.5 billion in revenue. Changes to the OVDP are effective July 1, 2014. Although not directly related, July 1, 2014 is also the deadline for foreign financial institutions to register under Foreign Account Tax Compliance Act (“FATCA”). (Please refer to the article which is attached for a complete review of FATCA and its implementation by the Intergovernmental Agreement between Canada and the United States.)
Streamlined Foreign Offshore Procedures. Changes to the SFCP Program are significant. For U.S. persons who do not reside in the United States:
- Non-residency requirements are clarified and expanded: the taxpayer need only satisfy the non-residency requirement for one of the three most recent years.
- Qualification is no longer based upon compliance risk: failures in U.S. tax compliance must result from “non-willful conduct.”
Other features of the Streamlined Foreign Offshore Procedures remain essentially the same as under the prior SFCP Program.
- Filing requirements are basically unchanged: three years tax and related information returns and six years Foreign Bank Account Reporting Forms (FinCEN 114, previously Form TD F 90-22.1).
- Taxpayers whose non-compliance was not willful are required to pay the full amount of any U.S. tax due plus interest but no penalties.
2014 OVDP. Many changes have been made to the OVDP process. However, the most significant change is a dramatic increase in the Offshore Penalty for certain taxpayers who fail to submit a preclearance letter prior to August 4, 2014. The Offshore Penalty is increased from 27.5% to 50% for those taxpayers who have an account at a foreign financial institution
(1) under investigation by the Internal Revenue Service or the United States Department of Justice,
(2) cooperating with IRS or Department of Justice, or
(3) identified in a court-issued summons seeking information about U.S. persons who may hold financial accounts (a “John Doe summons”) at the
foreign financial institution.
If a sense of urgency did not exist before, it surely should now. Especially for non-residents who cannot meet the non-willful standard, making a voluntary disclosure before the July effective date would in many cases reduce the Offshore Penalty from 27.5% to 5% and apply the Penalty to fewer assets.
Streamlined Offshore Domestic Procedures. As observed above, the SFCP Program has been extended to U.S. residents. U.S. residents whose compliance failures resulted from non-willful conduct will be eligible to make submissions comparable to those available under the SFCP Program. The most significant distinction between the Streamlined Offshore Domestic Procedures and the Streamlined Filing Offshore Procedures is that U.S. residents will be subject to a 5% Offshore Penalty. The Offshore Penalty is imposed on the aggregate high balance of the taxpayer’s foreign accounts. Accounts on which the Offshore Penalty is assessed include bank accounts, brokerage accounts, as well as other types of financial accounts. The Streamlined Domestic Offshore Procedures take the place of the 12.5% and 5% penalties available under the 2012 OVDP.
Role of Counsel. The choice between the OVDP and SFCP Programs has become more perilous. Under the 2012 SFCP, taxpayers who “did not represent a high compliance risk” would not be subject to penalties. As a result, the SFCP Program was a considerably more attractive option to come into compliance than the OVDP because (a) it involved submitting significantly fewer years returns (three years instead of eight) and (b) penalties would not be assessed. However, waiver of penalties remained in the discretion of the Internal Revenue Service and could be asserted in cases in which the taxpayer represented a high-compliance risk. In contrast, the OVDP offered certainty in that the penalties imposed were capped (5%, 12.5%, or 27.5% in the case of the Offshore Penalty).
The Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures dispense with the indicia used to assess the taxpayer’s compliance risk and instead provide a willfulness standard. “Non-willful conduct is conduct due to negligence, inadvertence, or mistake or conduct that is a result of a good faith misunderstanding of the requirements of the law.” Making the determination as to whether the taxpayer’s conduct satisfies the non-willful standard will require (a) careful and complete examination of the facts of the taxpayer’s circumstance and (b) a clear understanding of the case law assessing willfulness.
“Thus, returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate. Taxpayers who are concerned that their failure to report income, pay tax, and submit information returns was due to willful conduct and therefore seek assurances that they will not be subject to criminal liability and/or substantial monetary penalties should consider participating in the Offshore Voluntary Disclosure Program (OVDP) and should consult with their professional tax and legal advisors.” (Emphasis supplied.)