Just in time for the Foreign Account Tax Compliance Act (FATCA), which goes into effect July 1, the IRS announced changes to its streamlined filing compliance procedures and its Offshore Voluntary Disclosure Program (OVDP) designed to make it easier for taxpayers to comply with their obligations to report offshore assets and accounts (IR-2014-73). In a prepared statement, IRS Commissioner John Koskinen said the changes provide “additional flexibility in key parts of our compliance effort while maintaining central components of the offshore program.”
Expansion of streamlined procedures
The streamlined procedures for taxpayers who have undisclosed foreign financial accounts announced in 2012, which previously applied only to nonresidents, will now be available to certain U.S. taxpayers living in the United States. Other changes to the program include eliminating the cap on outstanding taxes owed (formerly, participating taxpayers had to have $1,500 or less of unpaid tax each year), doing away with the required risk questionnaire, and adding a requirement that participants certify that their previous failure to comply with their obligations was due to nonwillful conduct.
A significant element of the streamlined procedures involves the penalty. Eligible taxpayers outside the United States will not be liable for any penalty, and those inside the United States will be subject to a 5% “miscellaneous offshore penalty” on the foreign assets that gave rise to the noncompliance.
To file returns under the streamlined program, taxpayers must have either a valid Social Security number or a valid individual taxpayer identification number (ITIN), but taxpayers without one can submit an ITIN application with their returns. Taxpayers who are under civil or criminal investigation are not eligible for the program, even if the exam is not about those accounts.
Offshore Voluntary Disclosure Program
The changes to the OVDP are designed to change its focus to those taxpayers whose failure to comply with reporting requirements is considered willful. They are intended to bring it in line with the new streamlined procedure, so, for example, the 5% penalty that could be imposed in certain limited circumstances has been eliminated because taxpayers who were eligible for that lower penalty amount should qualify for the streamlined program.
Other changes to the 2012 OVDP (which the IRS is now calling the 2014 OVDP) include:
- Requiring more information from taxpayers in their applications;
- Requiring applicants to submit all account statements and pay the offshore penalty when they submit their application;
- Adding the technology to enable applicants to submit supporting documentation electronically; and
- Increasing the penalty from 27.5% to 50% if, before the taxpayer submits its OVDP preclearance request, 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 the Justice Department.