IRS Eases Offshore Voluntary Disclosure Program for Non-willful Tax Evasion

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The Internal Revenue Service said Wednesday it would make major changes in its offshore voluntary compliance programs to provide new options to help both taxpayers residing overseas and those residing in the United States.

The changes are expected to provide thousands of people a new way to come into compliance with U.S. tax obligations. The changes include an expansion of the streamlined filing compliance procedures that were announced in 2012 and important modifications to the 2012 Offshore Voluntary Disclosure Program, or OVDP. The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was non-willful.

“This opens a new pathway for people with offshore assets to come into tax compliance,” said IRS commissioner John Koskinen in a statement. “The new versions of our offshore programs reflect a carefully balanced approach to ensure everyone pays their fair share of taxes owed. Through the changes we are announcing today, we provide additional flexibility in key respects while maintaining the central components of our voluntary programs.”

He noted that the goal is to build on the success the IRS has already had in reducing offshore tax evasion through the OVDP, which allows individuals to avoid criminal prosecution if they disclose their foreign accounts and pay a substantial penalty.

“The current OVDP is the successor to prior initiatives in 2011 and 2009,” said Koskinen. “Taken together, these programs have resulted in more than 45,000 disclosures and the collection of about $6.5 billion in taxes, interest and penalties. To supplement the OVDP, in 2012 we added what we call the streamlined filing compliance procedures. This has provided a way for a limited group of U.S. taxpayers living abroad who didn’t know they were out of compliance to catch up on their U.S. filing requirements without paying steep penalties.”

The IRS believes the changes will encourage many more taxpayers with foreign income to come forward of their own accord.

“We believe that these changes are likely to lead to significant increases in the number of U.S. taxpayers with foreign offshore investments and/or residing in offshore locations coming forward to the IRS and getting right with the tax system, ensuring that their compliance with U.S. tax rules is what it should be,” said Michael Danilack, the IRS’s Large Business and International Deputy Commissioner (International) in a conference call with reporters.

The two sets of actions announced by the IRS on Wednesday involve technical issues, but carry great importance for thousands of taxpayers and the agencys's continuing efforts in the offshore arena.

“First, we’re expanding the streamlined procedures to cover a much broader group of U.S. taxpayers we believe are out there who have failed to disclose their foreign accounts but who aren’t willfully evading their tax obligations,” said Koskinen. “To encourage these taxpayers to come forward, we’re expanding the eligibility criteria, eliminating a cap on the amount of tax owed to qualify for the program, and doing away with a questionnaire that applicants were required to complete.”

Secondly, the IRS is reshaping the terms for taxpayers to participate in the OVDP. “This is designed to cover those whose failure to comply with reporting requirements is considered willful in nature, and who therefore don’t qualify for the streamlined procedures,” Koskinen explained. “These changes will help focus this program on people seeking certainty and relief from criminal prosecution. From now on, people who want to participate in this program will have to provide more information than in the past, submit all account statements at the time they apply for the program, and in some cases pay more in penalties than they would have done had they entered this program earlier.”

Both programs have been around for about two years, but the IRS is making substantial changes in them, in part due to feedback from tax practitioners.

“The OVDP is a program that is in its third generation,” said Danilack. “The first offshore voluntary disclosure program was launched in 2009. It had a limited term that ended in 2009 as well. There was a second iteration for offshore assets in 2011. That one also began and ended later in 2011. Then in 2012 we opened a 2012 OVDP program. In opening that program, we promised that it wouldn’t sunset at a particular point in time. Instead it would be evergreen until a point in time when we decided that closing the program down was appropriate. We have not reached that point yet. As a matter of fact, we’re making a set of modifications for that 2012 OVDP. The second program that is the subject of change is the program we referred to as streamlined filing compliance procedures and this too is not brand new. It’s a program that was also initiated in 2012, and that program was designed in particular for individuals that reside outside the United States to come into compliance and file their returns and get right with the system.”

Koskinen noted that the changes reflect the helpful feedback of tax practitioners and the National Taxpayer Advocate, along with what we learned in our experience operating the OVDP.

“Over time, we discovered that there were people, including many here in the U.S., for whom the existing program penalties were too harsh or restrictive,” he said. “These people had small enough issues that they didn’t really need the protection from criminal prosecution offered by the OVDP. But they also didn’t fit into the narrow criteria of the streamlined procedures, either. It’s important to keep in mind that the IRS is seeking a balanced approach with this program, particularly in light of our other work on offshore issues.  Our aim is to get people to disclose their accounts, pay the tax they owe and get right with the government. At the same time, for important categories of these non-willful people with offshore issues, a compliance regime that is too harsh won’t net the desired result."

In addition, the IRS wants to send a message to anyone who continues to willfully and aggressively evade the tax laws by hiding money overseas that they will pay a higher price for that noncompliance, Koskinen noted.

“Even though we’re tightening components of the OVDP, we still believe it’s a better deal than the alternative, because if we find you, you will face higher penalties and, as the record shows, could face criminal prosecution and jail time,” he said. “We want everyone to know that we are continuing our efforts to track down people still out there who are hiding assets overseas. More information on these accounts is coming in every day. For example, Swiss banks are cooperating through a program put in place last year by the Department of Justice. I would note that Justice recently reached an historic agreement with Credit Suisse. Also, more banks around the world will be coming forward with information on their U.S. customers beginning July 1. That’s when reporting requirements under the Foreign Account Tax Compliance Act, or FATCA, go into effect. It’s clear that the days of hiding assets in accounts overseas are coming to an end. There is no reason not to come into compliance.”

The IRS is encouraging taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. “By then, it will be too late to avoid the new higher penalties under the OVDP of 50 percent – nearly double the regular 27.5 percent,” said Koskinen. “For anyone who wants to come into compliance but isn’t sure what to do, I recommend talking to a tax professional or going to our website, This has a wealth of information about what disclosures are required and how to make them; we plan to add to this area.”

Balanced against the modified programs is the government’s ongoing effort to combat the misuse of offshore assets. The IRS, working closely with the U.S. Department of Justice, continues to investigate foreign financial institutions that may have assisted U.S. taxpayers in avoiding their tax filing and payment obligations. In addition, on July 1, the new information reporting regime resulting from the Foreign Account Tax Compliance Act (FATCA) will go into effect. Thousands of foreign financial institutions will begin to report to the IRS the foreign accounts held by U.S. persons. 

The current Offshore Voluntary Disclosure Program was launched in 2012 and is the successor to prior voluntary programs offered in 2011 and 2009. Since the launch of the first program, more than 45,000 taxpayers have come into compliance voluntarily, paying about $6.5 billion in taxes, interest and penalties.

The expansion of the streamlined procedures and modifications to OVDP reflect the thoughtful input of the tax community given the growing awareness among U.S. taxpayers of their offshore tax obligations.

“Through our enforcement efforts and implementation of FATCA, taxpayers are more aware of their obligations, and we believe want to come into compliance,” Koskinen said. “In this rapidly changing environment, we listened to feedback from the tax community as well as the National Taxpayer Advocate about our voluntary programs. We have made important adjustments to provide opportunities for all U.S. taxpayers to come in, including those who are not willfully hiding assets.”

“For me as a tax administrator, the bottom line on what we’re announcing today is about fairness,” Kosknen noted. “For our system of voluntary tax compliance to work right, the average taxpayer who abides by the law has to be confident that everyone is being held to a similar standard. As part of that, people can no longer expect to hide their money in foreign countries and avoid paying their fair share.”

The changes announced Wednesday make key expansions in the streamlined procedures to accommodate a wider group of U.S. taxpayers who have unreported foreign financial accounts.
The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. Taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a “risk” questionnaire.

The expanded streamlined procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States.

The changes include:  
•    Eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year;  
•    Eliminating the required risk questionnaire;
•    Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

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

The changes announced today also make important modifications to the OVDP. The changes 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 OVDP application;
•    Enabling taxpayers to submit voluminous records electronically rather than on paper;
•    Increasing the offshore penalty percentage (from 27.5% 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.

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