The Internal Revenue service has made major changes to its offshore voluntary compliance programs, providing new options to help taxpayers residing in the united states and overseas. The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations, according to the service.
The current OVDP 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.
IRS Commissioner John Koskinen announced two sets of modifications to the program. "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. 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 submit," he explained.
"Second, we will be 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. 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."
EVIDENCE OF CHANGE
"The original streamlined procedure was very narrowly tailored, and not many could meet the requirements," said James Mastraccho, partner and chair of the tax controversy practice at BakerHostetler. "The net result of the modifications will be to short circuit the need to opt out of the program and go to Appeals," he indicated.
The original streamlined procedures 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. "Many non-filers are really not willful evaders," Mastraccho said. "However, the IRS wants people to come in, but because of the 27.5 percent penalty, people are faced with very severe penalties. In the past, you could come in and if the penalty was too high you could opt out and deal with the agent. When you opted out, you would continue with the exam and try to work out a deal, and if you couldn't, you would wind up going to Appeals."
"Now, if you have someone who is non-willful, they simply file under the streamlined procedure, and sign an attestation that they are non-willful," he continued. "They just file three years of returns and six of FBARs, and that's it."
"For about the last five years, the IRS has had a program that allows individuals and companies that have unreported foreign accounts to come in out of the cold and get things straightened out," said Dennis Brager, head of the Los Angeles-based Brager Tax Law Group. "They can do this without criminal tax prosecution and at much lower penalty rate than if the IRS imposed the full penalty with respect to persons who wilfully fail to file foreign bank FBARs. The penalty was the greater of 50 percent of the balance or $100,000. That could be imposed for each year that the person failed to file FBAR. Since the statute of limitations is six years, conceivably the penalty could equal three times the balance in the account."
"So the IRS came up with the Offshore Voluntary Disclosure Program," he continued. "It has changed a bit over the last year, but as it was in place up through July 1, it imposed a one-time 27.5 percent penalty in lieu of possibly a 300 percent penalty. The complaint has always been that even 27.5 percent is rather harsh for individuals who didn't realize there was a requirement to file the FBAR. And under the old program -- the 2012 program -- there were some ways you could reduce the penalty, but most involved a rather large risk. If you thought what you did was not willful, you could opt out of the program, and the IRS would examine all the facts and circumstances regarding willfulness. If they disagreed, the penalty could be 50 percent or more of the account - you no longer had the protection of the 27.5 percent penalty."
"On June 18, the IRS announced a new program that would in some ways be much less onerous for people whose behavior was not willful," Brager said. "Essentially if you believe what you did was not willful, you file three years of amended tax returns, pay the tax, file six FBARs, and give an explanation of why you believe what you did was not willful. If the IRS agrees, then the penalty, instead of 27.5 percent or 50 percent will instead only be 5 percent, and if the individual taxpayer resides outside the U.S. then there would be no penalty."
"Many expatriates have foreign bank accounts as the result of living overseas," he added. "Many didn't realize they had the reporting requirement and did not realize they were supposed to be reporting all of their overseas income. For these individuals, this is a big sea change, and even for those living in the U.S. it is still a huge change because it brings the penalty down to only 5 percent."
EVIDENCE OF WILLFULNESS
Unfortunately, this program is not quite a free lunch, Brager observed. "One of the reasons that clients went into OVDP was to protect themselves against possible criminal prosecution," he said.
"If someone goes into the streamlined filing initiative -- the 5 percent program -- you have to file an affidavit stating that your failure to file the FBAR was not willful. If the IRS determines the statement is incorrect, that the failure to file FBARs is willful, at that point there is no protection from criminal prosecution. Contrast this with going into the OVDP. Even though it brings with it a 27.5 percent penalty, it comes with what amounts to a guarantee that you will not be criminally prosecuted. So there's going be a very large premium in determining up front whether to go into the streamlined program or the standard OVDP. It's important to decide when clients make up their mind as to which fork in the road they're going down. You have to help clients make a determination as to what the IRS is likely to determine regarding their behavior being willful or non-willful, because the consequence of going into the streamlined program and stating that it is not wilful can open them to criminal prosecution, multiple 50 percent FBAR penalties, and prosecution for making a false statement."
"Most clients will say, 'It wasn't willful, I didn't know what an FBAR is,' but the way the law has been developing has expanded the concept of willfulness," he explained. "For example, the court may look at a numbered bank account, or putting money in an offshore entity as being signs of willfulness. One court has even said that when you sign a tax return you are stating that the contents are correct, so if a taxpayer has a Schedule B check the box that says he doesn't have a foreign account, that by itself is evidence of willfulness."
Other indicia of willfulness may be things like taking out cash deposits just under the $10,000 reporting requirement, or failing to report income that the account is generating, Brager noted.
"You have to make a careful analysis as to which way to go. Most clients will jump on the idea that what they did wasn't intentional, and that they never intended to break the law, because it gets them down to the 5 percent penalty. For some it's a good idea, but for others it's a really bad idea."
Beginning on August 4, a taxpayer with an undisclosed foreign financial account at an institution that has publicly been identified as being under investigation, or is cooperating with a government investigation, will still be eligible to enter the OVDP but will be subject to a 50 percent penalty, rather than the existing 27.5 percent penalty, Brager noted.
"The IRS has published a list of these institutions," he said. "For anybody who has an account at one of the institutions on the list, they need to get in the program as soon as possible, and for other individuals, they need to know that they can go to sleep at night thinking they can enter the program at a 27.5 percent penalty, and wake up in the morning with a 50 percent penalty. Once you make a disclosure to IRS, they are protected, but until they do that, things can only get worse."
EVIDENCE OF CONFUSION
Many taxpayers, if they know about the issues involved, are confused by the interrelationship between FBARs, the OVDP and FATCA.
The Foreign Account Tax Compliance Act, or FATCA, enacted as part of the HIRE ( or "Hiring Incentives to Restore Employment") Act, is aimed at increasing tax receipts by identifying offshore U.S. accounts that could potentially be used for tax evasion purposes.
FBAR, or "Foreign Bank Account Reporting," is a product of the Bank Secrecy Act of 1970, but the section that requires the filing of an FBAR (FinCEN Form 114) has only been seriously enforced during the past few years. The FBAR requires disclosure of foreign accounts aggregating over $10,000 at any time during the year, and is filed electronically with the Treasury's Financial Crimes Enforcement Network, or FinCEN, by June 30 of each year.
FATCA Form 8938, on the other hand, is required when the total value of specified foreign assets exceeds certain higher thresholds, and is filed with the tax return.
"There's the FBAR, Form 8938, and you also have Swiss banks voluntarily reporting their U.S. account holders," said Kevin Packman, a partner at Holland & Knight. "A key issue that people get confused by is that real estate is not reported on Form 8938, but if it is held through an entity, the entity is reported."
"It's becoming cost-prohibitive to have foreign assets," Packman said. "You need to have the right CPA, and if it involves a complicated structure, you need the right lawyer. If you live or work abroad you probably won't get it right."
A number of factors have to be weighed in determining which route to take, according to Packman. For taxpayers concerned with criminal prosecution, the OVDP, although it comes with larger penalties, includes a closing agreement while the streamlined procedures do not, he said.
"If you take the streamlined route, you have to certify that your behavior was non-willful. If they determine that your behavior was not non-willful, you're at risk for audit and increased penalties."
The changes to the program are good, bad and ugly, according to Seth Entin, a shareholder at Greenberg Traurig LLC. "The good part is that the IRS has opened the door for much better results -- lower or no penalties for U.S. people who were not willfully evading their reporting responsibilities," he said. "For some, the bad part is the August 3 date. If they failed to come in by then, and do a voluntary disclosure for an account with an institution that is cooperating with the IRS or is publicly identified as being investigated, the penalty is now 50 percent."
And the ugly? "If the IRS gets your name first, you don't qualify for voluntary disclosure and you're open to criminal prosecution."
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