The IRS is increasing the penalties on U.S. taxpayers who attempt to hide assets overseas, while lowering or eliminating penalties for those who unintentionally failed to disclose offshore accounts.
The IRS has announced in Information Release 2014-73 major changes to its Offshore Voluntary Compliance Program (OVDP). The changes include:
1. Modifications to the 2012 OVDP
2. An expansion of the “streamlined” filing compliance procedures announced in 2012
There are a number of reporting requirements for taxpayers with foreign accounts. Affected individuals must fill out and attach Schedule B with their tax returns. Schedule B asks about the existence of foreign accounts.
Some taxpayers have to fill out Form 8938, Statement of Foreign Financial Assets. Other filing requirements apply to foreign trusts.
In addition, taxpayers with foreign accounts whose aggregate value exceeds $10,000 must file a Form 114, Report of Foreign Bank and Financial Accounts (FBAR), electronically through the Financial Crimes Enforcement Network’s BSA E-Filing System. Failure to comply with applicable reporting requirements can result in civil and criminal penalties.
On July 1, 2014, a new information reporting regime instituted by the Foreign Accounts Tax Compliance Act went into effect. Thousands of foreign financial institutions will begin to report to the IRS the foreign accounts held by U.S. persons.
Under the 2014 OVDP, taxpayers who do not meet certain deadlines will be subject to a 50 percent penalty under one of the following circumstances:
1. If 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 cooperating with the IRS or Department of Justice in connection with U.S. accounts, or
2. If such institution or the account facilitator has been identified in a court-approved “John Doe summons.”
Taxpayers already in the 2012 OVDP may be able to take advantage of certain of the new procedures.
The expanded streamlined procedures are intended for U.S. taxpayers whose failure to disclose their offshore assets was not willful. Key expansions in the streamlined procedures will accommodate a wider group of individuals living outside the United States and, for the first time, certain U.S. residents who have unreported foreign financial accounts.
If you are already in the 2012 OVDP, you should consult your tax adviser to determine whether you qualify for the new streamlined program. If you live outside of the United States and qualify, there are no penalties. If you live in the United States and qualify, there is a maximum penalty of 5 percent – down from the previous 27.5 percent.