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IRS Makes Big Changes to Offshore Tax-Compliance Programs

posted Jun 19, 2014, 12:33 PM by Krozel Capital
Just yesterday, the IRS announced changes to its offshore tax compliance programs that apply to U.S. persons with unreported foreign income and unreported foreign accounts

First, some background info: All foreign income earned by U.S. persons must be reported on your U.S. tax return AND foreign financial accounts must also be reported to the Department of Treasury/IRS. This is nothing new, but has been more heavily enforced by the IRS over the past 5 years. The IRS has unveiled various versions of the Offshore Voluntary Disclosure Program in 2009, 2011, 2012 and now 2014, to encourage individuals with unreported offshore income and financial accounts to 'come forward' and become tax compliant. The program has high penalties, but was really designed for the taxpayer that willfully tried to evade paying U.S. taxes (imagine millions stashed in secret Swiss bank accounts). The HUGE problem with the these programs was that they treated everyone who had unreported foreign income and accounts as tax evaders and criminals...and in my experience, this is definitely not the case. 

I have helped many U.S. persons with foreign accounts (both living in the U.S. and abroad) who simply were not aware of the reporting rules, or had just got behind on filing their taxes for a few years...but were not willfully evading taxation by any means. This left many in a sticky they hide? Subject themselves to very high penalties meant for tax evaders?  File their returns outside the program and hope the IRS doesn't notice? The IRS realized this problem and issued the Streamlined Filing Procedures in 2012. Unfortunately, while this was a step in the right direction, the program requirements were very restrictive and only applied to U.S. persons living overseas. The IRS has now taken another step in the right direction and issued the following changes:

New Streamlined Filing Compliance Procedures

-The 2012 Streamlined procedures required a questionnaire to be filled out. The submission would also be subjected to a risk assessment process by the IRS. These have been eliminated. For those who have already submitted under the 2012 Streamlined Procedures and have not been notified by the IRS in regards to its risk determination, the IRS will simply process the returns without regard to the risk assessment.

-New Streamlined Procedures have been added for individuals residing in the United States. This is a huge change. Here is an example: Let's say Diane moved to the U.S. years ago from her native country of Singapore and became a U.S. citizen or green card holder. She married, had children, worked, paid taxes and filed all of her U.S. tax returns on a timely basis. When living in Singapore she had also worked, contributed significant amounts to some investment accounts and had some local bank accounts. After moving to the U.S., the accounts remained open but inactive as she planned to save those funds for retirement.  Diane never new she was required to report to the U.S. any income from her foreign accounts or even report them on an FBAR. The non-reporting was not willful, due to fraud or an intent to evade U.S. tax. Under the former programs, Diane would be forced into the Offshore Voluntary Disclosure Program and could loose a substantial chunk of her retirement funds. These new Streamlined Filing Compliance Procedures For Residents could be a better option for her. 

The IRS also issued changes to the Offshore Voluntary Disclosure Program (OVDP). These are not all the changes, but a summary of a few important ones:

-A new 50% penalty will apply if the financial institution or individual that helped establish the offshore arrangement has been identified, under investigation, or cooperating with the authorities. 

-Additional information is required for pre-clearance into the program.

-The entire offshore penalty is now required to be paid at the time of the submission.

-All account statements must be provided at the time of submission regardless of the account balance. They may also be provided on a CD.

For more information and links to details on each program:

If you, or someone you know has unreported offshore income and/or accounts, it is imperative that they come forward under one of these programs and become compliant. In just two weeks, FATCA goes into effect and many foreign financial institutions will begin reporting to the IRS names of their U.S. account holders. Simply not doing anything is becoming a terrible option. My office specializes in helping individuals navigate the complexity of these programs - please feel free to contact me if I can assist.