IRS Publishes New Streamlined Domestic Offshore Procedures
In a recent article, Doug Eckert, Partner, Tax Services, addressed the Foreign Bank Account Report (FBAR) and the impending impact of FATCA being fully implemented. The main message of that article was that foreign account holders who had not previously reported their foreign accounts needed to take action prior to the IRS obtaining the account information through FATCA. The Offshore Voluntary Disclosure Initiative (OVDI), while designed to allow non-reporting foreign account holders to come forward, had such an onerous penalty regime — 27.5 percent of the highest foreign account balances during the prior eight years — that many taxpayers did not find the OVDI program attractive.
On July 1, 2014, the IRS published new Streamlined Domestic Offshore Procedures. The Streamlined Program does not replace the OVDI program. Rather, it is in addition to the OVDI program. Under the Streamlined Program, taxpayers must meet the following requirements:
- File amended income tax returns for the prior three tax years to report any unreported foreign account income.
- Include with the amended returns any other unfiled foreign information returns for the prior three years.
- File any unfiled FBARs for the prior six years.
- File the IRS certification provided on the IRS OVDI website. The certification includes a summary of the reasons for the failure to properly report offshore assets and includes a requirement to disclose the contact information of outside professionals from whom prior advice was relied on.
- The taxpayer must remit any income tax due and remit a penalty equal to 5 percent of the highest foreign account balances as of the last day of the year during the prior six tax years.
There are a couple of distinctions and issues of which taxpayers should be aware:
- The Streamlined Program only applies to non-willful conduct. If a person files under the Streamlined Program and it is subsequently determined that their failure to file was willful, they would not be able to avail themselves of either the 5 percent penalty or the 27.5 percent OVDI penalty. Rather, they would be subject to the applicable penalties which could equal or exceed the taxpayer’s total assets held offshore in certain circumstances. Taxpayers who are unsure about their type of failure to file need to carefully consider this distinction prior to filing pursuant to the Streamlined Program.
- If the non-filer has assets at an institution under investigation by the IRS, the 5 percent penalty does not apply. Rather, the IRS has announced a new 50 percent penalty regime for this circumstance. The IRS has published and will update a list of institutions under investigation in order for taxpayers to verify their circumstances prior to filing under the Streamlined Program. The IRS also announced that if a taxpayer has accounts at both an institution under investigation and at another institution, the 50 percent penalty applies to all the taxpayer’s accounts.
While tax professionals can only speculate how the IRS will handle non-filers who are identified by FATCA, the Streamlined Program is a strong indicator that the penalty will be at least equal to 50 percent of the non-disclosed foreign assets. The new program presents an opportunity to comply with the foreign asset reporting rules at a reasonable cost.