IRS RAISES THE STAKES FOR U.S. TAXPAYERS WITH OFFSHORE ACCOUNTS
This summer, the IRS reworked its offshore voluntary disclosure program, substantially raising the penalty for U.S. taxpayers who fail to disclose their overseas accounts before the IRS catches them. The program is part of a wider effort by the IRS to stop offshore tax evasion by targeting not only individual taxpayers, but also foreign financial institutions holding their accounts.
Beginning August 4, 2014, a 50% penalty will apply if a foreign financial institution holding a taxpayer’s undisclosed account has been publicly identified as being under investigation or is publicly cooperating with a government investigation. In other words, the message to taxpayers is–get to them (the IRS) before they get to you.
The current Offshore Voluntary Disclosure Program was launched in 2012 and is the successor to prior voluntary programs offered in 2011 and 2009. The program offers U.S. taxpayers with undisclosed income from offshore accounts an opportunity to come clean. In return, the taxpayers face reduced penalties and can avoid criminal prosecution. The program has no time limit, but it could end at any time.
Taxpayers with foreign accounts have another worry. On July 1, 2014, another new information reporting regime, the Foreign Account Tax Compliance Act (FATCA), went into effect. Under that program, thousands of foreign financial institutions will begin to report to the IRS on the foreign accounts held by U.S. persons.
Foreign Account Disclosure Requirements
U.S. citizens, residents and other people subject to U.S. tax who have foreign accounts with an aggregate value exceeding $10,000 at any time during the year must report the accounts to the IRS. The reporting form (FBAR or the new FinCEN form) is not filed with a federal tax return, but instead must be filed by June 30 each year. The civil penalty for willfully failing to file a foreign bank account reporting form can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. Non-willful violations are subject to a $10,000 penalty per violation.
Newly Expanded Streamlined Filing Procedures
The IRS’s latest rules expand the streamlined procedures first announced in 2012. Those procedures were available only to non-resident, non-filers. The expanded streamlined procedures are intended for U.S. taxpayers who were not willful in failing to disclose their offshore assets. The program is available to taxpayers living outside the country as well as those residing in the United States. The process provides taxpayers: (1) a streamlined procedure for filing amended or delinquent returns; and (2) terms for resolving their tax and penalty obligations.
The new process:
- Eliminates the requirement that the taxpayer have $1,500 or less of unpaid tax in each year;
- Eliminates a required risk questionnaire;
- Requires taxpayers to certify that previous failures to comply were not due to 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 account balances not previously reported. This new penalty structure applies to taxpayers currently participating in the program as well.