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IRS FAQs clarify changes to offshore voluntary disclosure program and transition rules

In conjunction with its announcement of changes to the offshore voluntary disclosure program (OVDP), IRS has issued a series of revised frequently asked questions (FAQs) providing detailed guidance on the newly revamped program and also issued new FAQs containing transition rules for taxpayers who are currently participating in the OVDP and meet the eligibility requirements for the newly expanded streamlined filing compliance procedures. This article highlights several key points from both sets of FAQs.
Background on IRS’s OVDP.  In the spring of 2009, IRS announced a settlement offer, the OVDP, for those who voluntarily and timely disclosed unreported offshore income for 2003 to 2008. Those meeting the terms of the OVDP had to pay back taxes and interest for six years, and pay either an accuracy or delinquency penalty for all six years. They also had to pay a penalty of 20% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. However, those who came forward on a timely basis did not face criminal prosecution. The deadline to participate in the program was Oct. 15, 2009.
In February of 2011, IRS unveiled a second OVDP to give taxpayers with undisclosed income from hidden offshore accounts for the 2003 – 2010 period the chance to get current with their taxes. It carried higher penalties (25% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value) than the 2009 program, but the penalties could be mitigated under certain circumstances.
In January of 2012, IRS announced a new OVDP that was substantially similar to the 2011 OVDP, but the maximum penalty was raised from 25% to 27.5%, and unlike previous OVDPs, there was no set deadline under the new program.
In IR 2012-65, IRS provided streamlined filing compliance procedures for certain “low risk” nonresident U.S. taxpayers. This option was made available to help U.S. citizens and others residing abroad to catch up with their tax filing obligations if they owe little or no back taxes and meet certain requirements so as to be considered as presenting a low level of compliance risk.
On June 18, IRS announced a number of changes that it is making to its offshore account compliance program, including an expansion of the streamlined filing procedures first introduced in 2012 and modifications to its Offshore Voluntary Disclosure Program (OVDP). One such modification was an increase in the offshore penalty percentage (from 27.5% to 50%) in certain cases, as explained further below. According to a statement by Commissioner Koskinen, the revisions are intended to allow more taxpayers to participate and to better account for taxpayers who have failed to disclose foreign accounts but didn’t willfully evade their tax obligations. The revised FAQs make the following clarifications on the newly changed OVDP:

… Continuation of 2012 OVDP.  The “revamped” OVDP is not a new program but rather a continuation of the 2012 OVDP with modified terms. Thus, it still has no set deadline for taxpayers to apply. IRS also reminds taxpayers that the terms of the program (i.e., penalty amounts and/or eligibility) are subject to change, and that the agency could decide to end the program entirely at any time.

… Increased penalty in certain situations.  A 50% penalty applies if either a foreign financial institution (FFI) at which the taxpayer has or had an account, or a facilitator who helped the taxpayer establish or maintain an offshore arrangement, has been publicly identified as being under investigation or as cooperating with a government investigation. The increased penalty is further explained, which provides that, beginning Aug. 4, 2014, the increased penalty will apply if, at the time that a pre-clearance letter is submitted, an event has already occurred that constitutes a public disclosure that the FFI where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, (i) is or has been under investigation by, or is cooperating with, IRS or the Department of Justice (DOJ) in connection with accounts that are beneficially owned by a U.S. person; or (ii) has been identified in a court-approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts at the FFI or have accounts established or maintained by the facilitator.

… Reduced penalty structure eliminated.  The reduced penalty structure has been eliminated due to the expansion of the streamlined filing compliance procedures.

… Potential penalties for non-disclosers.  IRS provided a list of penalties that could potentially apply to a taxpayer that doesn’t participate in the OVDP and is examined by IRS. These include penalties (many of which can run from $10,000 to $100,000) for failing to file a host of forms, including FBARs; fraud penalties; a penalty for failing to file a tax return; a penalty for failing to pay the amount of tax shown on the return under Code Sec. 6651(a)(2) ; and an accuracy-related penalty.

… Potential criminal charges for non-disclosers.  Possible criminal charges related to tax matters include tax evasion, filing a false return and failure to file an income tax return; willfully failing to file an FBAR and willfully filing a false FBAR (31 USC 5322); conspiracy to defraud the government with respect to claims; and conspiracy to commit offense or to defraud the U.S.

… Effect of prior “quiet disclosures.”  IRS encouraged taxpayers who have already filed amended returns reporting income from OVDP assets without actually making voluntary disclosures to participate in the OVDP by submitting an application with copies of the previously filed returns and all other required information. IRS emphasized that quiet disclosures provide no protection from criminal prosecution and may lead to civil examination and the imposition of all applicable penalties.

… Effective date.  The revised FAQs are effective for all new submissions made on or after July 1, 2014.

Transition rules.  IRS also issued a new set of FAQs that cover the transition rules governing the newly changed OVDP.

… Purpose of transitional treatment.  Transitional treatment under OVDP will allow taxpayers “currently participating” (see below) in OVDP who meet the eligibility requirements for the expanded Streamlined Filing Compliance Procedures announced on June 18, 2014, an opportunity to remain in the OVDP while taking advantage of the favorable penalty structure of the expanded streamlined procedures.

… “Currently participating.”  A taxpayer is considered to be currently participating in an OVDP for purposes of receiving transitional treatment if: (i) before July 1, 2014, he has mailed to IRS Criminal Investigation his OVDP voluntary disclosure letter and required attachments; and (ii) as of July 1, 2014, he has either: (a) remained in OVDP but not yet completed the OVDP certification process where a Form 906 Closing Agreement has been fully executed by IRS; or (ii) opted out of OVDP, but not yet received a letter initiating an examination and enclosing a Notice 609. A taxpayer will not be considered to be currently participating in OVDP for purposes of receiving transitional treatment unless, as of July 1, 2014, he has mailed to IRS Criminal Investigation his voluntary disclosure letter and required attachments. A taxpayer whose case has been removed from OVDP by IRS is not eligible for transitional treatment.

… Seeking transitional treatment.  A taxpayer is not required to opt out of the OVDP to receive transitional treatment, but must provide certain specified information to IRS in the manner stated. Transition treatment is not automatic, and IRS must agree that the taxpayer is eligible for it and that the available information is consistent with the taxpayer’s certification of non-willful conduct. There are no appeal rights within OVDP, including the determination of whether the taxpayer qualifies for transitional treatment.