Tax Law Center Blog

The IRS announced substantial changes to both the Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer Taxpayers and the Offshore Voluntary Disclosure Program (OVDP) on June 18, 2014.  Effective July 1, 2014, the IRS is making it easier for individuals to qualify for the new Streamlined Procedures. Taxpayers may now qualify under two scenarios:

1. U.S. citizens or permanent residents who reside outside the U.S. ($0 penalty)

Streamlined procedures for U.S. residents are referred to as the Streamlined Domestic Offshore Procedures (SDOP).  This program is for U.S. citizens or permanent residents who have physically lived outside the U.S. for at least 330 full days for any one or more of the most recent three years. These taxpayers will qualify for the $0 penalty as long as these failures resulted from non-willful conduct. SDOP description and submission instructions are available at http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States. Persons residing in the United States applying for the new streamlined procedures must complete and submit the “non-willful” certification statement available athttp://www.irs.gov/pub/irs-utl/CertUSResidents.pdf. 

Advocacy is required to affirmatively and persuasively demonstrate legal grounds for non-willfulness.  Do not disclose too much and beware of badges (evidence) of willfulness, blind willfulness, concealment, etc. For more information see IRS IRM 4.26.16.4.5.

2. U.S. citizens or permanent residents who reside in the U.S. (5 percent penalty)

Streamlined procedures for non-residents are referred to as the Streamlined Foreign Offshore Procedures (SFOP). These taxpayers will qualify for a 5 percent penalty as long as they have filed U.S. tax returns for the previous years and their failures to properly report income on their tax returns, or foreign accounts on their FBARs, resulted from non-willful conduct.

Persons residing outside the United States applying for the new streamlined procedures must complete and submit the “non-willful” certification statement available at http://www.irs.gov/pub/irs-utl/CertNonResidents.pdf.  Advocacy is required to affirmatively and persuasively demonstrate legal grounds for non-willfulness.  Do not disclose too much and beware of badges (evidence) of willfulness, blind willfulness, concealment, etc. For more information see IRS IRM 4.26.16.4.5.

Taxpayers in either Streamlined Program only need to file the most recent 3 years of tax returns (e.g., 2011, 2012 and 2013) and 6 years of delinquent FBARs (e.g., 2008-2013).

How to Choose?

Taxpayers who have already entered the 2012 OVDP may be eligible for transitional treatment from the 2012 OVDP. This would effectively apply the $0 or 5 percent penalty to their disclosure. Taxpayers who have not yet entered the 2012 OVDP, or who have only pre-cleared to enter the 2012 OVDP, may proceed directly through one of the 2014 Streamlined Programs.

Still Ineligible for the New Streamlined Procedures?

Taxpayers who do not qualify for one of the new Streamlined Procedures, but still qualify for the 2014 OVDP, face a one-time 27.5 percent offshore penalty based on the highest balance year unless the taxpayer has an undisclosed account at a bank listed on the IRS posted list – then it is a 50 percent penalty starting July 1, 2014. Taxpayers in the OVDP must file 8 years of income tax returns (or amended returns) and 8 years of FBARs.

Taxpayers must choose one or the other: either enter the 2014 OVDP or enter the 2014 Streamlined Programs. If rejected from the 2014 Streamlined Programs, taxpayers may not later enter the 2014 OVDP Program. Moreover the 2014 Streamlined Programs do not come with the guarantee that the IRS will not recommend criminal prosecution if rejected.

Determine Your Next Step in Light of These New IRS Changes

This alert discusses only some of the many changes made by the IRS. It is important to note that the IRS has the authority to change the terms (qualifications, penalties, etc.) whenever it chooses. Moreover, in certain situations the IRS is permitting taxpayers already in the OVDP to either adopt the rules of the new OVDP or convert their disclosure to one of the two more lenient streamlined programs – as long as the taxpayer has not yet signed the final Form 906 closing letter that is received at the conclusion of a taxpayer’s disclosure.

Anyone affected by the Streamlined Filing Compliance Procedures and the Offshore Voluntary Disclosure Program should have their individual situation carefully reviewed to determine the most advantageous route in light of these new rules.

As FATCA continues to go fully online, the cost and risk of doing nothing seems to have gone up significantly. In summary, taxpayers with undisclosed offshore accounts  should fully explore some form of voluntary disclosure before it is too late and much more costly.  Our law firm can assist in determining the IRS filing needs as well as any other international legal planning.

Our firm presented a informational webinar on the Streamlined Filing Compliance Procedures and the Offshore Voluntary Disclosure Program. Materials from the webinar can be downloaded here: Game Changer Streamline.