Major changes to IRS offshore voluntary compliance programs

Many clients are asking our office about the new compliance solutions to clean up past errors in disclosing foreign assets.

In June 2014, the IRS announced major changes to its offshore voluntary compliance programs, providing new options to help taxpayers residing both overseas and in the United States. The changes are intended to give thousands of people a new avenue to comply with their U.S. tax obligations (IR-2014-73). Modifications were made in response to public comments that the existing program lacked a path to compliance for individuals whose failure to report offshore accounts was not willful.

Because taxpayers’ non-U.S. investments vary widely, the IRS offers the following options for addressing previous failures to comply with U.S. tax and information return obligations:

1. The Offshore Voluntary Disclosure Program (OVDP); Taxpayers whose conduct was likely willful are directed to the OVDP—where they pay a much higher 27.5% miscellaneous offshore penalty;
2. A new non-willful certification program, referred to as the IRS Streamlined filing compliance procedures (SDOP and SFOP); Under this program, taxpayers residing in the United States whose failure to report foreign financial assets and pay all tax due on those assets was not the result of willful conduct are subject to only a 5% miscellaneous offshore penalty (non-residents pay no penalty); (click here for further details); and
3. Delinquent Report of Foreign Bank and Financial Accounts (FBAR) and delinquent international information return submission procedures.

Tax professionals must be familiar with each of these options to effectively advise taxpayers of the compliance solution that best fits the particular facts and circumstances of the case.

OVDP and/or the SDOP allow no u-turn. Once a taxpayer makes a submission under the streamlined program, the taxpayer may not participate in the OVDP.  A taxpayer who submits an OVDP voluntary disclosure letter on or after July 1, 2014, is not eligible to participate in the streamlined program. To avoid creating a bigger problem, taxpayers should very carefully choose their compliance solution with the advice of competent experienced tax legal counsel.