IRS Changes Offshore Disclosure Programs

The IRS announced this summer a change to both the Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer Taxpayers and the Offshore Voluntary Disclosure Program (OVDP) on June 18, 2014. This is also known as the Offshore Voluntary Disclosure Intiative (OVDI).

As of July 1, the IRS is making it easier for individuals to qualify for the new Streamlined Procedures.  Anyone affected by the Streamlined Procedures and the OVDP should have their unique situation reviewed to determine whether you are eligible for the new program.  Taxpayers will only qualify through the Streamlined Procedure if they met all the following criteria:

-had lived overseas since January 1, 2009

-had not filed a U.S. tax return since January 1, 2009

-presented a low compliance risk (based on a list of factors outlined on the IRS’s streamlined questionnaire.

Qualifying for the New Procedures

As many taxpayers did not follow the rules, they had to enter OVDP.  Taxpayers have to decide whether to stay in the program or not and face penalties of 5 percent, 12 or 27.5 percent.  Alternatively, to opt-out of the program and face FBAR (Foreign Bank Account Report) penalties, whether it was willful or not.  These penalties can range from $10,000 per account per year to 50 percent of the account value per year.

As of July 1, 2014, the IRS has made it easier for individuals to qualify for new Streamlined Procedures.  Taxpayers can qualify under the following scenarios.

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

This OVDP is for U.S. citizens or permanent residents who have physically lived outside the U.S. for at least 330 days for any one or more of the most recent three years.  As long as the failures were non-willful, taxpayers will qualify for $0 penalty.

-it no longer matters if they previously filed U.S. tax returns.

-it does not matter if they filed FBARs previously.

-it does not matter if their additional tax, as computed on new or amended U.S. tax returns exceeds $1,500 per year.

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

These taxpayers can 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 FBARs resulted from non-willful conduct.

-it does not matter if the foreign income was previously reported on the taxpayer’s U.S. tax returns.

-it does not matter if the foreign account was ever reported on an FBAR.

-it does not matter if the additional tax due exceeds $1,500 per return.

-Taxpayers in either Streamlined Program only need to file the most recent 3 years of tax returns, and 6 years of delinquent FBARs.

Which to Choose?

Taxpayers who have already entered the 2012 OVDP, meaning they submitted a letter and attachments to the IRS before July 1, 2014 and may be eligible for a transitional treatment from the 2012 OVDP. This would then apply the $0 or 5 percent penalty to the disclosure, depending on the new streamlined program to which they would qualify.

Taxpayers who have not yet entered the 2012 OVDP, or have only pre-cleared, may proceed directly through one of the 2014 Streamlined Programs.

What Comes Next?

It is important to note that the IRS has the authority to change the terms, whenever it chooses.  In some situations, the IRS permits taxpayers already in the OVDP to either adopt the new rules or apply for transitional treatment to one of the new programs.  As long as the taxpayer has not completed the OVDP certification process.

Talk to the experienced professionals at Dallo Law Group to see if you qualify for OVDP.   It’s important that you take the right steps with the IRS regarding your offshore account disclosures.  Contact us today!

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