The New Streamlined Filing Compliance for U.S. Persons Living Inside the U.S. and How for a Very Brief Period of Time the Participants of the OVDP may Significantly Benefit the Program
Up until last week, the 2012 Streamlined Filing Compliance Procedures offered by the Internal Revenue Service ("IRS") were limited to non-resident U.S. taxpayers who have resided outside the United States since January 1, 2009 and who have not filed a U.S. tax return during this same period. The Streamlined Filing Compliance Procedures required participants to file income tax returns for the previous three years and file FinCEN 114, Report of Foreign Bank and Financial Accounts, (previously Form TD F 90-22.1 FBAR) for the previous six years, if applicable. In exchange for participating in the Streamlined Filing Compliance Procedures, participants can avoid certain civil penalties. Although the Streamlined Filing Compliance Procedures’ terms are far more generous than the 2012 Offshore Voluntary Disclosure Program (OVDP)1 , participants of the Streamlined Filing Compliance program do not receive the benefits of an IRS closing agreement or protection from a subsequent investigation by the IRS Criminal Investigation Division (IRS-CI). This is because Streamlined Filing Compliance Procedures are not classified by the IRS as a voluntary disclosure; instead, they characterize Streamlined Filing Compliance as a filing position.
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On June 18, 2014, the IRS expanded Streamlined Filing Compliance Procedures to include "U.S. Persons Living Inside the United States." Now, ALL individual taxpayers residing in the United States can participate in Streamlined Filing Compliance Procedures. However, the terms of Streamlined Filing Compliance for U.S. participants are different. In order for a U.S. taxpayer to make a disclosure through Streamlined Filing Compliance Procedures, the participant must have filed tax returns for the previous three years, the failure to disclose foreign income and assets on U.S. federal tax returns must be the result of a non-willful act, and participants must amend their tax returns for the previous three years and file FBARs for the previous six years. (Note: a willfulness/non-willfulness analysis is complex and should only be performed by a tax attorney qualified to perform such an analysis).
In exchange for making a disclosure through Streamlined Filing Compliance Procedures, participants with undisclosed offshore accounts can avoid significant non-willful civil penalties. Generally, the non-willful civil penalty for each undisclosed account on an FBAR or a Form 8938 can be as high as $10,000 per violation. Under the terms of the new Streamlined Filing Compliance Procedures, participants will be subject to a five percent (5%) penalty on the highest aggregate account balance on their undisclosed account(s) for the past three years, and unlike the OVDP, the penalty is only assessed on foreign financial accounts that must be disclosed on a Form 8938 rather than all offshore assets.
Like the Streamlined Filing Compliance Procedures designed for "U.S. persons living outside the United States," a disclosure made through Streamlined Domestic Offshore Procedures does not offer the protection of a closing agreement or from an IRS criminal investigation. Despite the fact that Streamlined Filing Compliance Procedures do not offer the protection of a closing agreement or from an IRS criminal investigation, the penalty reductions still potentially make disclosure through Streamlined Filing Compliance Procedures beneficial for those whose failure to disclose foreign income or accounts was non-willful.
Not only do Streamlined Filing Compliance Procedures offer significant relief from offshore penalties for those seeking to make a disclosure to the IRS, Streamlined Filing Compliance Procedures may also be utilized by current participants of an OVDP or those who have "opted-out" of an OVDP. On June 20, 2014, at the NYU 6th Annual Tax Controversy Forum, Jennifer L. Best, Senior Advisor and John C. McDougal, Special Trial Attorney, Office of Chief Counsel announced that participants in an IRS OVDP or OVDP "opt-out" can elect to be removed from the OVDP program and placed into the 2012 Streamlined Filing Compliance Procedures.2 For some, the IRS’s change in position offers unbelievable potential savings from income tax, interest, and penalties. However, participants seeking to benefit from the reduced penalty structure of Streamlined Filing Compliance Procedures must do so no later than June 30, 2014.
Anyone considering removal from the OVDP should carefully weigh the risks and benefits of entering into Streamlined Filing Compliance Procedures. With that said, a very short window of opportunity has just opened for some U.S. taxpayers currently participating in an IRS OVDP or who have elected to "opt-out" of an OVDP.
An experienced tax attorney with Moskowitz LLP can help you to quickly determine your best course of action. To learn more, please contact our office by phone or email. We provide translation services in Korean, Cantonese, Mandarin, and Arabic.
1 Under the terms of the 2012 OVDP, participants must file or amend their tax returns and file FBARs for these years, and pay all delinquent taxes, interest, and penalties for the same years. In addition, participants are subject to a 27.5 percent penalty on the highest aggregate account balance on their undisclosed account(s) for the last eight years.
2 The removal from the OVDP or OVDP “opt-out” and placement into Streamlined Filing Compliance Procedures is only available to those who have not yet been audited by the IRS in the course of an “opt-out.”
Moskowitz LLP, A Tax Law Firm, Disclaimer: Because of the generality of this post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice from a tax attorney based on particular situations. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.