IRS Issues New Rules for Offshore Voluntary Disclosure

The IRS has announced (IR-2014-73) changes to its offshore voluntary compliance programs. These changes provide new options for taxpayers residing overseas and in the United States come into compliance their U.S. tax obligations. According to IRS Commissioner John Koskinen. “The new versions of our offshore programs reflect a carefully balanced approach to ensure everyone pays their fair share of taxes owed. Through the changes we are announcing today, we provide additional flexibility in key respects while maintaining the central components of our voluntary programs.”

The changes include an expansion of the streamlined filing compliance procedures announced in 2012 and modifications to the 2012 offshore voluntary disclosure program. The expanded streamlined procedures accommodate a broader group of U.S. taxpayers, including for the first time some U.S. taxpayers residing in the United States, who have unreported foreign financial accounts, and whose failure to disclose their offshore assets was not willful. The changes include:

  1. Eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year;
  2. Eliminating the required risk questionnaire;
  3. Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

Significant changes have been made to the OVDP including:
• Requiring additional information from taxpayers applying to the program;
• Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
• Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
• Enabling taxpayers to submit voluminous records electronically rather than on paper;
• Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice. This list is available at http://www.irs.gov/Businesses/International-Businesses/Foreign-Financial-Institutions-or-Facilitators. Once the 50% miscellaneous offshore penalty applies to any of the taxpayer’s accounts or assets, the 50-percent miscellaneous offshore penalty will apply to all of the taxpayer’s assets subject to the penalty.

For further information on how the new rules affect your US tax obligations, please contact Christopher J. Byrne at (212) 239-1931

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