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This past September, the IRS terminated the Offshore Voluntary Disclosure Program, stating that the program had fulfilled its potential, having been open for a decade (although revised periodically) and being used by over 56,000 taxpayers. However, the IRS just announced that they are initiating a new iteration of the program with modified rules. Find out what expats should know about the new program offerings, and why this program truly is a game changer for expat taxes.
The IRS offers amnesty programs to noncompliant taxpayers to encourage voluntary compliance. The OVDP was a program created specifically for taxpayers who had not disclosed their foreign accounts willfully – meaning they knew they had a filing obligation but avoided it. The OVDP did not protect taxpayers from steep penalties, but it did protect them from criminal prosecution. When it was discontinued, many taxpayers were left wondering how the remaining disclosure processes would be applied. This new communication answers those questions and provides a pathway to compliance for willfully noncompliant taxpayers.
The Streamlined Filing Procedures are the amnesty program for taxpayers who were non-willfully noncompliant – meaning those who were unaware they had a filing obligation. This program is still available, thankfully, and expats who choose to use it can get caught up penalty free! To use this program, expats are required to file three past years of Federal Tax Returns and six years of FBARs (Foreign Bank Account Reports), whether or not they met the thresholds for filing during those tax years. This termination of the OVDP was a wake-up call for noncompliant taxpayers because the Streamlined Filing Procedures are not permanent either, and the IRS can terminate those at any time as well.
So, what has changed for expats who need to use the OVDP for disclosure? A lot. First, the disclosure period was reduced from eight years to now just six, with a caveat that IRS agents can expand the period if they deem it necessary to correct any outstanding tax issues outside of the disclosure period. And, the new program can be used for domestic disclosures as well – not just foreign. Before even getting started, taxpayers must request pre-clearance, which used to be optional. However, the guidelines for receiving preclearance are unaffected.
The civil penalty increased quite a bit. The prior OVDP used a 20% presumed penalty for accuracy – and that grew to a 75% penalty for fraud; this penalty will now be applied to the tax year with the highest liability. The FBAR penalty is 50% of the highest total account balances during any year of the disclosure period, but again, IRS agents have leeway to raise or lower this penalty. Their power is limited here, though, and the penalty cannot go above 100% of the highest aggregate account balance.
Though failure to file penalties will not apply automatically to information-only returns (i.e., cases where tax was not owed), the IRS agents can employ these at their discretion toward certain foreign corporations or foreign partnerships.
Lastly, the IRS made a change giving delinquent taxpayers a way to ensure more fairness. Those who cannot reach an agreement with IRS through the updated voluntary disclosure program channels now preserve the right to use the appeals process through the IRS Office of Appeals. However, it’s not clear yet if those who choose the appeals process will still be criminally protected through the disclosure program.
What stayed the same? In general, taxpayers who use the updated voluntary disclosure program are protected from criminal prosecution, and they must file all of the Federal Tax Returns and other necessary reporting from the disclosure period and pay penalties and interest on all unpaid tax.
The good news for expats is that the IRS has resurrected a program to help all American taxpayers become compliant even if they are not eligible for the Streamlined Filing Procedures.
If you are years behind on your taxes, now is the time to become compliant. Since the IRS amnesty programs are not permanent, use them while you can! Our accountants can help you make the best determination for your individual situation, and you can rest assured that the process will be anxiety-free. Get started with Greenback today!