Updates to US Taxation Amnesty Programs by IRS

Updates to IRS US Taxation Amnesty Programs

In 2014, the Department of the Treasury and the IRS created two amnesty programs that allow US taxpayers to catch up on their delinquent taxes and Foreign Bank Account Reporting (FBAR) forms: the Streamlined Filing Compliance Procedures and the Offshore Voluntary Disclosure Program (OVDP). These programs allow taxpayers to voluntarily disclose their unreported offshore assets in order to become compliant with US taxation requirements – with greatly reduced or no penalties involved, depending on their circumstances and which program they utilize.

Proposed Improvements

The American Institute of CPAs (AICPA) recently made recommendations that it believes will improve both amnesty programs. The organization praises the programs, stating that their success is mostly attributable to the fact that they promote fairness and prevent unnecessarily punitive penalties on taxpayers who are able to use these programs to become compliant with US taxation.

For the OVDP, AICPA recommended that the IRS:

  • Restore the earlier practice of not requiring upfront payment of the miscellaneous offshore penalty by taxpayers
  • Apply the 50 percent miscellaneous “Super” penalty only to accounts held at institutions listed on the Foreign Financial Facilitators List
  • Allow the waiver of the passive foreign investment company (PFIC) computations for small account cases

For the Streamlined Procedures, the AICPA recommended that the IRS:

  • Modify the penalty base to only include assets associated with US taxation non-compliance
  • Expand the program to include certain classes of non-willful individuals who are currently ineligible for either the Streamlined Foreign Offshore Procedures (SFOP) or the Streamlined Domestic Offshore Procedures (SDOP)
  • Provide more guidance in both the SFOP and SDOP filing instructions to taxpayers on specific factors the IRS will consider in judging whether their non-compliance was willful

New Developments for the Streamlined Procedures

It was recently announced that the IRS modified the non-willfulness certification form that taxpayers are required to submit in order to utilize the Streamlined Filing Compliance Procedures. The Streamlined Procedures is geared toward taxpayers who non-willfully failed to disclose their foreign assets, unlike the OVDP, which is for taxpayers who were aware of the requirement but failed to do so in a timely manner. Both the SFOP and SDOP have disclosure requirements that state they must provide facts and reasons on why their failure to file was non-willful, but as mentioned in AICPA’s recommendation above, clarity and more details were needed related to the non-willful disclosure requirement. According to Lexology, the IRS has expanded their instructions to:

“Include the whole story including favorable and unfavorable facts.  Specific reasons, whether favorable or unfavorable to you, should include your personal background, financial background, and anything else you believe is relevant to your failure to report all income, pay all tax, and submit all required information returns, including FBARs.  Additionally, explain the source of funds in all of your foreign financial accounts/assets.  For example, explain whether you inherited the account/asset, whether you opened it while residing in a foreign country, or whether you had a business reason to open or use it.  And explain your contact with the account/asset including withdrawals, deposits, and investment/management decisions.  Provide a complete story about your foreign financial account/asset.   If you relied on a professional advisor, provide the name, address, and telephone number of the advisor and a summary of the advice.”

Due to the updates by the IRS, non-willfulness statements will certainly be held to a higher standard and it will be necessary for taxpayers to draft their narrative in their favor.

Don’t Forget About the OVDP

In the event that the taxpayer’s unfavorable facts outweigh the favorable facts in their non-willfulness disclosure, it’s important to consider the OVDP as an alternative. While the OVDP does carry penalties, they are far reduced from what taxpayers could face if the IRS finds their delinquency before the taxpayer comes forward.

In the recent Panama Papers case, for instance, there is speculation that a wave of OVDP submissions may occur by individuals affected by the leak. Those who enroll in OVDP are generally subject to an offshore penalty equal to 27.5 percent of the highest aggregate value of OVDP assets during the OVDP covered period. However, it increases to 50 percent if an event has already occurred that constitutes a public disclosure of the foreign financial institutions where the account is held. In the Panama Papers case, some banks have already been identified, but there may be others – so some non-compliant persons who enroll in OVDP now still have a chance at a lower penalty than they might at a later date. 

Have More Questions About Delinquent Taxes?

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