IRS Announces Major Changes Regarding Offshore Voluntary Disclosures

By Paul Bercovici  |  June 30, 2014  |  Download PDF

On June 18, 2014, the IRS announced significant changes to the 2012 Streamlined Program and to the 2012 Offshore Voluntary Disclosure Program. The changes to the terms of the 2012 Streamlined Program and the 2012 Offshore Voluntary Disclosure Program are designed to encourage more taxpayers who have failed to report income from offshore assets to voluntarily come forward to report the existence of such offshore assets and the income derived therefrom. According to the IRS, approximately 45,000 taxpayers have voluntarily disclosed the existence of such accounts under the terms of the various iterations of the offshore voluntary disclosure program that was first announced in 2009, and that such disclosures have resulted in the collection of approximately $6.5 billion in taxes, interest and penalties.

Changes to the 2012 Offshore Voluntary Disclosure Program

The 2012 Offshore Voluntary Disclosure Program (the “2012 OVDP”) was the third iteration of the offshore voluntary disclosure program first announced in 2009. The gist of the 2012 OVDP was that noncompliant taxpayers who submitted all required original or amended federal income tax returns reporting all previously unreported offshore income and who paid a 27.5% miscellaneous tax penalty were effectively shielded from any criminal prosecution for their failure to report the offshore income in question. 

The IRS is referring to the changes to the 2012 OVDP as the “2014 OVDP”. Under the terms of the 2014 OVDP, applicants are required to: 

• Pay the offshore penalty when they submit their application for acceptance into the 2014 OVDP
• Submit certain additional information in support of their application
• Pay a 50% penalty (instead of the existing 27.5% penalty) in cases where before the taxpayer submits its OVDP preclearance request, it becomes public that:

• A financial institution where the taxpayer holds an account is under investigation by the IRS or the Justice Department or is cooperating with a government investigation or
• Another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or the Justice Department or is cooperating with a government investigation. 

In addition, the former procedure for filing delinquent Reports of Foreign Bank and Financial Accounts (“FBARs”) and delinquent international information returns as outlined in FAQs 17 and 18 of the Offshore Voluntary Disclosure FAQs which were posted on June 26, 2012 has been replaced and superseded.

Changes to the 2012 Streamlined Program

For more information regarding the terms of the original 2012 Streamlined Program please see our Tax Alert entitled “New Guidance on Streamlined Compliance Program for Delinquent Non-Resident Taxpayers” dated September 9, 2012. 

Under the terms of the 2012 Streamlined Program, only taxpayers who had been nonresidents of the US for certain periods of time were eligible to participate in the program. Under the terms of the 2014 Streamlined Program, certain taxpayers who are residents of the US are also allowed to participate in the 2014 Streamlined Program. 

Other key changes to the 2012 Streamlined Program announced on June 18, 2014 include: 

• US resident taxpayers who qualify under the terms of the 2014 Streamlined Program will be subject to a 5% tax penalty.
• The $1,500 tax liability “safe harbor” for determining “low compliance risk” has been eliminated.
• The risk questionnaire that had to be completed and submitted under the terms of the 2012 Streamlined Program has been eliminated.
• A requirement that taxpayers certify that previous failure to comply with their tax filing and income reporting obligations was due to non-willful conduct.

With the exception of the rules regarding the 50% penalty under the 2014 OVDP, all other changes to the 2014 OVDP and the 2014 Streamlined Program will be in effect for all voluntary disclosure submissions made on or after July 1, 2014. In addition, the IRS has issued a new set of Offshore Voluntary Disclosure FAQs which are effective for submissions made on or after July 1, 2014.

For More Information

For more information, please contact:

• Paul Bercovici, LL.B., Principal - Tax, by phone at 212.201.2297 or by email at pbercovici@markspaneth.com

About Paul Bercovici