Ways for U.S. Taxpayers with Undisclosed Foreign Financial Assets to get back to Tax Compliance

Recent major modifications by IRS give an opportunity to taxpayers to get back to tax compliance with substantially reduced or no penalties.



In an effort to encourage the reporting of offshore assets, Internal Revenue Services (IRS) recently announced major modifications to the terms of its existing offshore voluntary disclosure programs. The new procedure offered by IRS gives an easy opportunity to the taxpayers, depending on individual circumstances, to fix the previous errors and get back to tax compliance with substantially reduced or no penalties. The taxpayer must not be under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the non-compliance to avail benefit of any of the options. Currently the following are the various options offered by the IRS:

2014 Offshore Voluntary Disclosure Program

The Offshore Voluntary Disclosure Program (OVDP) is a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets.  OVDP provides taxpayers with such exposure a protection from criminal liability and terms for resolving their civil tax and penalty obligations. Under this program, the base penalty is 27.5 percent of the highest aggregate value of the foreign bank accounts or assets during the period covered by the disclosure. The penalty will be increased to 50 percent for any foreign financial accounts that were held at a bank that has been publicly identified as being under investigation or as cooperating with a government investigation.

Streamlined Filing Compliance Procedures

The streamlined filing compliance procedures are available to taxpayers whose failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.  The procedures are designed to provide to taxpayers in such situations a streamlined procedure for filing amended or delinquent returns and terms for resolving their tax and penalty obligations.

The modified streamlined filing compliance procedures are designed for only individual taxpayers, including estates of individual taxpayers.  The procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States. Taxpayers using the Procedures will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.

Tax returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate. Taxpayers who are concerned that their failure to report income, pay tax, and submit required information returns was due to willful conduct and who therefore seek assurances that they will not be subject to criminal liability and/or substantial monetary penalties should consider participating in the Offshore Voluntary Disclosure Program (OVDP) and should consult with their professional tax or legal advisers.

Eligible US taxpayers who resided outside the US in any one of the most recent three years for which US tax returns due date (including extension) has passed, will not pay any penalties. Eligible US taxpayers who resided in the US during this period will pay a penalty of 5% of the highest aggregate balance/value of taxpayers’ foreign financial account during the three years period covered by the tax return or six years covered by the FBAR.  The IRS will not impose accuracy related penalty, information return penalties, or FBAR penalties.

The taxpayers who are currently participating under Offshore Voluntary Disclosure Program may be eligible for reduced penalties under the new streamlined filing procedures. A taxpayer seeking such treatment does not need to opt out of OVDP, but will be required to certify, in accordance with the instructions, that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct

Delinquent FBAR Submission/Information Return Procedures

These procedures allow taxpayers to file delinquent Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1) and/or information returns along with a statement of reasonable cause for late filing. No penalty will be imposed by the IRS for the failure to file the delinquent FBARs or information return if the taxpayer properly reported on U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported.

Given the ongoing efforts of the IRS to ensure tax compliance with regards to foreign financial assets, pressure on foreign bank to disclose US account holder information and recently announced cooperation among the governments around the world, it is highly recommended that US taxpayers having undeclared accounts review their individual situation with their CPA’s and/or legal counsel and opt for the best course of action.

Write to Baljeet Singh at baljeetsinghcpa@gmail.com

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