Volume 26 Issue 3 --May/June 2014
Much attention has been given to recent efforts
by the government to catch and prosecute individuals who fail to report
offshore accounts. In a well-publicized example, a widow inherited a
Swiss bank account of approximately $45 million, which she failed to
report on tax returns following her husband’s death. When discovered,
she agreed to pay a penalty of $22 million to the government and still
faced criminal prosecution.
For some time, US tax return filers have been
required to answer a question about their foreign accounts. While
having a foreign bank account is not illegal, failure to report them
can be.
For many years, US persons with foreign
financial accounts aggregating more than $10,000 in value have been
required to file a Foreign Bank Account Report (FBAR). More recently,
an additional set of reporting requirements using Form 8938 have come
into play. The potential penalties for failing to file
either form can be enormous.
In an effort to encourage non-compliant
taxpayers to come forward, the IRS created a series of Offshore
Voluntary Disclosure Initiatives or Programs (OVDP). Because of the
potentially large penalties for failing to report foreign accounts and income, many taxpayers
came forward. According to the June 26, 2014, IRS release, 45,000
taxpayers have come into voluntary compliance and have paid $6.5
billion in taxes, interest, and penalties.
Under these programs, taxpayers could pay a special fixed
penalty in addition to any regular tax,
interest, and late filing or late payment penalties due.
The amount of this special penalty, called an “Offshore Penalty” by the
IRS was smaller than the maximum penalties that could have been
assessed. Most recently, the Offshore Penalty was 27.5% of the highest
value of unreported assets during a six-year period. The amount of the
Offshore Penalty was not negotiable or subject to reduction except in
certain very limited situations.
In many situations, individuals who failed to
report foreign accounts solely because they were unaware of the
reporting obligations were effectively treated the same way as others
who were effectively using the foreign accounts for tax evasion.
Eligibility for these programs was dependent
upon first receiving a letter from the criminal division of the Justice
Department stating that criminal prosecution was not going to be
pursued. For taxpayers, satisfying the requirements of the programs was
difficult and the IRS was apparently having a hard time processing the
requests.
Recently, the IRS announced a number of
significant changes to streamline the offshore disclosure program for
those whose failures to comply are “non-willful.” Taxpayers
must show that their conduct in failing to report foreign income or
accounts was due to negligence, inadvertence, or mistake or conduct
that is the result of a good faith misunderstanding of the requirements
of the law.
For example, suppose Miya was given stock in
her father’s company in Asia and had a bank account created for her in
her home country. Miya went to a return preparer who did not ask
questions about foreign assets so the existence of the foreign stock
and foreign bank accounts was unreported. Miya had no idea that she
needed to report the foreign account or stock.
For such individuals whose failures were
non-willful, effective July 1, 2014, the IRS had created a new
“streamlined” approach with a lower 5% offshore penalty, in lieu of the
27.5% penalty. There are still a number of requirements that must be
met for participation in the program, but in many cases for taxpayers
that were unaware of their filing requirements, the changes can be
beneficial.
In addition to a reduced offshore penalty, the
streamlined program typically requires filing fewer amended tax
returns, but payment of all taxes, interest and penalties, including
the 5% offshore penalty is required at the time of application for the
program. While applying for the program is not for the faint of heart,
it can be better than the alternatives.
In addition to the new streamlined procedures
for some non-willful violators, the IRS has also upped the ante for
some violators. For those that have unreported accounts with one of a
number of overseas institutions that are currently cooperating with the
IRS, the penalties got worse. For such persons, the offshore penalty
has been increased from 27.5% to 50%. Clearly, the IRS is trying to
encourage violators to come forward before the IRS finds about the
accounts from other sources.
There are transitional rules for those who have
unresolved applications submitted under the prior versions of the
program.
If you have questions about this, please call
the Tax & Business Professionals.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
Redistribution or other commercial use of the material contained in Tax & Business Insights is expressly prohibited without the written permission of Tax and Business Professionals, Inc.
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