IRS Announces New Streamlined Voluntary Disclosure Procedures for Delinquent Taxpayers

The IRS announced new streamlined compliance procedures for U.S. citizens and residents who failed to disclose their offshore accounts and understated their taxable income in prior years, greatly expanding the availability of procedures for Americans who reside in the United States or offshore.The original streamlined procedures announced in 2012 were available only to nonresidents whose unpaid tax liabilities in any year were $1,500 or less. The new procedures (i) extend to U.S. taxpayers residing in the United States, (ii) eliminate the $1,500 tax cap and (iii) eliminate the risk-assessment procedure process used by the IRS to determine the level of penalties imposed. These procedures are available only to individuals and the estates of individual taxpayers who certify that their failure to report all income, pay all taxes and submit the required returns, including FBARs (Report of Foreign Bank and Financial Accounts), was not willful. According to the IRS, "non-willful conduct" is conduct that is the result of negligence, inadvertence or mistakes, or of a good-faith misunderstanding of the requirements of the law.

For all eligible taxpayers residing outside the United States, all penalties will be waived. For eligible taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty of 5% of the unreported foreign financial assets that gave rise to the tax compliance issue. Generally, taxpayers taking advantage of the streamlined procedures must file delinquent or amended returns for each of the three most recent years for which the due date for filing has passed, together with all information returns, and file any FBARs for each of the most recent six years. The full amount of the tax and interest due in connection with these filings (and the 5% penalty for taxpayers residing in the United States) must be remitted with the delinquent or amended returns. These procedures are not available if the IRS has initiated a civil examination of the taxpayer's returns for any taxable year, regardless of whether the examination relates to undisclosed foreign assets, or if the taxpayer is under criminal investigation. Returns submitted under the streamlined procedures will be subject to normal auditing, which can result in civil or even criminal penalties if the IRS determines that the failure to report income and file FBARs was willful, or that the delinquent or amended returns do not report all income. The IRS warns that taxpayers who are concerned that their failure to report income, pay tax and submit information returns was due to willful conduct, and who are looking to be assured that they will not be subject to criminal liability, should not use the streamlined procedures.

The IRS also made substantial modifications to its Offshore Voluntary Disclosure Program ("OVDP"), which is used by taxpayers seeking to avoid criminal liability for other willful failures to report foreign accounts and report all income therefrom. The modifications were made primarily to reflect the new streamlined procedures. These changes include requiring more information from taxpayers applying to the program, eliminating reduced penalties for certain non-willful conduct, requiring payment of offshore penalties to be made at the time of the OVDP application, and increasing the offshore penalty (from 27.5% to 50% of the undisclosed foreign financial assets) if, before the taxpayer's OVDP pre-clearance request is submitted, it becomes known publicly that a financial institution in which the taxpayer holds an account is under investigation by the IRS or the Department of Justice.

These procedures are applicable commencing on July 1, 2014, the date on which FATCA will be implemented. Under FATCA, account information with respect to offshore financial accounts that are held directly or indirectly by U.S. persons must be disclosed by the financial institution, directly or indirectly, to the IRS.

See: Streamlined Filing Compliance Procedures; U.S. Taxpayers Residing in the United States; U.S. Taxpayers Residing Outside the United States; Updated Offshore Voluntary Disclosure Program: Frequently Asked Questions and Answers. See also: Cabinet FATCA Materials (for Cabinet subscribers only). For more information, please contact Daniel Mulcahy and Mark Howe.