The IRS outlined a number of changes to its Offshore Voluntary Disclosure Program (OVDP) on Wednesday, which the head of the agency believes will lead to a significant increase in the number of US taxpayers coming forward to report on undisclosed foreign accounts.
One of the key changes noted by IRS Commissioner John Koskinen is expanding the initiative's streamlined procedures to cover a much broader group of taxpayers who have failed to disclose their foreign accounts but who aren’t willfully evading their tax obligations. The agency is also reshaping the terms for taxpayers to participate in the OVDP.
“It’s important to keep in mind that the IRS is seeking a balanced approach with this program,” Koskinen said. “Our aim is to get people to disclose their accounts, pay the tax they owe, and get right with the government. At the same time, for important categories of these nonwillful people with offshore issues, a compliance regime that is too harsh won’t net the desired result.”
The OVDP allows individuals to avoid criminal prosecution if they disclose their foreign accounts and pay a penalty. The agency reopened the program in 2012, modeled after similar initiatives in 2011 and 2009.
Koskinen said these programs have resulted in more than 45,000 disclosures and the collection of about $6.5 billion in taxes, interest, and penalties.
“To supplement the OVDP, in 2012 we added what we call the streamlined filing compliance procedures,” he said. “This has provided a way for a limited group of US taxpayers living abroad who didn’t know they were out of compliance to catch up on their US filing requirements without paying steep penalties.”
To encourage these taxpayers to come forward, Koskinen said the IRS is expanding the eligibility criteria, eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year, and doing away with a questionnaire that applicants were required to complete. Under the new rules, all penalties will be waived for eligible US taxpayers residing outside of the United States. For eligible US taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.
Additional changes to the program are designed to cover those whose failure to comply with reporting requirements is considered “willful in nature,” and do not qualify for the streamlined procedures.
“These changes will help focus this program on people seeking certainty and relief from criminal prosecution,” Koskinen said. “From now on, people who want to participate in this program will have to provide more information than in the past, submit all account statements at the time they apply for the program, and in some cases pay more in penalties than they would have done had they entered this program earlier.”
According to the IRS, a 50 percent offshore penalty could be applied "if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation."
Also, the civil penalty for willfully failing to file a Foreign Bank Account Report (FBAR) "can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. Nonwillful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation", according to the IRS.
“We want to send a message to anyone who continues to willfully and aggressively evade our tax laws by hiding money overseas that they will pay a higher price for that noncompliance,” Koskinen said. “Even though we’re tightening components of the OVDP, we still believe it’s a better deal than the alternative, because if we find you, you will face higher penalties and, as the record shows, could face criminal prosecution and jail time.”
The IRS chief also warned that more information on overseas accounts is being sent to the agency on a daily basis. He cited the recent agreement between Credit Suisse and the US Justice Department, in which the Swiss bank was charged with a felony for helping thousands of US customers cheat the IRS and ordered to pay about $2.6 billion in penalties.
In addition, the Foreign Account Tax Compliance Act (FATCA), which aims to fight offshore tax evasion by US citizens, goes into effect on July 1. The law requires foreign financial institutions to report information about accounts held by US taxpayers directly to the IRS, even if the accounts hold only foreign assets.
Roughly 77,000 foreign and US banks and financial institutions have registered with the United States to comply with FATCA.
“It’s clear that the days of hiding assets in accounts overseas are coming to an end,” Koskinen said. “There is no reason not to come into compliance.”