Earlier articles have focused on the filing requirements for U.S. persons with foreign bank accounts or other foreign financial accounts. If you have such accounts which have not been properly disclosed, consider participation in the IRS Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer Taxpayers (Streamlined Procedures) or the Offshore Voluntary Disclosure Program (OVDP).
These programs are not new, however, On June 18, 2014, the IRS announced substantial changes to both programs. Effective July 1, 2014, the IRS made it easier for individuals to qualify for the new Streamlined Procedures. Before these changes, taxpayers had to enter the OVDP or submit through the $0 penalty Streamlined Procedure. However, taxpayers only qualified for the Streamlined Procedures if they met all of the following criteria:
- Had lived overseas since January 1, 2009
- Had not filed a US tax return since January 1, 2009
- Presented low compliance risk, including underreported tax liability of $1,500 or less.
Major changes to the Streamlined Procedures include:
- Extension of eligibility to U.S. taxpayers residing in the United States,
- Elimination of the $1,500 tax threshold, and
- Elimination of the risk assessment process associated with the original streamlined procedures.
Qualifying Under the Revised Streamlined Procedures
The changes to the Streamlined Procedures include general requirements that apply to both foreign and domestic taxpayers. All taxpayers must certify that prior US tax reporting noncompliance was non-willful. The modified procedures are only available for individual taxpayers and their estates, and they are not available if the IRS has started a civil or criminal investigation in regards to the taxpayer. In addition to the above general requirements, a taxpayer must meet one of the following two scenarios:
1. US citizens or permanent residents who reside outside the U.S ($0 penalty)
This program is for US citizens or permanent residents who have lived outside the US for at least 330 full days for any one or more of the most recent 3 years. Individuals who are not citizens or green-card holders meet this requirement if they did not meet the substantial presence test for any one of the last three years.
2. US citizens or permanent residents who reside in the US (5% penalty)
Taxpayers must have previously filed a US tax return (if required) for the last three years in addition to having failed to report gross income from any foreign account.
If a taxpayer qualifies under the Streamlined Procedures, amended or delinquent returns should be filed in accordance with the specific instructions for the applicable Streamlined Offshore Procedures.
What does Non-Willful mean?
For purposes of the streamlined procedures, non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. All facts and circumstances must be carefully analyzed before making a determination regarding the submission of a “non-willful” certification.
Changes to the Offshore Voluntary Compliance Program
The original OVDP assessed penalties of 5%, 12.5% or 27.5%, depending on the value of unreported assets. The penalty is assessed on the highest value of the account during the time period included in the OVDP. Taxpayers could opt-out of the penalties and pay Foreign Bank Account Report (FBAR) penalties. These penalties ranged from $10,000 per account per year to 50% of the account value per year.
Under the new program, there are no longer reduced penalties of 5% or 12.5%. Additionally, the 27.5% penalty is raised to 50% if the taxpayer has an account with a foreign bank or facilitator that is under investigation or cooperating with the US government. Taxpayers are now required to pay offshore penalties up front and are able to opt out of penalties if they are disproportionate to the taxpayer’s situation.
Other changes to the OVDP include the removal of frequently asked questions (FAQs) 17 and 18 which are not applicable to the program as well as the expansion of preclearance. A request now has to include the identities of all foreign financial institutions where the taxpayers’ accounts were or where their assets are being held.
Why Participate in the Program?
The revisions of the Streamlined Procedures coincide with the implementation of certain FATCA regulations for foreign financial institutions. The FATCA regulations require foreign financial institutions to report certain information about foreign accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.
To assist with these requirements, banks are requesting their US clients to complete and sign Form W-9. This form requires US citizens to provide their identification number and other personal information for US tax purposes. Banks will utilize information provided on Form W-9 to fulfill their reporting requirements to the IRS.
This article only provides a broad highlight of the many changes made by the IRS. The IRS has the authority to change or discontinue these programs at any time. If you have undisclosed foreign assets, your individual situation should be reviewed to determine the most advantageous program under the new rules.