The US tax authorities have made significant changes in the offshore voluntary compliance programmes available to US citizens living abroad and domestic taxpayers who have unreported foreign financial accounts, to clamp down on offshore accounts and encourage higher rates of compliance.
The changes announced by the Internal Revenue Service apply to US taxpayers whose failure to disclose their offshore assets was ‘non-wilful’. They include an expansion of the streamlined filing compliance procedures announced two years ago and modifications to the 2012 Offshore Voluntary Disclosure Program (OVDP).
The original streamlined procedures announced in 2012 were available only to non-resident, non-filers. Taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a ‘risk’ questionnaire.
The new streamlined procedures are available to a wider population of US taxpayers living outside the country and, for the first time, to certain US taxpayers residing in the US.
The risk questionnaire requirement has been abolished, along with the requirement that the taxpayer have $1,500 (£880) or less of unpaid tax per year.Taxpayers are now required to certify that previous failures to comply were due to non-wilful conduct.
For eligible US taxpayers residing outside the country, all penalties will be waived. For eligible US taxpayers residing in the US, the only penalty will be a miscellaneous offshore penalty equal to 5% of the foreign financial assets that gave rise to the tax compliance issue.
John Koskinen, IRS commissioner, said: ‘This opens a new pathway for people with offshore assets to come into tax compliance. The new versions of our offshore programs reflect a carefully balanced approach to ensure everyone pays their fair share of taxes owed.’
The IRS has also announced modifications to the OVDP which allows individuals to avoid criminal prosecution if they disclose their foreign accounts and pay a substantial penalty. It has also abolished the existing reduced penalty percentage for certain non-wilful taxpayers in light of the expansion of the streamlined procedures.
The revised OVDP requires additional information from taxpayers applying to the programme. Taxpayers are required to submit all account statements and pay the offshore penalty at the time of the OVDP application. There is an increase in the offshore penalty percentage from 27.5% to 50% if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.
From 1 July, the new information reporting regime resulting from the Foreign Account Tax Compliance Act (FATCA) comes into effect, requiring foreign financial institutions to report to the IRS the foreign accounts held by US citizens.
Paul Behling, voluntary disclosure specialist at law firm Withers, described the IRS moves as ‘a huge and beneficial change for individuals and banks’, with the new streamlined process representing ‘a quick and low cost means to get compliant now and avoid future problems’.
‘Opening up the streamlined process and knocking the penalty rates down, is an acknowledgement by the IRS that there is a large group of people, both within and outside the US, who are not tax evaders and are looking for a way to become compliant without facing huge penalties,’ Behling said.
‘What is unclear is whether individuals who have been through the disclosure process, and have paid a penalty to the IRS under the previous rates, can now apply to have their case reviewed. No doubt many would wish to strike a new agreement at a much lower penalty, and it will be interesting to see whether these new rules lead to a rush of applications for reviews,’ Behling said.
