The June 2014 Revised Offshore Voluntary Disclosure Program and Streamlined Programs

By:
Melissa Gillespie, JD, CPA, MST
Published Date:
Aug 1, 2014

It has been interesting to watch the IRS mold and remodel its original 2009 Offshore Voluntary Disclosure Program (OVDP). Since then, updates have included the 2011 Offshore Voluntary Disclosure Initiative (OVDI), which closed in September 2011; the December 2011 new compliance procedures for nonresident U.S. taxpayers, with a promise of “more to follow”; the 2012 OVDP program, which replaced the 2011 OVDI; and the announcement in June 2012 of new streamlined filing compliance procedures for U.S. citizens or dual citizens residing outside the United States.

Since the formation of the 2009 OVDP, more than 45,000 taxpayers have come into compliance voluntarily, paying about $6.5 billion in taxes, interest, and penalties, according to the IRS. Each revised program was, generally, in response to the lessons learned by the IRS from taxpayers who came forward under the applicable programs. This shows that the IRS is paying attention and responding, though perhaps not as fast or fairly as many of us would like.

On Jun. 18, 2014, it was announced that the IRS has once again revised its OVDP, focusing on three general areas: 1) the 2012 OVDP, now being referred to as the 2014 OVDP; 2) the 2012 Offshore Streamlined Program (OSP); and 3) the new Domestic Streamlined Program (DSP).

Introducing the 2014 OVDP

The new program took effect as of Jul. 1, 2014. The IRS issued transitional FAQs for those who wanted to consider transitioning out of the OVDP and into one of the streamlined programs. If eligible to transition out of OVDP, the taxpayer would be eligible for the penalty structure of the applicable streamlined program, but would remain subject to other provisions of the OVDP. Changes to the 2012 OVDP are discussed below.


Melissa Gillespie, CPA, JD, MSTWant to learn more about the IRS OVD program? Get your questions answered, live, by author Melissa Gillespie, who will provide a comprehensive overview of the IRS OVDP on Aug. 7, between 6 p.m. - 8 p.m. in New York City. If you can't attend in person, learn from Melissa via webcast! Find out more here.


Increase to a 50 percent penalty rate. Among other changes to the prior program, one of the most significant is the potential of an increased penalty for certain taxpayers, which would take effect as of Aug. 4, 2014. Applicable taxpayers will be subject to an offshore penalty rate of 50 percent (versus the current 27.5 percent) if, at the time of submission of a preclearance letter to the IRS, the taxpayer has an undisclosed foreign financial account at a foreign financial institution (FFI) where an event occurs that is considered a “public disclosure.” A public disclosure occurs when—

  • the FFI where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice (DOJ)
  • the FFI or facilitator is cooperating with the IRS or DOJ in connection with these undisclosed accounts
  • the FFI or facilitator has been identified in a court-approved John Doe summons.

The IRS provides that it will maintain a list of these FFIs and facilitators on its website, but the list might not be up to date at any given time; 10 names are currently provided.

Note that if a taxpayer has at least one account subject to this increased penalty rate of 50 percent, this rate will be applied to all previously undisclosed foreign financial accounts and any other foreign assets.

Submission revisions. Certain revisions concern preclearance procedure and OVDP submission. The revisions to the preclearance procedure include providing the names, addresses, and telephone numbers of FFIs where undisclosed OVDP assets are held and identifying information, such as name, employer identification numbers, addresses and jurisdiction where organized, of all foreign and domestic entities (i.e., corporations, partnerships, limited liability companies, trusts, and foundations) through which undisclosed OVDP assets are or were held. The FAQs now advise that it could take up to 30 days for a response on the preclearance.

OVDP submission requirements now must include—

  • The offshore penalty check with the submission
  • Separate checks for the Title 26 amounts for each year
  • A copy of a completed OVDP letter, including enclosures and attachments as previously submitted to Criminal Investigation
  • Copies of statements of all foreign bank accounts and all relevant documents for other OVDP assets
  • A statement identifying all foreign identities held directly or indirectly by the taxpayer, including a statement concerning ownership or control of the identities
  • A statement advising that the amended or delinquent income tax returns filed involve passive foreign investment company (PFIC) issues for the OVDP years and if the mark-to-market alternative approach is being utilized
  • All of the documentation required in relation to a Canadian-registered retirement savings plan, as outlined in question 5 of the FAQs.

The IRS now also provides that certain submission documents that do not require an original taxpayer signature may be submitted on a CD or a USB. The IRS provides a separate FAQ with those requirements.

Other revisions. These include the following:

  • The IRS now provides examples of how to document requests to FFIs for obtaining records if the FFI is not cooperating. If the IRS now provides clear examples of what is required for a paper trail for such requests, its advice should be followed; this will help if a taxpayer ever has to explain to the IRS reasons for not having the necessary information in order to complete an accurate voluntary disclosure.
  • The IRS added a new FAQ, 35.1, which provides that OVDP assets are not subject to valuation discounts if held through an entity or a series of entities, when calculating the OVDP penalty.
  • The new FAQs delete questions 51.1 and 51.2, which addressed when opting out may or may not be appropriate.
  • Both the 5 percent and the 12.5 percent reduced penalty structures have been deleted.

In addition, certain forms have been revised, including the voluntary disclosure submission letter; the attachment letter; the penalty calculation worksheet, now titled Form 14453; and Form 14452.

The above revisions focus on those who continually and willfully hide their assets offshore and are not compliant with the applicable tax and reporting requirements. With the implementation of the Foreign Account Tax Compliance Act (FATCA), more offshore banks are disclosing information on their U.S. customers. The IRS continues to warn these taxpayers that their time for hiding assets is coming to an end, and with each revised OVDP, the requirements get more onerous and punitive.

The IRS has finally heard the outcry that not all taxpayers who failed to report their foreign assets or the income therefrom did so intentionally. It focused its June 2012 response on those residing outside of the United States, but the fact remained: many U.S. taxpayers who do reside in the United States were being pulled into the large net of tax noncompliance when, in reality, they were just not aware of these filing and reporting requirements. With the June 2014 revisions, the IRS is once again trying to get it right.

Streamlined Procedures

As for the revised OSP, the IRS has set eligibility criteria for which taxpayers can use the program. U.S. taxpayers and estates thereof, if applicable, must meet the defined nonresidency requirement, and must have nonwillfully failed to report income from a foreign financial asset or failed to file the FBAR (FinCEN Form 114; TDF 90-22.1). The IRS provides that nonwillful conduct is conduct due to negligence, inadvertence, mistake, or conduct that results from a good faith misunderstanding of the law’s requirements.

The necessary returns are—as with the prior program—the past three years of income tax returns and the past six years of FBARs. Eligible U.S. taxpayers utilizing this OSP, who are in full compliance with the criteria, will not be subject to the following penalties: failure to file/pay, accuracy-related, information return, FBAR, or Title 26 miscellaneous offshore. The IRS requires that “Streamlined Foreign Offshore” be written in red across the top of the first page of each submitted Form 1040. In addition, the taxpayer must submit an originally executed statement, along with a copy attached to each submitted Form 1040, certifying that 1) the taxpayer is eligible for the OSP; 2) all required FBARs have now been filed; and 3) the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including the FBARs, resulted from nonwillfull conduct.

The IRS has provided a draft of this certification on its website. All tax and applicable interest due should be submitted as indicated on returns. It seems that the IRS wants one check for this program.

The major distinctions between the original 2012 OSP and the revised 2014 OSP are as follows:

  • No longer a $1,500 tax due limitation
  • Amended returns now accepted
  • No risk-analysis determination or related risk questionnaire.

New DSP

The IRS is now offering a streamlined filing procedure for those taxpayers who reside in the United States. It has set eligibility criteria for which taxpayers can use the program. U.S. taxpayers and estates thereof, if applicable, must 1) not meet the defined nonresidency requirement, 2) have nonwillfully failed to report income from a foreign financial asset or failed to file the FBAR, and 3) have previously filed a required U.S. tax return for each of the three most recent years.

Required returns are the past three years of previously filed income tax returns and the past six years of FBARs (FinCEN Form 114; TDF 90-22.1). Originally filed late returns are not allowed under this program. Eligible U.S. taxpayers utilizing this DSP and who are in full compliance with the criteria will not be subject to the following penalties: accuracy-related, information return, or FBAR; however, the Title 26 miscellaneous offshore penalty will apply. The IRS requires that “Streamlined Foreign Offshore” be written in red across the top of the first page of each submitted Form 1040. In addition, the taxpayer must submit an originally executed statement, along with a copy attached to each submitted Form 1040, certifying that 1) the taxpayer is eligible for the DSP; 2) all required FBARs have now been filed; 3) the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including the FBARs, resulted from nonwillfull conduct; and 4) the offshore penalty, as submitted, is accurate. The IRS has provided an example of this certification on its website.

Note that in addition to the tax and applicable interest due at the time of submission, the Title 26 miscellaneous offshore penalty is also due. This 5 percent penalty will be applied to the highest aggregate balance/value of taxpayer’s foreign financial assets at year end (as opposed to how it is calculated for the OVDP) for the past six-year period. Foreign financial assets are included in the penalty base if it was not reported on either the FBAR or on the Form 8938, and if it was properly reported on either form but the gross income was not reported.

Additional Guidance

For taxpayers using the OSP or the DSP, the IRS warns that it is critical to follow the requirements; otherwise, returns will not be processed utilizing the streamlined procedures. For taxpayers who do not need to use the OVDP, OSP, or DSP to file delinquent or amended tax returns, the IRS has added separate guidance for both delinquent FBAR submission procedures and delinquent international information return submission procedures.

Every client case should be reviewed carefully because the new programs and procedures can potentially present many pitfalls. Despite the IRS’s efforts, there are more questions left unanswered, which results in uncertainty as to how clients should come forward and which alternative will be most fair to their situation. The issue of nonwillfullness is not straightforward. This is risky for those who are poorly counseled because a false certification could result in higher penalties, including criminal prosecution. There is not a one-size-fits-all approach. As the years have passed, some practitioners have begun to think this is the case—sadly, the taxpayer once again pays the price.


Melissa Gillespie, CPA, JD, MSTMelissa Gillespie, CPA, JD, MST, has her own law practice devoted to international taxation, including estate and global wealth planning for high net worth, non-resident individuals; non-U.S. individuals working in the United States and U.S. citizens working abroad. She served as chair of the NYSSCPA International Taxation Committee; she is a member of the AICPA, the American Bar Association and the New York State, New York City and Suffolk County Bar Associations. Ms. Gillespie is admitted to practice in New York and the Law Society of England and Wales. She has written several articles on foreign bank account reporting and FACTA, and has recently authored “FBAR Compliance Guide,” available online and in print, published by CCH.

 
Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought.