In an effort to assist taxpayers navigate compliance with reporting delinquent foreign financial accounts, the IRS has implemented some new programs. There are risks to consider with each; however, not disclosing foreign accounts could have devastating financial consequences.
One important change, making the process more complicated, is the recent expansion of the streamlined compliance procedures. In some ways the IRS has taken one step forward and two steps backwards in its efforts to help taxpayers with unreported foreign financial accounts.
The latest iteration of the Offshore Voluntary Disclosure Program (OVDP) allows taxpayers with undisclosed offshore accounts to disclose their accounts to the IRS until August 4th. Failure to do so causes the OVDP penalty to increase from 27.5 percent to 50 percent.
After August 4th, events such as tax treaty disclosure, department of justice investigations, John Doe Summons, the Foreign Account Tax Compliance Act (FATCA), and the Program for Swiss Banks could trigger public disclosure events at any time. This means, undisclosed accounts will almost inevitably be discovered by the IRS or disclosed by the banking institution itself.
On June 18th the IRS commissioner announced it would expand the Streamlined Filing Compliance Program (SFCP) for non-willful taxpayers. Under the new program taxpayers that file SFCP face only a 5 percent offshore penalty instead of the current 27.5 percent penalty with OVDP. Of course, these taxpayers also face several qualifications and risks in entering this program.
Qualifications and Risks
There is an initial three-part eligibility assessment for SFCP. Once the eligibility assessment is finalized, the taxpayer must complete a certification process requesting entry into the procedure. This process includes filing six years of delinquent Reports of Foreign Bank and Financial Accounts (FBARs), three years of amended tax returns, and upfront payment of the offshore penalty of 5 percent.
Additionally, there is a certification “non-willful” conduct, meaning there is a belief that that taxpayer did not “willfully” fail to report undisclosed foreign financial accounts. The IRS defines “non-willful conduct” as conduct due to mistake, negligence, inadvertence, or conduct that is the result of a good faith misunderstanding of the tax law. The problem is interpretation of this definition frequently differs between the taxpayer and the IRS.
Willful or Non-willful?
Whether the IRS agrees with your assertion is the key question. If the IRS disagrees with your certification of the facts and circumstances of your assertion of “non-willful” conduct, you face audit in addition to penalty of perjury. Furthermore, the SFCP does not limit civil penalties or provide protection from criminal prosecution. Because one cannot go back and seek the protection of the 2014 OVDP, this makes the decision of choosing OVDP vs. SFCP (willful vs. non-willful) rather significant.
What to Do
If you have an undisclosed foreign bank account then you have a couple of programs available to you to become compliant. Whether you are in previous iteration of OVDP (i.e., 2009, 2011 or 2012) that has not closed and curious about a transition to SFCP, or are just beginning the research into compliance and trying to determine OVDP or SFCP, you have options to weigh.
Legal counsel and risk assessment from an authorized tax attorney is required, especially given that taxpayers with undisclosed overseas accounts can expect an interview by an IRS examiner. It is in your best interests to seek wise counsel from a federally authorized tax practitioner such as a licensed and experienced tax attorney.