On June 18, 2014, the Internal Revenue Service announced revisions to the Streamlined Domestic Offshore Procedures (the “Streamlined Program”). The revised Streamlined Program offers reduced penalties for certain taxpayers with offshore reporting issues as compared to the higher penalties imposed under the Offshore Voluntary Disclosure Initiative (the “OVDI Program”). The Streamlined Program, however, does not offer many of the OVDI Program’s protections. A determination as to whether to pursue the OVDI Program or the Streamlined Program will depend on specific facts presented by a taxpayer, and will require careful contemplation of the circumstances involved by a qualified tax professional.
Prior to being revised, the Streamlined Program was offered only to non-resident non-filers with offshore reporting issues. Under the expanded program, United States residents are now eligible to participate. Individuals seeking to participate in the Streamlined Program (who do not meet the program’s requirement of being a non-resident) must (1) be residents of the United States, (2) have previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date has passed, (3) have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR and/or one or more international information returns with respect to the foreign financial asset, and (4) have such failures from non-willful conduct. The IRS defines non-willful conduct for these purposes as “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.”
Under the Streamlined Program, a taxpayer accepted into the program will pay a penalty equal to five (5%) percent of the highest aggregate balance/value of their foreign financial assets subject to the penalty for the years in the covered tax return period (the last 3 years) or the covered FBAR period (the last 6 years). This penalty compares favorably to the penalty under the OVDI Program, where a taxpayer is required to pay a penalty equal to twenty seven and one-half (27.5%) percent of the highest aggregate value of their foreign financial assets.
A foreign financial asset is subject to the 5% penalty in a given year if the asset (or gross income in respect of the asset) was not reported in a year in the covered period where it was required to be reported. For example, if an asset was required to be reported on the FBAR, the covered period for inclusion would be six years; if an asset was only required to be reported on Form 8938, the covered period would be three years.
Under transition rules announced for the Streamlined Program, current participants in the OVDI Program are permitted to seek a determination under the Streamlined Program while remaining in the OVDI Program. Those not currently in the OVDI Program will not be afforded such a luxury, and will not be able to participate simultaneously in both programs.
To participate in the Streamlined Program, the taxpayer must strictly adhere to the Program’s specific procedures. Failure to comply will result in the returns being processed in the normal course without the favorable treatment of the Program. An important step requires the taxpayer to file a certification stating (1) the taxpayer is eligible for the Streamlined Program; (2) all required FBARs have been filed; (3) the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct, and (4) the penalty amount is accurate. The taxpayer must also provide a statement giving specific reasons for the failure to report all income, pay all tax, and submit all required information returns.
If evidence of willfulness is uncovered by the IRS, it may open an examination or investigation that could subject the taxpayer to civil fraud penalties, FBAR penalties, information return penalties, or referral to the Criminal Investigation unit. By contrast, under the OVDI Program, no determination of willfulness is made by the IRS (though a significantly higher penalty amount is paid by the taxpayer), and taxpayers accepted into the OVDI Program can be assured they will not be subject to criminal prosecution.