2014 changes to Tax Laws for Offshore Accounts and Assets

The IRS has implemented new changes (as of June 2014) to the tax laws relating to offshore foreign accounts and assets. These changes are helpful to many U.S. taxpayers who have failed to file their income tax returns and/or report their foreign accounts. Taxpayers essentially have two options before them—but for many choosing to participate in one over the other could be perilous.

By way of background, the IRS imposes certain reporting requirements for those with foreign accounts and assets, for example, in Switzerland and other offshore localities. That is, taxpayers are under a duty to reveal to the IRS that they have these assets and to dutifully report the income generated in these accounts on their tax returns. Presently, there are two main ways to get back into compliance if you have blown the offshore reporting requirements and failed to report the income generated by offshore assets: the traditional Offshore Voluntary Disclosure Program (as modified when the 2012 OVDI program changed into the 2014 OVDP program) and the Streamlined Filing Compliance Procedures which have different program terms depending upon whether the taxpayer is located in the U.S. or offshore (Expats).

As mentioned, the IRS has recently (June 2014) made changes to these two methods. Basically, the IRS seeks to encourage people to participate in one of these two programs, and it has created some flexibility so that participating in them is easier.

Crucially, however, and as explained further below, choosing which of these to programs to participate in is no easy “coin toss” matter. There are serious advantages and disadvantageous to consider. This article walks through some of those.

1. Traditional Tax-Compliance Route: Offshore Voluntary Disclosure Programs (OVDPs)—Amnesty with Insurance

The traditional Offshore Voluntary Disclosure Program (OVDP) allows taxpayers with foreign accounts to “come clean” by—voluntarily—disclosing to the IRS previously undisclosed accounts and foreign income generating assets that they have failed to report income for in a manner that will lead to the avoidance criminal prosecution. In fact, those who participate in this OVDP will not be recommended to the criminal division of the IRS for prosecution. In this sense, then, it is an “amnesty program.”

However, 2014 OVDP participants will be charged with a 27.5 percent penalty (one time only) based on the highest fair market value at any one time (high watermark) for the 8 years in the program. That said, this penalty jumps to 50% if the undisclosed foreign account is with one of the banks that is on the IRS’s “hit list.” See: http://www.irs.gov/Businesses/International-Businesses/Foreign-Financial-Institutions-or-Facilitators This new 50% penalty applies after August 3, 2014. A participant in the 2014 OVDP must file 8 year’s worth of income tax returns (or, amended one’s if that is alternatively required) and 8 years of FBARs.

Some might describe the 27.5% penalty, coupled with an amnesty program, as “insurance.”

2. Revised “Streamlined Procedure”: Pandora’s Box? Danger – there is no amnesty for tax crimes provided with this program!

In addition to the above OVDP, there is also a so-called Streamlined Procedure that allows certain participating taxpayers to disclose their foreign accounts and assets. This streamlined procedure was first offered to taxpayers on September 1, 2012. In 2012, 2013, and half of 2014, there was a certain criteria a taxpayer must have satisfied in order to participate in this Streamlined Procedure.

But, as it turned out, the IRS discovered that this criterion was too restrictive, and on June 18, 2014, the IRS announced that it was making changes to the 2012 Streamlined Procedure. Consequently, taxpayers who were barred from this procedure were, essentially, forced into the Offshore Voluntary Disclosure Programs.

Among the changes going into effect on 6/30/14 includes an expansion of those who are eligible to participate in the procedure. IRS Commissioner John Koskinen explained that the decision to do this was to “cover a much broader group of U.S. taxpayers that the Service believes are out there who have failed to disclose their foreign accounts but who have not willfully evading their tax obligations.” See

http://www.irs.gov/uac/Newsroom/Statement-of-IRS-Commissioner-John-Koskinen.

In other words, the IRS is making it easier for people to participate in the 2014 Streamlined Procedure.

With the 2014 changes, which become effective July 1, 2014, taxpayers (who are U.S. citizens or permanent residents) may qualify under for the new Streamlined Procedures and be subject to either a 0% penalty (certain expats) or a 5% penalty for failing to previously disclose one’s assets. The distinction turns on whether the taxpayer resided outside or insidethe United States for a specified period of time.

If a U.S. citizen or permanent resident resided outside the U.S. for at least 330 days in any one (or more) of the last three years then he or she may participate in the 2014 Streamlined Procedure to disclose his or her foreign income generating assets and accounts. Consequently, this may result in a zero penalty, provided, however, that his or her failure to file their informational reporting documentation was non-willful (non-intentional).

Similarly, if a U.S. citizen or permanent resident resided inside the U.S. and he or she has filed U.S. tax returns for the previous years but non-willfully failed to report their existence or the income generated by their foreign accounts or income generating assets they may qualify for a five percent (5%) FBAR penalty, on the highest fair market value obtained on their offshore income generating assets and accounts during the six year FBAR filing period.

The “catch” here with these modifications to the streamlined approach is that the “willful” bar is set fairly low—making it easier for the IRS to assert that the taxpayer is guilty of tax evasion or tax perjury. If a taxpayer is “consciously ignorant” or reckless indifference as to his foreign account reporting requirement then his conduct rises to the level of being “willful.”

Part of what makes it so easy for the IRS to find that a taxpayer is guilty of tax evasion is because this streamlined procedure “require[s] [taxpayers] to certify . . . that the failure to report all [his or her] income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willfulconduct.” http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures Under the modified Streamlined Procedure, a taxpayer must amend their three (3) most recent annual tax returns, and file six (6) most recent delinquent FBARs.

Conduct is deemed “non-willful” if a taxpayer’s action or inaction was driven by negligence, inadvertence, or by mistake. But it is instructive to be reminded that one cannot be “intentionally ignorant” of his or her reporting requirements, otherwise the IRS will have good reason to assert that one has acted willfully and thus criminally. That was one of the holdings of the recent United States vs. J. Bryan Williams, 2012 WL 2948569 (4th Cir. 2012) case (discussed elsewhere on this site).

What is the significant of the Streamlined Procedure’s non-willful certification requirement? Just this: It forces the taxpayer to affirm, under penalty of perjury, that he has not crossed the low threshold of knowing (or choosing not to learn) of his or her duty to report his or her foreign accounts and the income generated by their offshore assets and willfully chose not to do so. If the IRS can show that, indeed, he or she did know of his or her duty to report his or her offshore accounts and assets, the IRS can stick the taxpayer with a tax perjury criminal conviction in additional to all the other criminal and civil remedies available to them, Tax Evasion and a penalty for 150% of the offshore account to name a few.

For more on tax perjury, see: http://klasing-associates.com/faq/tax-crime-commonly-known-tax-perjury/

Some might describe the combination of a non-amnesty program with the certification that one acted non-willfully in failing to report one’s foreign accounts/assets as a Pandora’s Box. We leave it to the reader to decide whether that assessment is correct. In any event – the decision of which program to be entered should not be made without legal counsel! Do not trust this decision to a anyone other than an experience criminal defense attorney.

Summary

We can summarize the above highlighted points about two programs in tabular form:

Penalty* (assumes only non-willful conduct involved) Amnesty Program? Number of Returns to File
Streamlined Program (as revised in 2014) 0% to 5% NO—and increased chances of tax evasion and/or perjury due to certification requirement that failure to file was due to “non-willful” conduct. 3 years of income tax returns; 6 years of FBARs
2014 OVDP One-time 27.5%–but up to 50% if the undisclosed account is with a foreign bank is under investigation YES 8 income tax returns; 8 years of FBARs.