This Q and A answers the above questions. To set the context, we first consider a little background.
As mentioned elsewhere on this website, time is ticking for those hiding foreign assets or accounts overseas. Starting in 2015, foreign banks will be turning over their U.S. account holder information to the IRS in order to comply with the Foreign Account Tax Compliance Act (FATCA). Therefore, taxpayer with offshore hidden accounts and income generating assets / business activity may have only a narrow window to “come clean” with the government.
Presently, taxpayers have two or possibly three options to “come clean” with the IRS. The IRS has announced changes to its (i) Streamlined Program, and its (ii) 2012 Offshore Voluntary Disclosure Initiative. In addition, under limited circumstances, (iii) a taxpayer may qualify for so-called “Transitional Treatment.” These first two programs are discussed in detail here:
b. Transitional Treatment
The remainder of this Q and A discusses the “Transitional Treatment” option. Transitional treatment is available only to certain taxpayers. What is the benefit of these Procedures? Simply put, it allows the eligible taxpayer to (1) receive the benefits of a reduced penalty structure and (2) receive the protection (i.e. liability protection) afforded by the OVDI.
“Non-willful” taxpayers that were previously excluded from the Streamlined Procedures—and who are presently excluded because they previously entered one of the previous versions of the offshore voluntary disclosure program may be eligible to utilize the Streamlined Procedures. These taxpayers might have been previously excluded from the Streamlined Procedures because they had a U.S. residency or they did not meet the prior tax threshold amount of $1,500.
To be more precise, a taxpayer may request Transitional Treatment if he or she is (i) allowed to receive treatment under the Streamlined Procedures, (ii) submitted an Offshore Voluntary Disclosure Letter before July 1, 2014, but (iii) has not yet received a Closing Agreement (i.e. a fully executed one). Ultimately, it is within the IRS’s discretion to grant Transitional Treatment to a taxpayer; it is a “facts and circumstances” determination, made on a case by case basis.
c. What happens if the IRS grants Transitional Treatment to a taxpayer?
If a taxpayer’s request to receive Transitional Treatment is approved by the IRS, then he or she will not have to pay the higher OVDI FBAR penalty of up to 27.5%. Whether he or she will be required to pay any penalty at all turns on whether he or she resides in the United States (Qualifying Expats). If not (because they qualify as an expat), then he or she does not have to pay any penalty; but, if the taxpayer is a qualifying U.S. resident, then he or she will be required to pay a reduced FBAR penalty of five percent (5%) penalty: five percent of the highest fair market value “watermark” of the foreign bank account’s balance and tainted offshore income generating assets.
d. What happens if the IRS denies Transitional Treatment to a taxpayer?
Things are simpler but less favorable if the IRS denies a taxpayer’s request to receive Transitional Treatment. If the taxpayer’s request is rejected, then the he or she remains within the OVDP / OVDI—but under the original terms depending upon which version of the program was entered.
e. My request for Transitional Treatment was granted, but I first entered the 2012 OVDP. Will I still have to submit up to 8 years of amended tax returns? And pay the penalties?
The short answer it “yes.” If a taxpayer’s request to receive Transitional Treatment is approved, and he or she previously entered the 2012 OVDP, he must still file up to eight (8) years of amended tax returns and FBARs. In addition, he or she must pay all the applicable late payments and accuracy-related penalties.
This contrasts with those taxpayers who enter the program after July 1, 2014 (and who have not previously entered the 2012 OVDP). The IRS requires only that they file three (3) years of amended returns and 6 years of FBARs, and the additional penalties will be waived.