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Streamlined Offshore Voluntary Disclosure Initiative entices more than it cures

Date: 09/26/12

Topic: Taxation

The Offshore Voluntary Disclosure Program (OVDP) has been criticized for its equally harsh treatment of intentional and inadvertent taxpayers that fail to comply with foreign account disclosures. As of September 1, 2012, the IRS has initiated streamlined filing procedures (SFP) designed for taxpayers that present low compliance risk. The current OVDP has increased the FBAR related penalties from 25 to 27.5 percent of the highest account value at any time during the previous eight years. However, under the SFP all submissions will be reviewed but the level of scrutiny will vary according the level of compliance risk. For taxpayers presenting a low compliance risk the review will be expedited and the IRS will not assert penalties or pursue follow-up actions.

The SFP is available to non-resident taxpayers that since January 1, 2009 have resided outside the U.S. and have not filed a U.S. tax return. The natural effect of these requirements is that only a few individuals fit the narrow criteria. More revealing are the taxpayers that are left out of the program. Since the program is only available to those that have not filed a tax return in the last six years, it is possible to treat more harshly those that have attempted to comply by filing a tax return that turned out to be defective than a person that made no attempt whatsoever. Additionally, it leaves out the whole host of taxpayers residing at least partially in the U.S. or that has dual citizenship and for whatever reason simply did not know about the reporting requirements.

On the surface the SFPs appear to take into consideration the distinction between willful violators and mistaken taxpayers but the program seems to maintain indifference. In the event a taxpayer enters the program but is deemed a higher compliance risk, the taxpayer will be notified that they are not eligible for SFP and can be subjected to a full examination as if they had opted out of the OVDP entirely. This gives taxpayers with undisclosed foreign income no more guarantee than a roll of the dice. By placing taxpayers in this situation the IRS is undermining compliance and perpetuating quite disclosures.

The IRS will determine the compliance risk level of submissions by assessing information provided with submissions including a questionnaire that is required. The level of risk will increase if any of the following are present:

  • If any of the returns submitted through the program claim a refund;
  • If there is material economic activity in the United States;
  • If the taxpayer has not declared all of his/her income in his/her country of residence;
  • If the taxpayer is under audit or investigation by the IRS;
  • If FBAR penalties have been previously assessed against the taxpayer or if the taxpayer has previously received an FBAR warning letter;
  • If the taxpayer has a financial interest or authority over a financial account(s) located outside his/her country of residence;
  • If the taxpayer has a financial interest in an entity or entities located outside his/her country of residence;
  • If there is U.S. source income; or
  • If there are indications of sophisticated tax planning or avoidance.

However, absent any of these high risk factors if the submitted returns show less than $1500 in tax due in each of years then the taxpayer will be treated as low risk and processed through SFPs.

The SFP does not provide protection from criminal prosecution if it is deemed warranted and once a taxpayer makes a submission under the SFP, participation in the 2012 OVDP is no longer available. Therefore, it is vital to seek the advice of a qualified and experience legal professional.