June 19, 2014

The IRS just announced major changes in its Offshore Voluntary Disclosure program. Because the implementation of the Foreign Account Tax Compliance Act (FATCA) and the IRS and Department of Justice offshore enforcement efforts continue to raise the risk of detection of taxpayers with undisclosed foreign accounts and assets for the foreseeable future, the IRS determined that the OVDP should be modified. The changes reflect a greater understanding of the fact that many taxpayers were simply unaware of their filing obligations. On the other hand, the 27.5% FBAR penalty has been raised to 50% in some circumstances.

Some of the changes that are effective for OVDP Submissions made on or after July 1, 2014 are:

• A 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation, e.g. Swiss banks, HSBC India etc.
   
  Once the 50% offshore penalty applies to any of the taxpayer's accounts, the 50% offshore penalty will apply to all of the taxpayer's assets subject to the penalty, including accounts held at another institution or established through another facilitator for which there have been no events constituting public disclosures.
   
• FAQ 17 concerning filing delinquent FBARs has been replaced and superseded by a new Delinquent FBAR Submission Procedure.
   
• FAQ 18 concerning filing certain delinquent international information returns has been replaced and superseded by a new Delinquent International Information returns Submission Procedure.
   
• Additional information required for preclearance by Criminal Investigation.
   
• The offshore penalty must now be paid at the time of the OVDP submission.
   
• Account statements must be provided for all foreign financial accounts regardless of the account balance

In addition, the Streamlined Procedure has been expanded and modified to accommodate a broader group of U.S. taxpayers. Major changes to the streamlined procedures include: (1) extension of eligibility to U.S. taxpayers residing in the United States, (2) elimination of the $1,500 tax threshold, and (3) elimination of the risk assessment process associated with the streamlined filing compliance procedure announced in 2012.

Under the new Streamlined Procedure, the FBAR penalty for nonresident U.S. taxpayers can be 0% and for U.S. taxpayers located in the United States it can be 5%. The latter is great news for those who were facing a 27.5% penalty. A taxpayer who is eligible to use the new Streamlined Procedures will not be subject to accuracy-related penalties or information return penalties.