The IRS makes major changes to its offshore disclosure procedures to encourage U.S. taxpayers with foreign financial assets to comply with their tax obligation. On June 2014, the IRS announced major changes to its offshore compliances as an alternative to its existing Offshore Voluntary Disclosure Program (OVDP), which was designed more for taxpayers who willfully failed to disclose foreign assets. Specifically, Streamlined Filing Compliance Program (SFCP) is intended to cover individual taxpayers who non-willfully failed to disclose foreign assets (e.g., they did not know about the requirement or their ownership interest in foreign assets).
If you are a U.S. taxpayer and you have undisclosed foreign bank accounts and or unreported foreign income, then under FATCA (Foreign Account Tax Compliance Act) and IRS general tax law, you may be subject to extremely high penalties according to the Reporting of Foreign Bank and Financial Account Rules. Voluntary compliance programs providing new options to help thousands of people to comply with their U.S. tax filing obligations. Taxpayers’ non-U.S. income and investments vary widely, the IRS offers the following options for addressing previous failures to comply with U.S. tax and information return obligations:
• The Offshore Voluntary Disclosure Program (OVDP)
• Streamlined Filling Compliance procedures (SFCP)
• Delinquent Report of Foreign Bank and Financial Accounts (FATCA/FBAR) and delinquent international information return submission procedures
The key aspect of Streamlined Filing Compliance Procedures is an expansion of the non willful certification program for taxpayers residing in the United States or foreign country whose failure to report foreign financial assets and pay all tax due on those assets was not the result willful conduct are subject to only a 5% miscellaneous offshore penalty on the maximum value of the highest annual aggregate total balance going back 6 years.
At the other end of the spectrum, if a person was willful, which generally means they intend on defrauding the Unites States by evading tax, then they have to enter the traditional OVDP (Offshore Voluntary Disclosure Program) and pay a penalty of either 27.5% or 50% miscellaneous offshore penalty on the maximum value of the highest annual aggregate total balance going back 8 years.
Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, generally avoid substantial civil penalty and eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity of resolving all offshore tax issues. Taxpayers who do not comply voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty, foreign information return penalties and the risk of criminal prosecution.
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