In the publication featuring the Tax Specialist in February 2017 titled “Nowhere to Hide – An Update on Remediation Options for U.S. Taxpayers with Australian Assets” Click here to read our paper, I stepped through the tax amnesty programs offered in the U.S. for taxpayers that have failed to disclose foreign income and asset. One of which was the Offshore Voluntary Disclosure Program (OVDP).
The IRS has announced that it will close the 2014 OVDP effective September 28, 2018. With the impending closure of the program in mind, taxpayers that are in noncompliance and have undisclosed foreign assets should consider whether what their options are and whether they should be making an application under the OVDP before its closure. The alternative avenues of coming into compliance is under the streamlined procedures. It is imperative that you apply for the best program available to you in the first instance because if you are not accepted into one program, you become ineligible for relief under any of the programs offered.
Clients with foreign holdings, financial assets and business interests are often unaware of the stringent disclosure requirements in the US. In our experience, it is very commonplace for taxpayers to enter into compliance procedures as these were designed to provide avenues for compliance.
The importance of getting this right and the choice of program hinges on the severity of the associated penalties for non-disclosure. Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded US$10,000 at any time during a calendar year generally must file an FBAR. This is an information return disclosing the highest aggregate account balances of foreign financial accounts held.
Failing to file an FBAR can carry a civil penalty of US$10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of US$100,000 or 50% of the amount in the account for each violation with each year of non-disclosure being a separate violation. For expats with foreign retirement and investment funds, you can see how the penalty itself can be huge.
The different programs offered by the IRS each have different eligibility requirements for acceptance into the programs and offer different reduced penalties.
The OVDP was designed for taxpayers that are knowingly or ‘willfully’ failing to disclose foreign financial assets and are in non-compliance with the IRS reporting requirements. to bring US taxpayers into compliance where there was willful noncompliance with the foreign offshore disclosure rules as they relate to foreign financial assets.
The important difference between OVDP and streamlined procedures is conduct of a taxpayer. Where a taxpayer has willfully failed to disclose his or her foreign income or financial assets, they are ineligible to file under the streamlined procedures as it is a requirement that the taxpayer’s non-compliance was due to non-willfulness.
A taxpayer will be found to be ‘wilful’ if they knew of the requirement to disclose but chose not to. This can often include circumstances in which you display “willful blindness”, so to speak. This is important to understand when decided the best course of action for you as you are required to sign a form with the IRS under the penalty of perjury. Where a taxpayer was completely unaware of their reporting obligations, they may be more suited to the streamlined procedures.
If you are in non-compliance with the foreign asset disclosure requirements and are unsure as to which program is the best course of action for you, please contact our office to discuss the different avenues available to you.