IRS Introduces New Streamlined Filing Compliance Procedures for Offshore Accounts
In prior Tax Alerts, we have described the various changes the Internal Revenue Service (IRS) has made to its recent voluntary disclosure programs, starting with the program made available in 2009. With each version of the program the IRS increased the highest “offshore penalty” from 20% (2009 Program) to 25% (2011 Program) and then to 27.5% (2012 Program). This penalty is based on the largest offshore account balance (with all accounts combined) over the eight-year disclosure period. The IRS has recently revised its voluntary disclosure program and the offshore penalty can, in certain cases, be increased from 27.5% to 50% of the highest offshore account balance.
Taxpayers with unreported offshore accounts often struggled with the “one size fits all” approach of the prior voluntary disclosure programs, particularly in the case of the amount of the offshore penalty, when they felt the facts in their case suggested that “willfulness” was not present. The prior programs did allow for a lower offshore penalty in limited cases, but in our experience the reviewers at the IRS made compliance with the requirements of the lower penalty extremely difficult. For these taxpayers, they felt the cost of participating in the prior voluntary disclosure programs was excessive when compared to the “quiet disclosure” process of filing back returns and FBARs outside of the voluntary disclosure programs.
As part of the 2014 Voluntary Disclosure Program, the IRS has introduced Streamlined Filing Compliance Procedures. Taxpayers who want to use the Streamlined Procedures follow a separate process instead of participating in the Voluntary Disclosure Program.
The key aspect of the Streamlined Procedures is the requirement to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs was due to non-willful conduct. The certification states that “non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the law.”
Taxpayers file only three years of income tax returns (as opposed to eight years under Voluntary Disclosure) and pay tax and interest for late payment, but no 20% penalty is required as is the case under Voluntary Disclosure. Taxpayers also file six years of FBARs (as opposed to eight years under Voluntary Disclosure) and pay a 5% offshore penalty on the highest account balance over the six-year period, as opposed to the substantially higher offshore penalty under Voluntary Disclosure. Taxpayers must also provide a statement as to why the income was not reported and why the FBARs were not filed.
Taxpayers who previously filed returns under a “quiet disclosure” can participate in the Streamlined Procedures, although penalties assessed based on the quiet disclosure will not be abated. If the IRS has initiated a civil examination of a taxpayer’s returns for any year, then a taxpayer cannot participate in the Streamlined Procedures. The new Streamlined Procedures are not available if you instead choose to participate in the 2014 Voluntary Disclosure Program.
Unlike the Voluntary Disclosure Program, the IRS will not enter into a closing agreement. As a result, the returns filed under the Streamlined Procedures can be selected for audit by the IRS. However, the IRS will not impose any accuracy related penalties or FBAR penalties unless the IRS determines that the original returns were fraudulent or that the FBAR violations were willful.
The Streamlined Procedures can significantly lower the cost of compliance compared to Voluntary Disclosure when the failure to report income and file FBARs was not willful. If you have an offshore account reporting obligation, we suggest that you be proactive and discuss your reporting options with your tax advisor, including the possibility of filing tax returns and FBARs under the Streamlined Procedures.
If you would like to discuss how any of these reporting obligations may affect your business or personal income tax situation, or have any other tax or estate planning questions, please contact, Bill Hussey (215-864-6257, email@example.com), John Eagan (212-868-4835, firstname.lastname@example.org), Kevin Koscil (215-864-6827, email@example.com) or Suzanne Prybella (215-864-7188, firstname.lastname@example.org). The Tax and Estates Practice Group at White and Williams is committed to keeping our clients and friends up to date with important tax developments. For current information, please refer to the Tax and Estates page on our website, www.whiteandwilliams.com.