IRS Expands Offshore Amnesty for Taxpayers Living in the U.S. and Abroad
The Internal Revenue Service just announced the expansion of a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed offshore income or activities get current with their taxes and informational reporting obligations. Since 2009, over 45,000 tax payers and 100 foreign banks have come forward under the 2009, 2011 and 2012 special voluntary disclosure programs raking in over $6.5 billion for the U.S. Treasury and creating an extensive database of information for further investigation. This fourth initiative, known as the 2014 Offshore Voluntary Disclosure Program (OVDP), is a welcome expansion and clarification of the 2012 OVDP with a few key differences. U.S. taxpayers, including permanent residents and citizens living abroad, with unreported offshore income, assets, bank accounts or businesses now have four official options to resolve their non-compliance voluntarily:
- Offshore Voluntary Disclosure Program (OVDP). This is a continuation of the same OVDP program that has been evolving since 2009. Some of the provisions that were already included for practical purposes have been carved out and refined in the form of the following 3 alternatives to the OVDP. The OVDP is still designed for the taxpayer whose non-compliance meets the legal standard of “willfulness”. Qualifying taxpayers can avoid criminal prosecution (and deportation in the case of non-citizens) and potentially higher civil penalties in exchange for a special, one-time 27.5% penalty. However, the new rules provide that those who join after their bank has been publicly identified as being under investigation or cooperating with the government will pay an increased, one-time 50% penalty, as opposed to the regular 50% penalty that is otherwise applied per tax year.
- Streamlined Filing Compliance Procedures. This option already existed but wasn’t very useful because most taxpayers didn’t meet the strict eligibility standards. Still intended for taxpayers whose failure to report does not meet the legal standard of “willfulness”, but with more relaxed standards so more people qualify. For example, it is no longer limited to non-filing taxpayers living abroad. Qualifying taxpayers residing outside the United States (e.g. many “accidental Americans”), can pay their taxes without penalties. Those residing in the United States pay the tax, plus a special 5% penalty.
- Delinquent FBAR Submission Procedures. Qualifying taxpayers who have reported all the income from their offshore bank accounts, but accidentally never filed FBARs to report the accounts themselves, can come forward with no penalty.
- Delinquent International Information Return Submission Procedures. Qualifying taxpayers who have reported all the income from their offshore activities, but inadvertently failed to attach the proper informational forms (e.g. 5471, 3520, etc.) detailing their direct or indirect ownership or transactions with foreign companies, partnerships, trusts and other foreign financial assets, can file those forms without penalties.
What if I don’t come clean? How will they know? Will it go away by itself?
Tax authorities are exchanging more and more information every day, including many “offshore” jurisdictions. U.S. citizens and tax residents, living in the U.S. or abroad, who have accidentally or intentionally failed to report income, bank accounts, corporations, trusts or other assets outside the U.S. are increasingly at risk of being detected, penalized and in some cases even incarcerated and deported. When given the opportunity, we prefer to help our clients proactively arrange their affairs to reduce their tax burden to the legal minimum. However, we never recommend simply moving on with life and pretending as if no offshore accounts or income ever existed or maintaining the delusion that living abroad is an excuse for not complying with U.S. tax laws.
For those who are not in compliance and are ready to come clean, we can establish attorney-client privilege and help them understand and resolve their non-compliance with minimal taxation, penalties and criminal exposure. By contrast, any non-attorney, including CPAs, bankers and offshore company/trust vendors, can be compelled to testify against the taxpayer and all their files and email correspondence can be subpoenaed, as well as phone conversations recorded by banks and copies of emails kept by internet service providers.
What are my options?
There are several ways to resolve tax non-compliance prior to being detected, but a quantitative and qualitative analysis must be performed to gauge which options are available and beneficial for a particular taxpayer. Taxes and interest must be paid under any scenario, but the penalties can vary tremendously depending on various factors. Possible penalty outcomes can range from zero if the taxpayer meets the legal standard of “Reasonable Cause” for not reporting, to a reduced penalty if the IRS determines the non-compliance does not meet the legal standard of “Willfulness”, to an increased penalty if the IRS determines that the taxpayer was “Willful”, to even greater penalties plus possible jail time and deportation if the taxpayer’s Willfulness is such that the IRS refers the case for criminal prosecution.
For many taxpayers, the four options outlined in the 2014 initiative offer clear benefits to come clean now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward can face far higher penalty scenarios as well as the possibility of criminal prosecution. It is important to note the IRS has not announced any deadline to participate. As such, the IRS may increase the penalties, make certain persons ineligible or eliminate the program entirely at any time.
Tax Globalization is Here
Multinational families with U.S. investments or a member who is or might become a U.S. tax resident, and who have not received current legal advice regarding their wealth from an experienced, independent and practicing U.S. international tax attorney, should act quickly to ensure that their wealth is properly structured for maximum tax efficiency and legal advantage. Anyone unsure whether they have fulfilled all their tax and information reporting obligations should seek the privileged advice of a tax attorney as soon as possible to determine the safest and most economical way of resolving their non-compliance prior to detection.