This week the IRS announced a new guidance on the options available for taxpayers with undisclosed foreign bank accounts. The guidance comes with some pros and cons for the individual looking to come forward and become compliant with their filing obligations.
On the plus side, the IRS has opened up its Streamline Compliance Procedure to a far greater number of individuals. In order to qualify under the old Streamline Compliance Procedure, effective September 1, 2012, the individual had to have been living abroad, have not filed US tax returns and owed less than $1,500 in tax. If you met these requirements you were able to file three years past due returns, six years past due FBARs, pay no penalty and be compliant with US laws. Now, under the new Streamline Compliance Procedure, US residents and citizens are able to file three years amended tax returns, six years delinquent FBARs and pay a penalty of 5% of the highest account balance from the last six years to become compliant with US laws; provided, however, the failure to file must not have been a willful failure.
The IRS has no doubt expanded this program after much of the negative attention surrounding the Offshore Voluntary Disclosure Program (“OVDP”). In particular, the Taxpayer Advocate has criticized the OVDP for its punitive scheme, imposing high penalties and excessive delays on those that inadvertently failed to file. The Taxpayer Advocate further suggested the expansion of the Streamline Compliance Procedure to include all benign actors, including US residents and those owing more than $1,500 in tax.
Those individuals living abroad can still qualify for a zero penalty as was allowed under the old Streamline Compliance Procedures.
Those individuals who have already entered the OVDP may feel cheated; however, the IRS also published guidance on transition relief. The program participants will have to continue to make a full submission, including six years amended tax returns and FBAR filings but if they can show that they were not willful they may qualify for a reduced penalty of 5%.
In light of the recent case USA v. Zwerner, those individuals that are fearful that the failure to file may be willful may still want to enter the OVDP in order to fix the amount of penalties. In Zwerner the IRS imposed the full 50% penalty for each year of the failure, thus, even after a reduction by the Court, the total penalties came out to greater than the account balance.
For those entering the OVDP though the changes announced this week are not all good. In particular, the IRS has increased the 27.5% penalty to a 50% penalty where the financial institution where the taxpayer’s account was held or the taxpayer’s advisor is under investigation by the IRS or DOJ.
