Important Law Changes for those with Offshore Financial Assets

U.S. citizens, resident aliens and certain nonresident aliens are required to report worldwide income from all sources including foreign accounts and pay taxes on income from those accounts at their individual rates. The Offshore Voluntary Disclosure Program and Streamlined Filing Compliance Procedures were developed to provide non-compliant taxpayers with options for complying voluntarily. Changes to each of the programs are listed below.

Offshore Voluntary Disclosure Program (OVDP)

The Offshore Voluntary Disclosure Program (OVDP) was designed to offer taxpayers with undisclosed accounts the opportunity to report foreign financial assets and pay all tax due in respect of those assets.

Effective July 1, 2014:

  • Additional information is required from taxpayers applying to the program.
  • Taxpayers are required to submit all account statements and pay the offshore penalty at the time of the OVDP application.
  • The offshore penalty increases from 27.5% to 50% if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that the financial institution where the underlying financial account is maintained is under investigation by the IRS or the Department of Justice.
  • Reduced penalty percentages for certain non-willful taxpayers have been eliminated.
  • Taxpayers are now able to submit records electronically rather than by paper.

Effective August 4, 2014:

  • Any taxpayer having an undisclosed interest in an account maintained at certain listed foreign financial institutions listed at will be subject to a 50% miscellaneous offshore penalty if they submit a pre-clearance letter to the IRS Criminal Investigation.

More information re: the OVDP can be found here on the IRS web site.

Streamlined Filing Compliance Procedures (SFCP)

The Streamlined Filing Compliance Procedures (SFCP) was designed to provide taxpayers with unreported offshore assets a penalty-free option if they met certain requirements. (Taxpayers who have made a submission under the SFCP are not eligible to participate in OVDP.)

Effective July 1, 2014:

  • The expanded streamlined procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States.
  • No longer a requirement that the taxpayer have $1,500 or less of unpaid tax per year;
  • The required risk questionnaire (requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct) is no longer required.
  • For eligible U.S. taxpayers residing outside the United States, all penalties will be waived.
  • For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

More information re: the SFCP can be found here on the IRS web site.

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