The IRS has provided guidance and clarifications for U.S. taxpayers who have failed to disclose offshore assets and pay taxes due. The new instructions apply to taxpayers who apply for relief under the streamlined filing compliance procedures and are effective for applications submitted on or after July 1, 2014. The streamlined program is available to all U.S. taxpayers, including resident aliens living in the United States and U.S. citizens living abroad.
The streamlined program provides reduced penalties—five percent for taxpayers in the U.S.; zero for taxpayers living outside the U.S. The program is available only to taxpayers who can demonstrate that their actions were not willful. Taxpayers whose conduct may be willful can pursue relief through the IRS’s Offshore Voluntary Disclosure Program (OVDP). The latter program imposes a penalty of 27.5 percent, but protects participants from potential criminal liability. Taxpayers who previously applied under the OVDP, but who have not entered into a closing agreement, can apply for reduced penalty relief under the OVDP transition program and remain in the OVDP.
While practitioners welcome the additional guidance clarifications, many are concerned about the lack of IRS guidance on the facts and analysis that will be treated as willful conduct. Taxpayers cannot participate in both the streamlined program and the OVDP. A taxpayer who applies under the streamlined program but whose claim of nonwillful conduct is rejected cannot then reapply for relief under the OVDP program.
U.S. taxpayers are required to report and pay taxes on worldwide income, including income from foreign assets. U.S. taxpayers who own foreign assets may be required to submit any of the following forms or reports to the government:
- Form 1040, Schedule B (Part III) – foreign accounts;
- Form 8938, Statement of Foreign Financial Accounts – overseas assets whose value exceeds certain thresholds; and
- Form 114, Report of Foreign Bank and Financial Accounts (FBAR) – foreign accounts above $10,000.
FBARs must be filed with Treasury’s Financial Crimes Enforcement Network (FinCEN). The IRS has enforcement authority for FBARs.
The IRS provided separate guidance—including streamlined procedures and frequently asked questions (FAQs)—for U.S. taxpayers residing in the U.S., and U.S. taxpayers residing outside the U.S. The new guidance is helpful, for example, because it explains how U.S. citizens, lawful permanent residents, and others who lived in the United States for a period of time can be treated as nonresidents by demonstrating that they did not have a U.S. “abode” or a “substantial presence” in the U.S. The guidance also explains which assets are counted for applying the penalty rates.
The IRS also provided guidance for taxpayers to submit delinquent information returns but who do not need to use the streamlined program or the OVDP to file returns and report and pay additional tax.