Finally, the U.S. Treasury and the Internal Revenue Service is assisting people with the dilemma of choosing to become current with U.S. taxes or remaining potential targets for later discovery by the U.S. Treasury. As you may expect, the “Streamlined Filing Compliance Procedure” is complicated, but does contain provisions that are designed to actually help the average U.S. Expatriate to become compliant with the IRS.
Here are the basics of this complex addition to the OVDP, which I have divided into two parts of the population:
INDIVIDUALS RESIDING OUTSIDE OF THE U.S.
There is a onerous financial penalty, termed the “offshore penalty” that is equal to 5 percent of the highest aggregate balance/value of the individual’s foreign financial assets during the past six years, which consists of bank accounts, hedge fund balances, and other financial securities. The above mentioned Streamline addition would not apply in situation where the individual does not maintain a U.S. abode and (2) has been physically outside the U.S. for at least 330 days for any one or more of the most recent three years for which the due date for the return has passed. This second requirement is similar to the IRC Section 911 for the foreign sourced earned income exclusion wherein an individual resides outside of the U.S. for a 330 days out of a consecutive 365 day period. The IRC Section 911 exclusion will also apply to individuals who are bona fide residents of a foreign country and can NOT meet the 330 day requirement. Unfortunately, escaping the “offshore penalty” will only be met on the 330 days rule and not the bona fide resident rule. This may be an oversight by the IRS, but many individuals living overseas may, for now, be subject to the burdensome 5% penalty.
Individuals who successfully completes the Streamlined Program will be allowed to have the IRS waive any failure-to-file and failure-to-pay penalties, accuracy-related penalties, information-return penalties, and FBAR penalties for the amounts reported under the Streamlined Program.
In addition, either an original or an amended U.S. tax return, depending on the circumstances, for the three most recent years for which the due date for the return has passed (including extensions); (2) payment of any tax shown as due on the returns submitted under the program plus interest; (3) Foreign Bank Account Reports FBARs electronically filed for the most recent six years for which the filing deadline has passed; and (4) a written statement (on the form required by the IRS) signed under penalties of perjury that certifies, among other things, that the individual’s failure to report offshore accounts and income was due to non-willful conduct.
INDIVIDUALS RESIDING WITHIN THE U.S.
Individuals residing in the United States must pay the “offshore penalty” equal to 5 percent of the highest aggregate balance/value of the individual’s foreign financial assets during the past six years and file an original or an amended U.S. tax return for the three most recent years for which the due date for the return has passed, which would include any filed extensions and pay of any tax shown as due on the returns submitted under the program plus interest. The individual must also prepare and file Foreign Bank Account Reports FBARs electronically filed for the most recent six years for which the filing deadline has passed and provide a IRS approved formatted written statement signed under penalties of perjury that certifies, among other things, that the individual’s failure to report offshore accounts and income was due to non-willful conduct.
If you do not meet the eligibility requirements for the Streamlined Programs, the OVDP still may be an option. Recent modifications by the IRS to the current OVDP was to increase the 27.5 percent offshore penalty to 50 percent in the case of taxpayers who had accounts with any bank or facilitator identified by the U.S. Department of Justice as being under investigation or as cooperating with a government investigation.
Also, an individual who files a submission under one of the above Streamlined Programs. You are no longer eligible for the OVDP. An individual who has submitted an OVDP disclosure letter after July 1, 2014, is disqualified from participating in this above Streamlined Program.
And now the hard part to understand: if the IRS has initiated a civil audit or criminal investigation of you, regardless of whether the audit or investigation relates to undisclosed foreign financial assets, and regardless of whether you even knew about the audit or investigation, you will not be eligible for any of the IRS’s disclosure programs mentioned above. If you are one of the tens of thousands of individuals that now falls into this disclosure dilemma, I highly recommend that you seek competent legal tax counsel at your earliest convenience and to know your options and rights before it is too late.