Offshore Voluntary Disclosure Program and Streamlined Filing Compliance Procedures

Rödl & Partner Tax Matters Vol 2014 – 11, published in August 2014​

Overview

On September 28, 2018 the IRS Offshore Voluntary Disclosure Program (“OVDP”) expired. The IRS Streamlined Filing Compliance Procedures (“SFCP”) which were first introduced on September 1, 2012, still exist together with programs for delinquent FBARs (“Foreign Bank Account Reporting”) and delinquent international information returns. 

Taxpayers with undisclosed foreign accounts, assets, or entities may make a voluntary disclosure utilizing the SFCP to become compliant with tax reporting obligations and avoid substantial civil penalties. Taxpayers who do not participate in the SFCP run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution. The IRS remains actively engaged in ferreting out the identities of those with undisclosed foreign accounts. Moreover, increasingly this information is available to the IRS under tax treaties, through submissions by whistleblowers, and through information obtained under FATCA and Foreign Financial Asset Reporting on Form 8938. The current program has no deadline to apply, although the terms of the program could be changed or the program could be ended at any time.

The different programs are outlined in three distinct sets of procedures: 

• 2014 Streamlined Filing Compliance Procedures, 
• Delinquent FBAR submission procedures, and
• Delinquent international information return submission procedures.

Utilizing the Streamlined Filing Compliance Procedures

The purpose of the streamlined procedures is to encourage taxpayers to come forward without fear of steep penalties in cases where non-compliance is non-willful. Therefore, as mentioned above, a taxpayer participating in the SFCP will be required to sign a certification that the failure to report all income, pay tax, and submit all required information returns, including FBARs, was due to non-willful conduct. Non-willful conduct is defined as conduct that is due to negligence, inadvertence, or mistake, or conduct that is the result of a good faith misunderstanding of the requirements of the law. The IRS has stated that the concept of willfulness is well documented in case law and they would rely on practitioners to advise their clients on risks of criminal prosecution. Therefore, all potential SFCP cases must be referred to an attorney who will, together with the taxpayer, assess whether or not a taxpayer can certify, as required by SFCP, that their lack of compliance is non-willful.

The IRS has outlined eligibility requirements and procedures for both residents and non-residents.

General Eligibility Requirements Applicable to Residents and Non-Residents

• Streamlined procedures are only available to individual taxpayers including estates.
• If a civil examination or criminal investigation has already been initiated by the IRS, then the taxpayer is not eligible to use the streamlined procedures.
• The IRS will not acknowledge receipt of the returns and there will not be a closing agreement.
• Submitted tax returns are subject to audit under existing audit selection guidelines applicable to all U.S. tax returns.
  

Eligibility Requirements for Residents

• Failure to meet the applicable non-residency requirement (i.e. is a U.S. citizen, green card holder or meets the substantial presence test) (for joint return filers, one or both of the spouses must fail to meet the non-residency requirement,
• Has previously filed a U.S. tax return (if required) for each of the most recent 3 years for which the U.S. tax return due date (including extensions) has passed,
• Has failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset, and
• Such failures resulted from non-willful conduct.

Eligibility Requirements for Non-Residents

• Was physically outside the United States for at least 330 days in one or more of the past three years.  
  
• Did not have an "abode" in the United States at any point during the three-year period explained above.  Generally, an "abode" is a permanent home, habitation, residence, domicile, or place of dwelling.  The term "abode" also refers to the place where a taxpayer maintains economic, family, and personal ties,
• Failed to file annual Forms 1040, or filed annual Forms 1040 that did not properly report worldwide income,
• Has failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR and/or one or more international information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621) with respect to the foreign financial asset, and
• Such failures resulted from non-willful conduct.

Procedures for Residents and Non-Residents

The resident and non-resident Streamlined Procedures require a taxpayer to:

1. File amended tax returns for the most recent three years for which the tax return due date (or properly applied for extended due date) has passed
2. File any delinquent FBARs for each of the most recent six years for which the FBAR due date has passed,
3. File all relevant international information returns for the past three years.  These include, but are not limited to, Forms 8938 for foreign financial assets, Forms 5471 for foreign corporations, Forms 8865 for foreign partnerships, Forms 3520 and Forms 3520-A for foreign trusts, Forms 8621 for passive foreign investment companies, etc.
4. Sign and date a certification for the IRS, under penalties of perjury, stating to the IRS that the failure to report all foreign income, accounts, assets, etc. was not "willful" including providing a detailed description of the facts supporting the position that the U.S. tax violations were unintentional/non-willful and the taxpayer acted reasonably and in good faith. 
5. Pay the income taxes and interest charges related to the delinquent or amended tax returns for the past three years. A taxpayer who is eligible to use the non-resident Streamlined Procedures, and complies with the procedures, will not be subject to failure-to-file and failure-to-pay penalties, accuracy related penalties, information return penalties, or general FBAR penalties.

Resident taxpayers must also pay a miscellaneous offshore penalty. The miscellaneous offshore penalty is equal to 5% of the highest aggregate balance or value of the taxpayer's foreign financial assets that are subject to the penalty during the years in the relevant tax return period and relevant FBAR period. 

Delinquent FBAR Submission Procedures

Taxpayers who do not need to use the SFCP to file delinquent or amended tax returns to report and pay additional tax, may use the delinquent FBAR submission procedures as long as the following requirements are met:

1. Have not filed a required FBAR(s),
2. Are not under civil examination or criminal investigation by the IRS,
3. Have not been contacted by the IRS about the delinquent FBAR, and
4. Have reported and paid tax on income from the foreign financial accounts reported on the delinquent FBAR.
   

The taxpayer should file the FBAR for up to six years, if needed, according to the form's instructions (including electronic filing requirements) and include a statement why the FBAR is being filed late. The IRS will not impose a penalty for the failure to file the FBAR if the taxpayer has properly reported on a U.S tax return, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBAR(s).

Delinquent International Information Return Submission Procedures

Taxpayers who do not need to use the SFCP to file delinquent or amended tax returns to report and pay additional tax, may use the delinquent international information return submission procedures as long as the following requirements are met:

1. Have not filed one or more required international information returns,
2. Have reasonable cause for not timely filing the information returns,
3. Are not under a civil examination or a criminal investigation by the IRS, and
4. Have not already been contacted by the IRS about the delinquent information returns.

The taxpayer should file the delinquent information returns (attached to an amended return for the year or years for which the compliance failure exists) with a statement of all facts establishing reasonable cause for the failure to file the information returns. The taxpayer must also certify in a statement that any entity for which the information returns are being filed was not engaged in tax evasion. A reasonable cause statement must be attached to each delinquent information return.

 If you have any questions regarding SFCP, please contact your Rödl and Partner tax advisor.

We have made reasonable efforts to ensure the accuracy of the information contained in this publication, however this cannot be guaranteed. Neither Rödl Langford de Kock LP nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at user's risk.

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