The Internal Revenue Service (IRS) has announced it will begin to wind down the 2014 Offshore Voluntary Disclosure Program (OVDP) and close it entirely on Sept. 28, 2018. The program was one of four methods by which United States taxpayers could become compliant in their reporting obligations to the IRS:

  1. streamlined filing compliance procedures (domestic and foreign);
  2. OVDP;
  3. delinquent FBAR submission procedures; and
  4. delinquent international information return submission procedures.

While each of these programs will help a taxpayer in becoming current with the IRS, determining which program is most appropriate requires an assessment of the circumstances necessitating the filings and whether the taxpayer is delinquent in the filing of their U.S. income tax returns or has no requirement to amend previously filed returns to include unreported income.

The IRS has identified the following information forms that carry the potential for imposition of penalties in connection with late or non-filing:

Form Purpose Penalty (in USD)
Form 114 (FBAR) U.S. citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be a fine as high as the greater of $100,000 or 50 per cent of the total balance of the foreign financial account per violation. Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation. These penalty amounts are indexed to account for inflation.
Form 8938 The form reports the taxpayer's interest in certain foreign financial assets, including financial accounts, certain foreign securities and interests in foreign entities. Fines of $10,000 may apply for each return, with an additional $10,000 added for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts

Taxpayers must report various transactions involving foreign trusts, including creation of a foreign trust by a U.S. person, transfers of property from a U.S. person to a foreign trust and receipt of distributions from foreign trusts. This return also reports the receipt of gifts from foreign entities.		 The fine for failing to file each of these information returns or for filing an incomplete return is the greater of $10,000 or 35 per cent of the gross reportable amount, except for returns reporting gifts, where the penalty is five per cent of the gift per month, up to a maximum penalty of 25 per cent of the gift.
Form 3520-A Information Return of Foreign Trust with a U.S. Owner

Taxpayers must also report ownership interests in foreign trusts by U.S. persons with various interests in and powers over those trusts.		 The fine for failing to file each of these information returns or for filing an incomplete return is the greater of $10,000 or five per cent of the gross value of trust assets determined to be owned by the U.S. person.
Form 5471 Information Return of U.S. Persons with Respect to Certain Foreign Corporations

Certain U.S. persons who are officers, directors or shareholders in certain foreign corporations are required to report specified information.		 The fine for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
Form 5472 Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

Taxpayers may be required to report transactions between a 25 per cent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party.		 The fine for failing to file each of these information returns, or failing to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency.
Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation The fine for failing to file each of these information returns is ten per cent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
Form 8865 Return of U.S. Persons with Respect to Certain Foreign Partnerships

U.S. persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships and acquisitions, dispositions and changes in foreign partnership interests.		 The fine is $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten per cent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Need to report previously unreported income?

Taxpayers who are either delinquent in the filing of their U.S. income tax returns or have the requirement to amend previously filed returns to include unreported income should use the streamlined filing compliance procedures or the OVDP.

Streamlined filing compliance procedures

The streamlined filing compliance procedures, in effect since 2012, are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide taxpayers in such situations with:

  • a streamlined procedure for filing amended or delinquent returns;
  • terms for resolving their tax and penalty procedure for filing amended or delinquent returns; and
  • terms for resolving their tax and penalty obligations.

The modified streamlined filing compliance procedures are designed only for individual taxpayers, including estates of individual taxpayers. The streamlined procedures are available to U.S. individual taxpayers residing outside and within the United States. The specific eligibility requirements for the streamlined procedures for both non-U.S. residents (streamlined foreign offshore procedures) and U.S. residents (streamlined domestic offshore procedures) are as follows:

Taxpayers must certify that conduct was not willful.

Taxpayers using either of the streamlined procedures will be required to certify that the failure to report all income, pay all tax and submit all required information returns, including FBARs, was due to non-willful conduct. Non-willful conduct is 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 not initiated a civil examination of the taxpayer's returns for any taxable year.

If the IRS has initiated a civil examination of a taxpayer's returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Similarly, a taxpayer under investigation by the IRS Criminal Investigation division is also ineligible to use the streamlined procedures.

Taxpayers who have previously filed delinquent or amended returns must pay previous penalty assessments.

Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called "quiet disclosures" made outside of the OVDP or its predecessor programs) may still use the streamlined procedures. However, any penalty assessments previously made with respect to those filings will not be abated.

Taxpayers who participate in the streamlined procedures need a valid Taxpayer Identification Number.

All returns submitted under the streamlined procedures must have a valid Taxpayer Identification Number (TIN). For U.S. citizens, resident aliens and certain other individuals, the proper TIN is a valid Social Security Number (SSN). Individuals who are not eligible for an SSN or an Individual Taxpayer Identification Number (ITIN) may not have their returns processed under the streamlined procedures. However, taxpayers who are ineligible for an SSN and do not have an ITIN may apply under the streamlined procedures if they include a complete ITIN application.

OVDP

Taxpayers who are concerned that their failure to report income, to pay tax and/or to submit required information returns was due to willful conduct and who therefore seek assurance that they will not be subject to criminal liability and potential substantial monetary penalties should consider participating in the OVDP immediately, before it is terminated. For more information, contact your local Collins Barrow office as soon as possible.

All income reported but didn't file all the forms?

Taxpayers who are not delinquent in the filing of their U.S. income tax returns and have no requirement to amend previously filed returns to include unreported income may use the delinquent FBAR submission procedures or the delinquent international information return submission procedures.

Delinquent FBAR submission procedures

Taxpayers may file delinquent FBARs according to the FBAR instructions if they:

  • have not filed a required Report of Foreign Bank and Financial Accounts (FBAR);
  • are not under a civil examination or a criminal investigation by the IRS; and
  • have not already been contacted by the IRS about the delinquent FBARs.

The IRS will not impose a penalty for the failure to file the delinquent FBARs if the taxpayer properly reported the income associated with the accounts on their U.S. tax returns and paid any tax arising thereon. Additionally, the taxpayer must not have been contacted previously regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

Delinquent international information return submission procedures

Taxpayers may file delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file if they:

  • have not filed one or more required international information returns;
  • have reasonable cause for not timely filing the information returns;
  • are not under a civil examination or a criminal investigation by the IRS; and
  • have not already been contacted by the IRS about the delinquent information returns.

The reasonable cause statement should contain a description of the facts and circumstances leading to the original non-filing of the information returns, and will usually seek to establish that the taxpayer used all ordinary business care and prudence in determining the filing was unnecessary. The IRS will then assess whether reasonable cause for non-filing exists.

As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.