The IRS has significantly improved its existing programs that enable U.S. citizens living abroad to become compliant with their U.S. tax filing obligations without being subject to any penalties, and has also made significant changes to the separate existing offshore voluntary disclosure program (OVDP) for taxpayers that have willfully failed to report offshore accounts.
Key actions
Canadian-resident U.S. citizens who have not been filing tax returns should review the new procedures which may cancel out any penalties they otherwise would owe. The new procedures are available here.
Taxpayers who have willfully failed to report offshore accounts or assets and are considering entering into the OVDP should make note of the August 3, 2014 deadline mentioned below to avoid increased penalties and the June 30, 2014 deadline for transitional relief.
Some key highlights
The existing so-called "streamlined" procedures for non-resident, non-compliant taxpayers have been expanded significantly to permit many more non-filers to qualify for full abatement of penalties. Like the existing procedures, the new procedures require taxpayers to file tax returns for the three most recent years, and to file foreign bank account reports (FBARs) for the six most recent years. The new procedures eliminate the requirement that the taxpayer's unreported tax liability not exceed $1,500. They also eliminate the risk assessment process and an associated questionnaire under which many taxpayers who were identified as having indications of tax avoidance (e.g., bank accounts outside of the taxpayer's country of residence) were ineligible for the streamlined procedure. These streamlined procedures were originally intended to help Canadian-resident U.S. citizens who were not in compliance with their U.S. tax filing obligations, but many such individuals could not meet the restrictive requirements. Under the new procedures, taxpayers will merely be required to certify that their non-compliance was not willful and provide a reason for the failure to comply. The new changes should permit many more Canadian-resident U.S. citizens to become compliant without facing penalties.
The OVDP for taxpayers who willfully failed to report offshore assets remains in effect, and the 27.5% penalty continues to apply in many cases. However, certain voluntary disclosures filed on or after August 3, 2014, will face a 50% penalty on the maximum value of unreported assets. The higher penalty will apply to accounts held at institutions or through facilitators that have been the subject of a public disclosure, and that either:
- Are or have been under investigation by the IRS or the U.S. Department of Justice;
- Are cooperating with the IRS or the Department of Justice in connection with reporting of U.S. account holders, or:
- Have been identified in a court-approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a "John Doe summons").
An initial list of 10 such entities appears on the IRS website here.
Taxpayers who are considering a voluntary disclosure may need to act by August 3rd to avoid the higher penalties.
There is a new streamlined procedure for U.S.-resident taxpayers whose failure to report offshore assets and income was not willful. Taxpayers who qualify for this procedure (which does not provide the protection against criminal prosecution that is available under a full-blown voluntary disclosure) will pay a penalty equal to 5% of the unreported offshore assets. Under a special transition rule, taxpayers who enter the OVDP before July 1, 2014, can request that their case be considered for eligibility for the 5% penalty if the facts indicate the failure to report was not willful. Taxpayers who enter the OVDP after June 30 will not be eligible for the 5% penalty
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.
