United States: Streamlined And OVDP Update

U.S. persons looking to catch up on required U.S. income tax filings may now be able to take advantage of an updated set of "taxpayer friendly" rules introduced in June 2014: the Streamlined Filing Compliance Procedures (Streamlined Program), and the Offshore Voluntary Disclosure Program (OVDP). These programs are integral parts of the ongoing Internal Revenue Service initiative to encourage U.S. taxpayers, particularly those located outside the U.S., to become compliant.

The updated changes include an expansion of the Streamlined Program, originally introduced in 2012, and important modifications to the 2012 OVDP. In conjunction with these programs, the IRS continues its ongoing effort to combat what it considers the "misuse" of foreign assets, including the implementation of the Foreign Account Tax Compliance Act (FATCA), which took effect on July 1, 2014. FATCA is intended to encourage foreign financial institutions to provide reporting to the IRS on their U.S. account holders, thus assisting with the investigation and identification of U.S. taxpayers that may be avoiding tax filing, reporting and payment obligations.

Streamlined Program

The Streamlined Program was originally introduced to help U.S. citizens residing outside the United States who had not kept up with their U.S. tax filings, or had never filed U.S. tax returns, to become compliant with their U.S. personal tax and other filing requirements without facing penalties or additional enforcement action. The program originally was available only to non-resident non-filers; it subjected the taxpayer to different degrees of review based on the amount of tax owing (i.e., less than $1,500 resulted in being classified as a "low-risk" taxpayer) and the taxpayer's responses to a "risk" questionnaire. Generally speaking, the classification as a low-risk taxpayer meant that the submission would be subject to minimal review by the IRS.

Neither the initial version nor the recently updated version of the Streamlined Program provides protection from criminal penalties, though both do provide for civil penalty protection. The program requires individuals to file the most recent three years of income tax returns and related tax information forms, as well as six years of the Foreign Bank and Financial Account Report (FBAR) form. 

The expanded Streamlined Program is now available to a wider group of U.S. taxpayers living outside the country and, for the first time, to certain U.S. taxpayers residing in the United States. The general framework is essentially the same: three years of prior year income tax returns, six years of FBAR forms, etc. However, some of the conditions and procedures have been modified, including:

  • eliminating the requirement that the taxpayer have $1,500 or less of unpaid tax per year in order to be considered "low risk";
  • eliminating the required risk questionnaire; and
  • requiring the taxpayer to certify that previous failures to comply were due to non-wilful conduct. Such certification is provided on a new form introduced by the IRS for the Streamlined Program.

For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to five per cent of the foreign financial assets that gave rise to the tax compliance issue.

OVDP

Under the OVDP, participating taxpayers were afforded certain protections from potential criminal and civil penalties, while the Streamlined Program provided protection only for civil penalties. However, the OVDP has much more significant administrative and cost requirements. Under the previous and continuing OVDP, taxpayers generally are required to file eight years of prior period tax returns and eight years of all information reporting forms, including the FBAR. In addition, though civil penalty rates had been potentially lower than they were without use of the program, typically assessed on the highest aggregate balance in a taxpayer's foreign bank accounts, they were not completely waived like they can be for non-resident U.S. filers under the Streamlined Program.

The new changes make significant modifications to the OVDP, including:

  • requiring additional information from taxpayers applying to the program;
  • eliminating the existing reduced penalty percentage for certain non-wilful taxpayers in light of the expansion of the streamlined procedures;
  • requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
  • enabling taxpayers to submit the voluminous records electronically rather than on paper; and
  • increasing the offshore penalty percentage from 27.5 per cent to 50 per cent if, before the taxpayer's OVDP pre-clearance is submitted, it becomes evident that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer's offshore arrangement is under investigation by the IRS or the Department of Justice.

Under the Streamlined Program, there is a requirement to state that the reason for past non-compliance was not "wilful." While most taxpayers affected by these rules believe that their non-compliance was not wilful, the issue may become whether or not the IRS agrees. Thus, taxpayers should be cautious when certifying such so as to avoid a destructive and lengthy criminal investigation by the IRS.

Factoring in the impact of the FATCA legislation – procedures to facilitate reporting to the IRS are already well under way – and the continuing attention that the IRS and other U.S. authorities are devoting to the matter of non-compliance, there are many reasons to become compliant now, before these programs are modified in an unhelpful way or even worse, disbanded. If you are a U.S. taxpayer, contact a Collins Barrow advisor to discuss your compliance requirements and find out how the Streamlined Program and the OVDP might help you.

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.

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