You may have U.S. taxpayer clients who have failed to report income and pay tax. IRS has amnesty programs available for non-compliant U.S. taxpayers, including the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Procedure. The OVDP was created in 2009 and has been updated periodically. (The most recent changes became effective on July 1, 2014.) The program gives willfully non-compliant U.S. taxpayers an opportunity to avoid civil penalties and, most likely, criminal prosecution.
The penalty for clients with undisclosed foreign assets is 50% of the highest aggregate value of the assets over the eight most recent non-compliant tax years. But that rate only applies if the taxpayers’ foreign financial institution is under U.S. government investigation. Otherwise, the penalty is 27.5%. Clients who didn’t disclose also have to pay a 20% accuracy-related penalty on any offshore-related underpayments of tax for all relevant years. Other failure-to-file and failure-to-pay penalties may also apply.
The 2012 Streamlined Procedure was also updated last year. Under the Streamlined Procedure, clients certify that their failure to file with the IRS was non-willful. This makes the program preferable for clients who were unaware of their U.S. filing obligations.
U.S. taxpayer clients living outside the U.S. who file under this program will generally not be subject to any penalties. U.S. taxpayers living in the U.S. who file under the Streamlined Procedure will be penalized at a rate of 5% of foreign financial assets.
OVDP filing procedure?
To use the OVDP, the client must fax a pre-clearance letter to the IRS’s Criminal Investigation Lead Development Center (LDC). The letter must include:
- your client’s full legal name, contact information, birth date and tax identification number; and
- full names and contact information of the financial institutions that held undisclosed assets.
- if your client held undisclosed assets in entities such as corporations or trusts, the IRS requires the entities’ tax identification numbers, and full legal names and addresses, as well as the jurisdictions in which they were created; and
- if your client will be represented by a third party, the IRS requires a signed power of attorney form be faxed to LDC with the pre-clearance letter.
LDC will respond via fax within 30 days with notification of whether or not pre-clearance has been approved.
Once pre-cleared, your client has 45 days to make disclosure by submitting IRS Form 14457 – Offshore Voluntary Disclosure Letter (OVDP Letter) and IRS Form 14454 – Attachment to OVDP Letter (Attachment) via mail. (One Attachment per financial institution is required.)
LDC will likely respond within 45 days and notify your client whether the OVDP Letter and Attachment(s) were filed in a timely manner. If accepted as timely, your client will be required to complete his or her disclosure within 90 days.
Making complete disclosure includes submitting copies of previously filed tax returns for the period covered by the disclosure, amended tax returns for the period, copies of previously filed FBARs for the period, relevant bank statements and other applicable information.
The client must pay the tax, interest and penalties for the period at the time of disclosure. If he or she can’t pay the full amount at once, IRS usually accepts proposed payment arrangements.
Who’s eligible for the OVDP?
For 2014’s OVDP updates to apply, clients must have submitted the OVDP Letter and Attachment(s) on or after July 1, 2014. Filing the pre-clearance letter prior to July 1, 2014 doesn’t preclude eligibility for the 2014 OVDP, but if the OVDP Letter and Attachment(s) were submitted prior to July 1, 2014, previous OVDP rules apply. That said, it is possible for clients who submitted before July 1, 2014 to transition into the 2014 OVDP program by written request.
Clients who submitted their OVDP Letter and Attachment(s) on or after July 1, 2014 cannot participate in the Streamlined Procedure, but clients who submitted their OVDP Letter and Attachment(s) prior to July 1, 2014 and have not yet completed the OVDP process may request to transition to the Streamlined Procedure to benefit from its more favourable penalty scheme.
However, like all applicants to the Streamlined Procedure, those clients will need to prove their failure to be IRS-compliant was due to non-willful conduct.
To participate in the Streamlined Procedure, clients residing outside the U.S. must certify, on IRS Form 14653, that their failure to be compliant was non-willful. (Taxpayers residing in the U.S. certify non-willful conduct on IRS Form 14654.)Both forms define non-willful conduct as “conduct due to negligence, inadvertence, or mistake, or conduct that is the result of a good-faith misunderstanding of the requirements of the law.”
The forms are signed under penalty of perjury, so clients should only enter the Streamlined Procedure if they are certain their conduct was non-willful. If the IRS discovers evidence of willfulness, fraud or criminal conduct, civil and/or criminal penalties may result. Additionally, if clients enter the Streamlined Procedure and did not submit an OVDP Letter and Attachment(s) prior to July 1, 2014, they cannot participate in the OVDP. These clients should be certain they can prove non-willful conduct in order to avoid the possibility of severe civil and/or criminal sanctions.
However, clients attempting to transition from the OVDP into the Streamlined Procedure will remain in the OVDP and will only be subject to OVDP penalties if the IRS does not accept their proof of non-willful conduct.
To take advantage of the Streamlined Procedure, U.S. citizens, or lawful permanent residents of the U.S. (such as green card holders) who reside in Canada or elsewhere outside the U.S., must not have had a U.S. abode and must have remained outside of the U.S. for 330 days in at least one of the previous three years for which a tax return deadline has elapsed.
These requirements prevent U.S. citizen Canadian snowbirds who spend substantial time in the U.S. (more than 35 days per year) from participating in the Streamlined Procedure, even if they otherwise qualify based on the dates of their submissions and their ability to certify their conduct was non-willful.
U.S. taxpayers who are not U.S. citizens, and who are not lawful permanent residents, may qualify for the Streamlined Procedure as long as they don’t meet the substantial presence test outlined under Section 7701(b)(3) of the IRC in at least one of the three most recent years for which they were non-compliant.
Streamlined Procedure filing requirements
In addition to filing Form 14653, non-resident U.S. taxpayer clients will have to file three years of delinquent or amended tax returns (one for each of the three most recent years during which a tax return due date has elapsed), all required information returns, and six years of FBARs (one for each of the six most recent years during which your clients missed their FBAR filing due date).
All tax and interest due must also be remitted when returns are submitted. IRS may provide a refund or balance due notice if your U.S. taxpayer clients have incorrectly calculated amounts owing.
The top of the first page of each tax return and the top of each information return must state “Streamlined Foreign Offshore” in red ink. If this instruction is not followed, returns will not be processed through the special procedure.
David A. Altro is a Florida attorney, Canadian legal advisor and the managing partner at Altro Levy. He can be reached at 416-477-8155 or firstname.lastname@example.org.