IRS Expected to Change Offshore Voluntary Disclosure Program, Reduce FBAR Penalty for Non-Willful Violations

For years, taxpayers and tax practitioners have complained that the IRS’s Offshore Voluntary Disclosure Program was too harsh on those who were unaware that they were required to file annual Foreign Bank Account Reports (FBARs).  Finally, it appears that the IRS is doing something about it.  At a recent international tax conference, the IRS Commissioner announced that the IRS expects to modify the Offshore Voluntary Disclosure Program in the near future and suggested that reduced penalties may be offered to taxpayers whose failure to file was “of the non-willful variety.”

At the June 3, 2014 meeting of the U.S. Council for International Business / OECD International Tax Conference in Washington, D.C. the Commissioner delivered the following prepared remarks:

Now, while the 2012 OVDP and its predecessors have operated successfully, we are currently considering making further program modifications to accomplish even more. We are considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don’t necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. For example, we are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives. We have been considering whether these individuals should have an opportunity to come into compliance that doesn’t involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas. We are also aware that there may be U.S.-resident taxpayers with unreported offshore accounts whose prior non-compliance clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn’t involve the threat of substantial penalties.

We are close to completing our deliberations on these respects and expect that we will soon put forward modifications to the programs currently in place. Our goal is to ensure we have struck the right balance between emphasis on aggressive enforcement and focus on the law-abiding instincts of most U.S. citizens who, given the proper chance, will voluntarily come into compliance and willingly remedy past mistakes. We believe that re-striking this balance between enforcement and voluntary compliance is particularly important at this point in time, given that we are nearing July 1, the effective date of FATCA. We expect we will have much more to say on these program enhancements in the very near future. So stay tuned.

Those advising taxpayers with respect to foreign account issues are eagerly awaiting the anticipated changes.  Taxpayers dealing with FBAR issues should seek the advice of an experienced tax attorney to determine how best to proceed in light of this formal announcement.

The attorneys at the Pittsburgh law firm Williams Coulson have successfully advised many clients with respect to foreign financial account matters, including the 2009 Offshore Voluntary Disclosure Program, the 2011 Offshore Voluntary Disclosure Initiative, and the 2012 Offshore Voluntary Disclosure Program.  Should you have questions concerning this development or other foreign financial account matters, please contact Stephen J. Pieklik at 412-454-0229 or