On June 18, 2014, the IRS overhauled its foreign account disclosure programs. The most significant changes were with respect to the Streamlined Filing Compliance Procedures (the Streamlined Program). The changes are beneficial for many (if not most) taxpayers with undisclosed foreign accounts. However, the Streamlined Program is not for everyone as it is limited to those whose failure to report income and file Foreign Bank Account Reports (FBARs) and similar information returns was due to “non-willful conduct.”
What Changes did the IRS make to the Streamlined Program?
In 2012, the IRS announced a no-penalty program for nonresidents who failed to report their foreign income and file FBARs (and similar information returns). The program was incredibly attractive, but was only open to nonresidents who failed to file their tax returns and owed less than $1,500 in U.S. tax for each of the last three years.
The New Streamlined Program loosens the qualification requirements of the attractive 2012 streamlined program by:
- Opening up the Streamlined Program to U.S. residents and nonresidents.
- Opening up the Streamlined Program to those who previously filed tax returns, including those who previously made “quiet disclosures.”
- Eliminating the $1,500 tax due limitation.
However, the New Streamlined Program is not open to those under audit or criminal investigation. Nor is it open to those who have been previously contacted by the IRS concerning their failure to file FBARs or other information returns.
What Do I have to Pay to Participate in the New IRS Streamlined Program?
Compared to those participating in a traditional offshore voluntary disclosure, taxpayers participating in the New Streamlined Program pay significantly less in tax, accuracy penalty, interest, and information return penalties. The following table summarizes the differences.
|Item||Traditional Offshore Voluntary Disclosure||Streamlined Program|
|Tax||8 years of back taxes, plus interest||3 years of back taxes, plus interest|
|Accuracy Penalty||20% of tax, plus interest||No accuracy penalty imposed|
|Non-Reporting (FBAR )Penalty||Generally 27.5% of highest aggregate balance during last 8 years||For nonresidents: 0%
For residents: 5% of highest year-end balance during last 6 years
What is Non-Willful Conduct for Purposes of the IRS Streamlined Program?
The New Streamlined Program is only open to those whose failure to report income and file information returns is due to “non-willful conduct.” The IRS defines non-willful conduct as “negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.” The test is somewhat curious in that it employs both an objective standard (negligence) and subjective standard (good faith misunderstanding). This can be a difficult standard to apply, especially when taxpayers:
- Have an account in a bank secrecy jurisdiction.
- Have a numbered account at their foreign bank.
- Have a “hold mail” or similar agreement with their foreign bank.
- Hold the account in a trust, foundation, or other entity.
- Made large cash withdrawals.
- Moved funds from a foreign bank under U.S. pressure to another foreign bank.
- Had face-to-face-meetings with foreign financial advisors in foreign countries.
Before participating in the New Streamlined Program, every taxpayer should evaluate the facts and circumstances surrounding their failure to report income and file information returns, preferably with the help of experienced U.S. tax attorneys.
What Documents are Required to Participate in the New Streamlined Program?
Taxpayers are generally required to:
- File three (3) years of original or amended tax returns, together with information returns which are required to be filed with income tax returns (including Forms 3520, 5471, and 8938).
- Complete and sign, under penalties of perjury, a Certification that the failure to report income and file information returns was due to non-willful conduct.
- Pay back income tax and interest (and 5% nonreporting penalty for U.S. residents) for three years.
- File any elections that may be required with respect to foreign retirement or savings plans.
- File six (6) years of back FBARs.
What Factors Should I consider when Deciding Whether to Participate in the Streamlined Program?
Each foreign account case is unique and a variety of factors should be explored. Common factors include:
- How much income was unreported?
- Was the foreign income subject to foreign tax?
- Is the foreign income material with respect to U.S.-source income?
- How much was on deposit in foreign banks?
- What information has my CPA or other tax professional sent to me concerning foreign bank accounts (organizers, client letters, etc.)?
- Was the foreign account question at the bottom of Form 1040, Schedule B accurately completed?
- Was the amount on deposit ever subject to U.S. tax?
- How much time remains on the applicable statutes of limitations?
- Is my foreign bank cooperating with the United States Department of Justice?
- What would happen at an IRS audit if I elected not to participate?
The attorneys at the Pittsburgh law firm Williams Coulson have successfully advised many clients with respect to foreign financial account matters, including the New Streamlined IRS Program, the 2009 Offshore Voluntary Disclosure Program, the 2011 Offshore Voluntary Disclosure Initiative, the 2012 Offshore Voluntary Disclosure Program, and this new program. Should you have questions concerning this amnesty program or other foreign financial account matters, please contact Stephen J. Pieklik at 412-454-0229 or firstname.lastname@example.org.