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***NEWS FLASH***- June 18, 2014- New Streamlined and OVDI Guidance – New Streamlined Represents BONANZA GIFT for Non Reported U.S. Tax Return Filers

 

 

December 17, 2017

by: Marc J. Strohl, CPA, Protax Consulting Services Inc.

Click here for PDF version.

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Executive Summary; – June 18, 2014 Changes Affecting Existing Streamlined and OVDI Programs:

Streamlined- expanded and eased to a wider population of U.S. taxpayers living outside the U.S. and for the first time to certain U.S. taxpayers residing in the U.S.

1- Amended to extend to U.S. taxpayers residing in the U.S.- called: ‘Streamlined Domestic Offshore Procedures’-(completion of new Form 14654- Certification of U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures)- , introducing a 5% Title 26 Misc. Offshore Penalty on the Highest Aggregate Year End Account and Asset values of Foreign Financial Asset Balances (for taxpayers residing outside U.S. called “Streamlined Foreign Offshore Procedures”).

-Completion of new Form 14653- Certification of U.S. person residing Outside the United States for Streamlined Foreign Offshore Procedures.

2- Eliminates Questionnaire requirement and concept of Risk Assessment or $1,500 or less of unpaid tax.

3- Introduces a wide sweeping definition and concept of ‘non-willful’- requiring a Certification by taxpayer that they were non-willful in failing to report all income, pay all tax and submit all information returns, including FBARs.

4- Eliminated situation in OLD Streamlined Program where if taxpayer concluded they represented a low level of compliance risk, but IRS later concluded as gleaned from the required associated filings based upon multiple (about 8) additional factors that taxpayer represented in fact a high level compliance risk and was ineligible to participate, however already red flagging themselves!

Where- Non-willful– is defined as: conduct that is due to negligence, inadvertence or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

When Streamlined was originally announced on 6/26/12 most C.P.A.’s were reluctant to get involved in the Streamlined process since the old program required the completion of an intrusive Questionnaire to establish risk factors in part that required a low unpaid tax threshold resulting from low income, all suggesting that affected taxpayers would not pay fees required to involve professional assistance. The new Guidelines/ Program significantly alters the playing field eliminating this risk assessment, introducing a very wide, sweeping and all-encompassing definition of ‘non-willful’ to apply to all but the most egregious violators making compliance easier with the introduction of a simple Certification. This new Streamlined program means that taxpayers owing an unlimited substantial amount of unpaid tax can now participate in the Streamlined Program regardless of where they reside.

The Streamlined Program always offered a penalty free environment, which was initially and now is even more attractive to delinquent filers. This included protection from the late filing, late payment, accuracy, information return and FBAR penalties.

Tax returns submitted under the Streamlined Domestic or Foreign Offshore Procedures, although subject to a penalty free environment- other than the 5% Title 26 Misc. penalty- continue to remain subject to criminal liability obviated under OVDI for a substantially higher penalty participation.

The new Streamlined Procedures are not eligible to taxpayers where the IRS has already initiated civil or criminal examinations or investigations for any tax year of the taxpayer.

The penalty free concept only applies to penalties on a prospective basis, it will not apply to prior penalty assessments under prior quiet disclosures.

Streamlined Foreign or Domestic Offshore filings are not subject to automatic audit, but only to regular submission audit selection processes including matching audits.

Tax returns submitted under the Streamlined Domestic or Foreign Offshore Procedures as is generally the case, will be processed as any regular filing, will not be acknowledged by the IRS and additionally no closing agreements are required.

After July 1, 2014 Streamlined Foreign or Domestic Offshore Procedures exclude OVDI and vice-versa.

OVDI- Strengthened, tightened and toughened. Now Requires:

1- The submission of all account statements up front,

2- Payment of penalties upon application,

3- Electronic versus paper submissions,

4- Elimination of certain reduced penalties in light of the expanded Streamlined Program and

5- Increasing the offshore penalty from 27.5% to 50% where prior to preclearance in the application process a financial institution where the taxpayer holds accounts becomes subject to an IRS or U.S. DOJ investigation.

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For some time now since the swearing in of John A. Koskinen on December 23, 2013 as the IRS’s 48th IRS Commissioner we have been aware through the Commissioner’s prior statements of impending changes to the old Streamlined Program originally announced 6/26/12 to be effective 9/1/12 and the pre-existing OVDI program that has a long history dating back to 2009 in multiple versions.

On June 18, 2014 changes to the Streamlined Program represent a huge gift to delinquent U.S. tax return filers. Changes to the OVDI program however were far less generous.

Opposite to the Streamlined modifications, the OVDI Procedures have been in fact strengthened in a tightening and a toughening to require more information upfront than previously, including submission of all account statements up front and the payment of penalties upon application, electronic versus paper submissions, the elimination of certain reduced penalties in light of the expanded Streamlined Program and increasing the offshore penalty from 27.5% to 50% in cases where prior to preclearance in the application process a financial institution where the taxpayer holds accounts becomes subject to an IRS or U.S. DOJ investigation.

The purpose of the expansion of these programs was to allow thousands of taxpayers who did not meet the requirements for the preexisting Streamlined Programs an opportunity to come out of the cold and become compliant with U.S. tax law regime. In the words of Commissioner Koskinen- “This opens a new pathway for people with offshore assets to come into compliance”. In effect expanding the program to cover a much broader group of U.S. delinquent taxpayers who have failed to disclose their foreign accounts, but are not willfully evading U.S. income taxes. To effect this change, per the executive summary above the eligibility criteria has been expanded- now available to U.S. taxpayers residing in the U.S.- eliminating the risk based cap on the amount of tax owed in fact eliminating the concept of a risk assessment all together and eliminating the requirement for a questionnaire which many found overly burdensome and intrusive.

Streamlined-

Information on general Streamlined Filing Compliance Procedures may be found at:

http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures

Streamlined Procedures would require the filing of the 3 most recent U.S. tax returns that have passed as delinquent or amended together with all information returns and the most recent 6 years of FBARs either delinquent or as amended FBARs, with the Certification and the 5% Title 26 Misc. Offshore Penalty if a Streamlined Domestic Offshore matter.

Information on the Streamlined Foreign Offshore Procedures may be found at:

http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States

Eligibility: 1) taxpayers must meet applicable nonresidency requirements (if joint filing BOTH taxpayers must meet this test), 2) have failed to report income from a Foreign Financial Asset (FFA) and pay the tax as required by U.S. tax law and 3) MAY have failed to file an FBAR and 4) all resulting from non-willful conduct, as defined above.

Nonresidency- for U.S. citizens or green card holders- where in at least 1 or more of the last 3 years the taxpayer has no U.S. abode (meets the Tax Home Test) and meets the Physical Presence Test as defined in IRC Sec. 911. For non U.S. citizens the individual in at least 1 or more of the last 3 years did not meet the Substantial Presence Test under IRC Sec 7701(b)(3).

Instructions include: 1) Submitting 3 prior years of U.S. tax returns Form 1040 or 1040X as may be the case, with all Information returns even if filed separately. 2) At top of each return, and/ or information return “Streamlined Foreign Offshore” must be written in red, 3) Complete and signed Form 14653- Certification of U.S. person residing Outside the United States for Streamlined Foreign Offshore Procedures, 4) Submit payment of all tax and interest, 5) If no SSN then Submit Form W-7, 6) Relief/ failure to timely elect deferral of income from certain retirement or savings plans procedures, 7) Send documents and payment to specified address per instructions, 8) FBARs filed electronically, choosing as a delinquent reason Other and type in “Streamlined Filing Compliance Procedures”.

Information on the Streamlined Domestic Offshore Procedures may be found at:

http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States

Eligibly: 1) taxpayers FAIL to meet applicable nonresidency requirements (if joint filing BOTH must meet this test), 2) having previously filed a U.S. tax return (if required to) for each of the 3 most recent years, and 3) failed to report gross income from a FFA and pay tax as required by U.S. tax law and may have failed to file FBAR and one or more information returns and 4) all resulting from non-willful conduct, as defined above.

The payment of the 5% Title 26 Misc. Offshore Penalty must accompany the tax returns, information returns, FBARs and Certification.

The 5% Title 26 Misc. Offshore Penalty is equal to 5% of the highest aggregate balance/ value of the taxpayers FFA that are subject to the misc. offshore penalty during the years in the covered tax return period and the covered FBAR period.

The highest aggregate balance/ value is determined by aggregating the Year End account balances and Year End asset values of all FFA’s subject to the misc. offshore penalty for each of the years in the covered tax returns period and the covered FBAR period and selecting the highest aggregate balance/ value from amount those years.

An FFA is subject to the 5% offshore penalty in a given year if it should have been but was not: 1) reported as an FBAR on Form 114 for that year, or 2) reported on a Form 8938 or 3) gross income in respect of the FFA was not reported in that year.

Instructions include:1) Submitting 3 prior years of U.S. tax returns Form(s) 1040X, with all Information returns even if filed separately, 2) At top of each return, and/ or information return “Streamlined Domestic Offshore” must be written in red, 3) Complete and sign Form 14654- Certification of U.S. person residing in the United States for Streamlined Domestic Offshore Procedures, 4) Submit payment of all tax and interest, 5) Payment of Title 26 Misc. 5% offshore penalty, 6) Relief/ failure to timely elect deferral of income from certain retirement or savings plans procedures, 7) Send documents and payment to specified address per instructions and 8) FBARs file electronically, choosing as a delinquent reason Other and type in “Streamlined Filing Compliance Procedures”.

Delinquent FBAR Submission-

Information on Delinquent FBAR Submissions may be found at:

http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-FBAR-Submission-Procedures

If no Streamlined or OVDI program procedures are required to file delinquent or amended tax returns to report gross income or pay additional U.S. income tax, then delinquent or amended FBARs should be filed quietly.

Delinquent International Information Returns Submission Procedures:

Information on Delinquent Information Return Submissions may be found at:

http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-International-Information-Return-Submission-Procedures

If no Streamlined or OVDI program procedures are required to file delinquent or amended tax returns to report gross income or pay additional U.S. income tax, then delinquent or amended Information Returns should be filed with Reasonable Cause quietly also Certifying that the entity is not engaged in tax evasion.


Marc J. Strohl, CPA is a Principal at Protax Consulting Services Inc
He may be reached at: Tel: (212) 714-1805, Fax: (212) 714-6654
Email: mstrohl@protaxconsulting.com
Web site: protaxconsulting.com

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