IRS Commissioner John Koskinen Announces Important Changes to Offshore Account Compliance Programs

On June 18, 2014, IRS Commissioner John Koskinen announced a number of important changes to the IRS offshore account compliance program that the IRS believes will lead to a significant increase in the number of U.S. taxpayers coming forward to report on undisclosed foreign accounts. The steps outlined by the IRS include an expanded streamlined filing compliance process and important modifications to the IRS Offshore Voluntary Disclosure Program, or OVDP. The combined effect of these revisions will be to allow more taxpayers to participate. The IRS is providing additional flexibility in key parts of its compliance effort while maintaining central components of the offshore program.

The IRS goal is to build on its success in reducing offshore tax evasion through the OVDP, which allows individuals to avoid criminal prosecution if they disclose their foreign accounts and pay a substantial penalty. The current OVDP is the successor to prior initiatives in 2011 and 2009. Taken together, these programs have resulted in more than 45,000 disclosures and the collection of about $6.5 billion in taxes, interest and penalties. To supplement the OVDP, in 2012 the IRS added what it calls the streamlined filing compliance procedures. This has provided a way for a limited group of U.S. taxpayers living abroad who didn’t know they were out of compliance to catch up on their U.S. filing requirements without paying steep penalties.

The IRS announced two sets of actions. These involve some very technical issues, but they carry great importance for thousands of taxpayers in the offshore arena. First, the IRS is expanding the streamlined procedures to cover a much broader group of U.S. taxpayers who have failed to disclose their foreign accounts but who are not willfully evading their tax obligations. To encourage these taxpayers to come forward, the IRS is expanding the eligibility criteria, eliminating a cap on the amount of tax owed to qualify for the program, and doing away with a questionnaire that applicants were required to complete. Second, the IRS will be reshaping the terms for taxpayers to participate in the OVDP. This is designed to cover those whose failure to comply with reporting requirements is considered willful in nature, and who therefore do not qualify for the streamlined procedures. These changes will help focus this program on people seeking certainty and relief from criminal prosecution. From now on, people who want to participate in this program will have to provide more information than in the past, submit all account statements at the time they apply for the program, and in some cases pay more in penalties than they would have done had they entered this program earlier.

According to the Commissioner, these changes reflect the helpful feedback of tax practitioners and the National Taxpayer Advocate, along with what the IRS learned in its experience operating the OVDP. Over time, the IRS discovered that there were people, including many here in the U.S., for whom the existing program penalties were too harsh or restrictive. These people had small enough issues that they did not really need the protection from criminal prosecution offered by the OVDP. However, these taxpayers did not fit into the narrow criteria of the previous streamlined procedures.

The aim of the IRS is to get people to disclose their accounts, pay the tax they owe and get right with the government. The IRS wants to send a message to anyone who continues to willfully and aggressively evade the U.S. tax laws by hiding money overseas that they will pay a higher price for noncompliance. Even though the IRS is tightening components of the OVDP, it believes it’s a better deal than the alternative, because if the IRS finds you, you will face higher penalties and, as the record shows, could face criminal prosecution and jail time.

The IRS Commissioner wants everyone to know that the IRS is continuing its efforts to track down people still out there who are hiding assets overseas. More information on these accounts is coming in every day. For example, Swiss banks are cooperating through a program put in place last year by the Department of Justice. The Commissioner noted that the U.S. Department of Justice recently reached an historic agreement with Credit Suisse. Also, more banks around the world are coming forward with information on their U.S. customers beginning July 1, 2014 when the reporting requirements under the Foreign Account Tax Compliance Act, or FATCA, go into effect. Under the FATCA, foreign banks are now required to disclose the names and account information of U.S. taxpayers to the IRS. The days of hiding assets in accounts overseas are coming to an end and there is no reason to not come into compliance.

The IRS is encouraging taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50 percent – nearly double the regular 27.5 percent. For anyone who wants to come into compliance but isn’t sure what to do, Daniel Rosefelt & Associates, LLC, Attorney & CPA recommends that you consult with an experienced tax attorney versed in the intricacies of U.S. offshore disclosure practice.