The IRS announced changes to the OVDP process that clearly distinguished between non-willful taxpayers and taxpayers in willful non-compliance with the reporting requirements. The goal of the new changes is to improve participation. Such participation will be improved by clearly distinguishing between non-willful taxpayers who accidentally fell out of compliance with foreign reporting requirements and willful non-compliance by taxpayers making a deliberate decision not to report their foreign accounts.
Internal Revenue Service Commissioner John Koskinen explained in a statement that the changes will, “allow more taxpayers to participate” in the Offshore Voluntary Disclosure Program. The international tax team at LSL CPAs knows the changes will significantly affect both non-willful taxpayers who fell out of reporting compliance by mistake and the deliberately non-compliant taxpayers that are willfully failing to disclose foreign accounts.
Non-Willful Taxpayers Vs. Willful Taxpayers
The IRS decided to change the OVDP process to increase participation in the program by removing the fear element for non-willful taxpayers. As opposed to willful taxpayers making a choice, non-willful taxpayers fell out of compliance with the foreign reporting requirements by mistake or without any conscious wrongdoing. As a result, once designated, such non-willful taxpayers will be subject to lower penalties. In addition, the in-depth personal questionnaire that had to be completed prior to acceptance into the program has been removed as a necessary OVDP requirement.
For the non-willful taxpayers, the penalty under the OVDP has been significantly reduced to 5% of the balance of the foreign account or foreign accounts being disclosed. As compared to the original terms of a 27.5 percent penalty of the highest balance outlined in the 2012 OVDP legislation, the 5% penalty is designed to greatly increase participation in the OVDP process. The international tax team at LSL CPAs believes this reduction to be a step in the right direction. Given the significant savings involved, the international tax consultants at LSL CPAs encourage all non-willful taxpayers with foreign accounts to step forward and take advantage of the reduced penalty rate. The time to take action is now.
Willful Non-Compliance Means Trouble
In contrast to the taxpayers placed in the non-willful category, the taxpayers with foreign accounts that are deemed to have been willful in their non-compliance could be in for some serious trouble. Under the new terms of the OVDP, taxpayers who were “willfully” non-compliant face a 50% penalty if it becomes public that their foreign financial institution is under investigation by the IRS or Department of Justice. In other words, willful non-compliance with the OVDP is a major mistake for a taxpayer to make. At an almost doubling of the previous “one-size-fits-all” penalty of 27.5%, willful non-compliance has become a much more serious financial issues.
IRS Commissioner Koskinen believes wholeheartedly in the changes because they will “help focus this program on people seeking certainty and relief from criminal prosecution…. We want everyone to know that we are continuing our efforts to track down people still out there who are hiding assets overseas. More information on these accounts is coming in every day.”
Whether Willful Or Non-Willful, Take Action Now
Although the IRS will now accept required tax documentation from willful taxpayers electronically, the reporting requirements in regards to such cases are lengthy and extreme. Even for the willful taxpayers, not taking advantage of the OVDP process is a mistake. Without question, the timeline to opt into the program will be limited. Once that timeline expires, the large financial penalties will seem small in comparison to the huge specter of potential criminal prosecution.
Pursuant to U.S. Treasury Department Regulations, any federal tax advice in this article is not intended or written to be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
It is important to further note that this article presents only a partial view of the subject matter. It does not claim or attempt to be comprehensive or perfectly accurate. To learn more about how these IRS changes to the OVDP process might apply to your particular international accounts or financial holdings, please call LSL CPAs international tax accountant Yana Weaver at 714.569.1000.
