The IRS is encouraging taxpayers who have been hiding assets in foreign accounts to step forward and pay their fair share of U.S. taxes. To facilitate this goal, it has announced major changes to its Offshore Voluntary Disclosure Program (OVDP). In doing so, the IRS is using a “carrot-and-stick” approach by widening the scope of the program and increasing penalties for noncompliance.

Background: In recent years, the government has ramped up efforts to uncover assets being hidden in foreign bank accounts and other entities. Under the Foreign Account Tax Compliance Act (FATCA), U.S. taxpayers must meet certain obligations, including paying their tax liability and filing FBARs (Reports of Foreign Bank and Financial Accounts), when needed.

As an added inducement, the IRS initiated an amnesty program, the OVDP, back in 2009. It has been revived with a few modifications. Prior to the latest changes, taxpayers generally were required to pay a penalty of 27.5% of the balance in their foreign accounts covering a period of eight years. The OVDP also offered streamlined procedures for qualified taxpayers.

But not everyone could benefit from the OVDP. Now the IRS has expanded the streamlined procedures and made additional modifications to the program.

Specifically, the streamlined procedures are now available to more U.S. taxpayers living abroad. Also, for the first time ever, U.S. taxpayers residing in this country may be eligible.

The changes include the following:

  • Eliminating a requirement that the taxpayer have $1,500 or less of unpaid tax per year;
  • Eliminating a previously required risk questionnaire;
  • Requiring the taxpayer to certify that previous failures to comply were due to non-willful conduct.

Penalties will be waived for eligible taxpayers residing outside the United States. In addition, for taxpayers residing in the United States, the only penalty will be one equal to 5% of the foreign financial assets causing the tax compliance issue.

Other modifications to the OVDP include the following:

  • Requiring additional information from taxpayers applying to the program;
  • Eliminating the existing reduced penalty percentage for certain non-willful taxpayers in light of the expansion of the streamlined procedures;
  • Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the application;
  • Enabling taxpayers to submit voluminous records electronically rather than on paper; and
  • Increasing the penalty from 27.5% to 50% in cases relating to an investigation by the IRS or the Department of Justice

Thus, more taxpayers should be able to qualify under the OVDP, but the penalties resulting from noncompliance may be higher. This is the carrot-and-stick aspect.

Taxpayers are urged to comply with the laws and FBAR filings concerning foreign accounts as well as other tax liabilities. However, it is perfectly acceptable to use legal techniques to minimize the amount of tax you owe.