I am glad the IRS announced, on June 18, 2014, changes to the existing Offshore Voluntary Compliance Program. Many of the changes were long overdue and so I must commend the IRS for the changes, particularly with the adoption of the new Streamlined Compliance Filing Procedures, for those folks who acted non-willfully. However, there is a hidden problem in the “transition” rules that comes with a rapidly approaching deadline – – – i.e., if a taxpayer currently under the OVDP wishes to be considered under the new Streamlined provisions, he/she must provide all documents and submissions by July 1, 2014. This is explained more fully below.
My problem with the requirement is that many taxpayers are missing the required information. Indeed, the IRS acknowledges that taxpayers currently in the regular OVDP may request an “extension” of time to provide the documents required to be submitted. See FAQ #25.1, which allows extensions up to 90 days.
Second, the IRS is requiring that taxpayers “full pay” the tax, accuracy related penalty (and/or other filing penalties), plus interest for the required 8 years. The FBAR penalty of 27.5% need not be submitted but the penalty worksheet computing same needs to be submitted.
My question at this point is what happens to the “overage” from the payment should the taxpayer be accepted into the new Streamlined program? Presumably the taxpayer will be entitled to use that as an offset or credit to the 5% penalty. Here’s the story: under the new Streamlined program, the taxpayer is only required to file amended tax returns for the past 3 years, and is not subject to the accuracy related or filing penalties. So, the most the taxpayer must pay would be tax and interest on 3 years, plus a 5% penalty on the FBAR (for 6 years). Conceivably there will be a credit under the transition rules since the taxpayer must pay more – – 8 years of amended tax returns, plus the accuracy related penalty, plus interest.
Here’s the relevant steps to take if your considering a transition from the regular OVDP to the new Streamlined Provisions.
1. Review the IRS webpages, in particular the following:
Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers – Effective for OVDP Submissions Made On or After July 1, 2014.
2. On that webpage, pay attention to FAQ # 1.4. “If I applied to OVDP prior to the effective date of the expanded Streamlined Filing Compliance Procedures, may I request consideration under those procedures?”
(Answer is “yes”) See the separate set of Frequently Asked Questions (below for information about eligibility and the process for requesting transitional treatment under the terms of the Streamlined Filing Compliance Procedures in your OVDP case.
3. On the FAQ webpage for Streamlined Filing Compliance Procedures – Transition Rules, note the following:
A. FAQ # 2: When am I considered to be currently participating in an OVDP for purposes of receiving transitional treatment?
Answer: A taxpayer will be considered to be currently participating in an OVDP for purposes of receiving transitional treatment if:
Before July 1, 2014, he has mailed to IRS Criminal Investigation his OVDP voluntary disclosure letter and attachments as described in OVDP FAQ 24, and
As of July 1, 2014, he has either:
• remained in OVDP but not yet completed the OVDP certification process where a Form 906 Closing Agreement has been fully executed by the IRS, or
• opted out of OVDP, but not yet received a letter initiating an examination and enclosing a Notice 609.
A taxpayer who, as of July 1, 2014, has completed the OVDP certification process where a Form 906 Closing Agreement has been fully executed by the IRS will not be considered currently participating in an OVDP and thus will not be eligible for transitional treatment.
B. FAQ # 3: What if I made a request for OVDP pre-clearance before July 1, 2014, but not a full voluntary disclosure?
Answer: A taxpayer will not be considered to be currently participating in OVDP for purposes of receiving transitional treatment unless, as of July 1, 2014, he has mailed to IRS Criminal Investigation his voluntary disclosure letter and attachments as described in OVDP FAQ 24. Thus, a taxpayer who makes an offshore voluntary disclosure as outlined in FAQ 24 on or after July 1, 2014 will not be eligible for transitional treatment under OVDP, even though he may have made a request for OVDP pre-clearance before July 1, 2014.
C. FAQ # 6: What steps must I take to seek transitional treatment?
Answer: You are not required to opt out of the OVDP to receive transitional treatment, but you must provide to the IRS:
• if not already submitted, all submission documents required under the voluntary disclosure program in which you are currently participating (submission documents for each OVDP can be accessed here as follows: 2009 OVDP, 2011 OVDI, and 2012 OVDP);
• a written statement in the appropriate certification form that would be required under the Streamlined Filing Compliance Procedures signed under penalty of perjury certifying their non-willfulness with respect to all foreign activities/assets, specifically describing the reasons for the failure to report all income, pay all tax, and submit all required information returns, including FBARs, and, if the taxpayer relied on a professional advisor, including the name, address, and telephone number of the advisor and a summary of the advice; and
• full payment of tax, interest, and any accuracy-related, failure-to-file, and/or failure-to-pay penalties that would be due under OVDP, if not already made.
• This information must be provided to the IRS as follows:
If you are currently working with an examiner on your OVDP case, send this information directly to the examiner.
If you are not currently working with an examiner on your OVDP case, send this information to the Austin OVDP Unit at:
Internal Revenue Service
Offshore Voluntary Disclosure Unit – Streamlined Waiver Request
3651 South IH-35
Mail Stop 4301 AUSC
Austin, Texas 78741