New Changes to the 2012 OVDP

Also Referred to as the 2014 OVDP.

The 2014 OVDP is a continuation of the 2012 OVDP but for a few changes.  This article attempts to highlight the changes and discuss why they are significant.  The changes are as follows:

Increased 50% Penalty

A 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation.

This is significant because there are a number of banks attempting to acquire Non-Prosecution Agreements with the Department of Justice.  So far the list of financial institutions whose clients would be subject to the 50% offshore penalty rather than the 27.5% penalty includes only ten banks and their subsidiaries and predecessors.  The ten specific banks that are listed as meeting that criteria as of June 18, 2014 are UBS AG; Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.; Wegelin & Co.; Liechtensteinische Landesbank AG; Zurcher Kantonalbank; swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG; CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates; Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.; The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India); and The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates.

However, this list can grow at any moment especially considering the US Department of Justice is offering Non-prosecution Agreements to Swiss Banks in a joint effort facilitated by the US and Swiss governments (hyper link this to our other article).  Under the new program for Swiss Banks, a vast number of banks have identified themselves as Category 2 banks seeking a non-prosecution agreement with the US Department of Justice.

More specifically, there are three events that will cause a financial institution’s offshore account holders to be subject to the 50-percent penalty beginning on August 04, 2014 if at the time of submitting a preclearance letter to IRS Criminal Investigation, the following has already occurred:

(a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person;

(b) the foreign financial institution or other facilitator is cooperating with the IRS or the Department of Justice in connection with accounts that are beneficially owned by a U.S. person or

(c) the foreign financial institution or other facilitator has been identified in a court- approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts (a “John Doe summons”) at the foreign financial institution or have accounts established or maintained by the facilitator.  Examples of a public disclosure include, without limitation:  a public filing in a judicial proceeding by any party or judicial officer; or public disclosure by the Department of Justice regarding a Deferred Prosecution Agreement or Non-Prosecution Agreement with a financial institution or other facilitator.

Thus, account holders of Swiss banks seeking non-prosecution agreements with the Department of Justice may soon be subject to the 50% penalty when the Department of Justice publically discloses the non-prosecution agreement.

Expanded Streamlined Procedures – Now Include U.S. Residents

The next significant change is that the reduced penalty structure under former FAQs 52 and 53 has been eliminated due to the expansion of the Streamlined Filing Compliance Procedures.

According to IRS commissioner John Koskinen, the IRS is expanding the streamlined procedures to cover a much broader group of U.S. taxpayers they believe who have failed to disclose their foreign accounts but who are not willfully evading their tax obligations. With the new changes, more taxpayers will qualify for the Streamlined Filing Compliance Procedures than before.  At Abajian Law, we believe the overall changes are designed to encourage taxpayers to come forward now and further penalize those that wait.

The Streamlined Filing Compliance Procedures will be expanded; the streamlined procedures are available to both U.S. individual taxpayers residing outside the United States and U.S. individual taxpayers residing in the United States.  Certain dollar and risk thresholds no longer apply.  A taxpayer using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will be required to certify, in accordance with the specific instructions set forth, that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.

Returns submitted under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures will not be subject to IRS audit automatically, but they may be selected for audit under the existing audit selection processes applicable to any U.S. tax return and may also be subject to verification procedures in that the accuracy and completeness of submissions may be checked against information received from banks, financial advisors, and other sources.  Thus, returns submitted under the streamlined procedures may be subject to IRS examination, additional civil penalties, and even criminal liability, if appropriate.

Consequently, unlike the OVDP, the Streamlined Foreign Offshore Procedures do not cleanse the taxpayer of criminal liability before they are discovered by the IRS.  Therefore, the judgment call on what constitutes non-willful versus willful conduct becomes more important because once a taxpayer makes a submission under either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures, the taxpayer may not participate in OVDP.  Similarly, a taxpayer who submits an OVDP voluntary disclosure letter pursuant to OVDP FAQ 24 on or after July 1, 2014, is not eligible to participate in the streamlined procedures.  Once a taxpayer picks one route or another, they must stick with it.  This makes it more important than ever to consult a tax professional with experience and expertise to make the judgment call of whether a taxpayer should join the OVDP or make submission under the Streamlined Procedures.  The good news is that the reduced penalty qualifications become broader than under FAQ 52 and 53 which had black and white stringent guidelines and number thresholds even though all other facts may suggest an un-willful disclosure.

FAQ 17 concerning filing delinquent Report of Foreign Bank and Financial Accounts (commonly known as an FBAR) has been replaced and superseded.  See “Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets”.

The main difference is if there is no tax non-compliance in regards to an account that should have been disclosed on an FBAR, it needs to be filed electronically.  

As described below, FAQ 18 concerning filing certain delinquent international information returns has been replaced and superseded. See “Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets”.

The main difference is if there is no tax non-compliance in regards to an account that should have been disclosed on an FBAR, it needs to be filed electronically.  

FAQs 31 through 41 pertaining to the asset base to which the offshore penalty applies have been modified to promote clarity and consistency of application.

Several changes pertain to the asset base that the penalty will be a percentage of.  For example:

FAQ 23 has been modified to require additional information for preclearance by Criminal Investigation.

The Offshore Voluntary Disclosures Letter and attachment have been modified. 

FAQ 7 has been modified to require that the offshore penalty be paid at the time of the OVDP submission.

Although this is the case, there may be exceptions for taxpayers that do not have the money to pay.  Speak to a tax professional for more detail.

There are some other minor changes; we recommend that taxpayers seek a tax professional before trying to navigate the complex law regarding offshore voluntary disclosures.  Additionally, in light of the new streamlined process available to U.S. Residents, it is more important than ever to consult a professional who can determine the best course of action because the distinction between willful and non-willful conduct is very fact specific and will ultimately determine the best course of action.