Massive change is coming to the IRS Offshore Voluntary Disclosure Program (OVDP). These changes will affect different groups of taxpayers differently, and it will be at least a few days before tax attorneys have had an opportunity to make sense of it all.
One group of FBAR non-filers that have a very short time frame to get into OVDP is those individuals who have offshore bank accounts with a foreign financial institution which has been publicly identified as being under investigation, or is cooperating with a government investigation.
The same goes for taxpayers who worked with a "facilitator" who helped the taxpayer establish or maintain an offshore arrangement if the facilitator has been publicly identified as being under investigation or as cooperating with a government investigation.
Those individuals have until August 3, 2014 to enter the OVDP. If they do not enter the OVDP by that date then they will still be eligible to enter the OVDP, but they will be subject to a 50 percent offshore penalty, rather than the existing 27.5 percent penalty.
Of course if the IRS already has a particular taxpayer's name, then that person will not be eligible to enter the OVDP, and could be subject to multiple FBAR penalties.
The IRS has published a list of those foreign financial institutions or facilitators. The complete list is as follows:
1. UBS AG
2. Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.
3. Wegelin & Co.
4. Liechtensteinische Landesbank AG
5. Zurcher Kantonalbank
7. CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates
8. Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.
9. HSBC India
10. The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield).
Of course, the IRS may add names to that list at any time, and whole groups of taxpayers will then be cut-off from OVDP without prior notice.
For those taxpayers whose conduct was non-willful, however, they may be able to escape with only a one-time five percent offshore penalty, or perhaps no penalty. The IRS has greatly expanded its streamlined procedures, and created two streamlined programs for those taxpayers whose conduct was non-willful. One is for non-resident persons; the other is for U.S. residents. Qualifying non-residents will not pay any penalty. Qualifying residents will pay a five percent offshore penalty.
This penalty will be assessed on the highest aggregate balance/value of the taxpayer's foreign financial assets, generally over the previous six years. The IRS will not assess any FBAR penalties, nor will it assess a 20 percent accuracy penalty under IRC Section 6661. In order to be eligible, taxpayers must certify under penalty of perjury that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. Non-willful conduct is defined by the IRS as conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
Taxpayers who enter the streamlined programs are not automatically subject to audit, but may be audited under existing IRS procedures. The IRS warns that if the submissions are inaccurate, taxpayers could be subject to additional liabilities, and even criminal tax prosecution. That is because taxpayers who enter the streamlined programs, unlike those who enter the OVDP, are not insulated from criminal prosecution if the IRS later determines that the failure to file FBARs was willful. The IRS points out that individuals, who are concerned that their behavior may be deemed to be willful, and want assurances that they will not be criminally prosecuted or subjected to additional penalties, should enter the OVDP.
Those taxpayers who already signed closing agreements, and paid substantially greater penalties will not be able to reopen their cases, and obtain refunds. On the other hand, individuals who are currently in OVDP, but who have do not have countersigned closing agreements may be eligible to enter the streamlined programs if they otherwise qualify, but are subject to additional strictures under transitional rules announced by the IRS.
Please do not hesitate to contact me if you have any questions.