The U.S. Internal Revenue Service has announced changes to its offshore voluntary compliance programs that will provide new options to Caymanians who also have U.S. citizenship or green card status and have not filed U.S. tax returns.
The changes include an expansion of streamlined filing compliance procedures for U.S. taxpayers who did not willfully fail to disclose their offshore assets.
“This opens a new pathway for people with offshore assets to come into tax compliance,” said IRS Commissioner John Koskinen.
“The new versions of our offshore programs reflect a carefully balanced approach to ensure everyone pays their fair share of taxes owed. Through the changes we are announcing today, we provide additional flexibility in key respects while maintaining the central components of our voluntary programs.”
Under the modified rules, tax penalties will be waived for eligible U.S. taxpayers who reside outside the United States. To become eligible, taxpayers must certify that they did not deliberately fail to report offshore accounts.
The changes are also designed to accommodate a wider group of taxpayers who have unreported financial accounts. In order to qualify, there is no longer a requirement that a taxpayer has $1,500 or less of unpaid tax per year. In addition, the program is now available to U.S. resident taxpayers who, if they are eligible, are subject to a lesser offshore penalty equal to 5 percent of the foreign financial assets that caused the tax compliance issue.
Penalties have been raised, in turn, for cases, where it became public before the voluntary disclosure that the financial institution where the account in question is held is under investigation by either the IRS or the Department of Justice.
The IRS has offered various disclosure facilities since 2009 in an effort to find previously undeclared offshore assets and bring taxpayers into compliance. The current Offshore Voluntary Disclosure Program was launched in 2012 and is the successor to prior voluntary programs offered in 2011 and 2009.
Since the launch of the first program, more than 45,000 taxpayers have come into compliance voluntarily and paid about $6.5 billion in taxes, interest and penalties.
In addition, the Foreign Account Tax Compliance Act will come into effect on July 1. This new regime forces foreign financial institutions worldwide to report the offshore assets of U.S. taxpayers or face a 35 percent withholding tax penalty on transactions involving the United States.
“This is extremely important for Caymanians,” said Patrick Hackenberg, a U.S.-based tax adviser and former resident of the Cayman Islands, who assists Cayman residents with their U.S. tax reporting obligations.
“In less than two weeks, the new information reporting regime resulting from FATCA will go into effect. Thousands of foreign financial institutions will begin to report to the IRS the foreign accounts held by U.S. persons. Therefore, time is of the essence for Caymanians with U.S. status to voluntarily begin reporting before the IRS has information from Cayman Islands banks under FATCA.”
However, previous disclosure programs have been criticized by tax advisers, the IRS ombudsman and taxpayer organizations for being overly harsh on certain taxpayers who were unaware they had to report their offshore bank accounts and other assets.
The offshore voluntary disclosure programs not only failed to bring offshore account holders into compliance, but the programs that were designed for “bad actors” burdened “benign actors” who inadvertently violated the rules, the IRS ombudsman Nina E. Olson said in a report in January. According to the report, many taxpayers first needed to opt into a voluntary disclosure program, only to then opt out again and get audited to get a fair result.
The IRS believes the streamlined procedures and modifications to the offshore voluntary disclosure program announced this week reflect these concerns from the tax community.
“Through our enforcement efforts and implementation of FATCA, taxpayers are more aware of their obligations, and we believe want to come into compliance,” Mr. Koskinen said. “In this rapidly changing environment, we listened to feedback from the tax community as well as the National Taxpayer Advocate about our voluntary programs. We have made important adjustments to provide opportunities for all U.S. taxpayers to come in, including those who are not willfully hiding assets.”
Other changes to the voluntary disclosure process affect the information that has to be provided by the taxpayer.
Previously, taxpayer submissions to the disclosure program were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a “risk” questionnaire. This questionnaire, which just as the disclosure process as a whole typically required the help of a tax adviser, has been eliminated. However, taxpayers who apply to the program have to provide additional information. Certain documents like account records can now be provided electronically rather than on paper.