ELITE ADVISOR BEST PRACTICES
New Offshore Income Compliance Procedure
What advisors with international clients need to know about the new disclosure rules
By Deepa Venkatraghvan
- As of September 1 of this year, certain types of “low risk” nonresident U.S. taxpayers have the opportunity to become compliant for offshore income disclosures.
- While the procedure is likely to help only a few small taxpayers, it’s clear that the IRS intends to pursue offshore income of U.S. taxpayers very aggressively.
- With FATCA imminent from 2013, there will be fewer opportunities in the future for defaulters to come into compliance.
- It may be best to make use of all existing opportunities to help your clients come into compliance.
Effective September 1 of this year, a new IRS procedure called the “New Streamlined Filing Compliance Procedures for Non-Resident, Non-Filer U.S. Taxpayers” went into effect to help “low compliance risk” U.S. citizens and green card holders living abroad comply with their offshore income disclosures. The new procedure is being termed by some as the new “EZ Pass” or “Express OVDP” for nonresident U.S. taxpayers.
According to the IRS Web site, “These procedures are being implemented in recognition that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), but have recently become aware of their filing obligations and now seek to come into compliance with the law.”
What the IRS is signaling
While the number of people who might benefit from this procedure is not likely to be widespread, experts say that the important takeaway from such initiatives is the message from the IRS. The IRS is clearly telling its taxpayers that it is going to be aggressive about tracking offshore accounts irrespective of size. But until the IRS puts various checks and balances in place, it will allow taxpayers to come into compliance and face lower penalties.
In the last few years, the IRS has evidently increased its focus on tracking undisclosed offshore accounts. After the high-profile indictments of certain UBS and HSBC (India) accountholders in 2009, the IRS has not only become stricter in enforcing the FBAR, but has also introduced more statutory disclosures such as the Form 8938 “Statement of Foreign Financial Assets.” At the same time, while these measures are being put together, the IRS is also coming up with programs to give its taxpayers an opportunity to comply by paying lower civil penalties and, in most cases, no criminal exposure. So far, the IRS has successfully conducted three voluntary disclosure programs, raising more than $4 billion from the 2009 and 2011 programs while its 2012 program continues to be open for participation.
The Foreign Account Tax Compliance Act (FATCA), which becomes effective in 2013, is likely to be a great way for the IRS to collect information about foreign accounts of U.S. taxpayers. Under the FATCA, foreign financial institutions will be obliged to share information with the IRS about their U.S. accountholders. Once this kicks in and the IRS starts getting all the information, it is likely that affected taxpayers will have fewer opportunities to come into compliance at the “low penalty” rates. In fact, a recent court conviction of Indian American neurosurgeon Dr. Arvind Ahuja also points to the fact that the IRS will not hesitate to pursue criminal penalties actively if a taxpayer is found noncompliant.
New filing compliance procedures for nonresident, nonfiler U.S. taxpayers
Here is a quick snapshot of this new procedure:
This procedure is available for nonresident U.S. taxpayers who have resided outside of the United States since January 1, 2009, and who have not filed a U.S. tax return during the same period. However, these taxpayers must present a low level of compliance risk (discussed in next point).
What is low compliance risk
In the absence of any high-risk factors, if the submitted returns and application show less than $1,500 in tax due in any of the tax years 2009, 2010 and 2011, then they will be treated as low risk and processed in a streamlined manner. The risk level may rise under several circumstances, such as if a return filed under this program is an amended return or if the taxpayer has not declared all of his or her income in his or her country of residence or if the taxpayer is under audit or investigation by the IRS, etc.
Procedure to participate
Taxpayers must submit complete and accurate delinquent tax returns and mention “Streamlined” at the top of the return to indicate that their returns are being filed under the new initiative. They must also pay all the taxes due along with interest and penalty, if any, for being late. They must also submit a questionnaire as prescribed by the IRS to present their compliance risk profile.
The IRS clarifies that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution.
You can find full details on the IRS Web site.
Advice to clients
At this point in time, it might be best for you to advise your overseas clients, no matter how large or small their default, to make use of all available voluntary disclosure opportunities. As the old saying goes, “Get to the IRS before the IRS gets to the taxpayer.”