We have been talking about offshore assets and some changes the IRS has made to reporting procedures. The best idea is always to report any foreign assets you hold with your annual tax return.
The IRS has not been doing such a great job of enforcing that, though, so there are many taxpayers who, for one reason or another, have not reported foreign assets for a few years. With the Foreign Account Tax Compliance Act going into effect today, the IRS will have more ways to ferret out foreign accountholders and then assess hefty penalties for their failure to report over the years.
One program is the offshore voluntary compliance program. OVCP offers taxpayers certain incentives to report now what they have intentionally failed to report in the past. One of those incentives is waiving any criminal liability.
There are taxpayers, though, who did not intentionally fail to report. If they are confident that theirs was an honest mistake and not a calculated risk, they may want to take advantage of the streamlined reporting program. The program had been restricted to U.S. citizens living outside of the country who hadn't filed a return. Now, for a small penalty, some taxpayers living in the U.S. are also eligible.
The IRS has also dropped the $1,500 tax debt threshold for participants. Taxpayers may have any amount of tax debt. In the past, too, the streamlined program included a "risk questionnaire"; the questionnaire has been dropped.
The key, and perhaps the biggest stumbling block for taxpayers, is that they must certify that their failure to disclose foreign assets in the past was not willful. It takes more than an affidavit or a taxpayer's initials on a form. The taxpayer must include a statement with his return that explains the circumstances, the details of how he came to make such a mistake.
The cost of such a pledge is a 5 percent penalty. The taxpayer who could have had to pay 27.5 percent under OVCP may now pay 5 percent of the previously unreported foreign assets.
That's actually a problem for some. Taxpayers who did not qualify for the streamlined program earlier this year took it on the chin and filed under the OVCP. The question for the IRS is whether they are due a refund. So far, the IRS has not addressed the matter.
Source: Forbes, "IRS Offers New Incentives To Disclose Foreign Bank Accounts," Deborah L. Jacobs, June 18, 2014