In an embarrassing about face the American Internal Revenue Service (IRS) has stated it will be substantially diluting key features of its offshore voluntary compliance program (“OVCP”) which was hitherto designed to force US citizens with undisclosed Offshore Bank Accounts, (or Offshore Companies or Offshore Income or Offshore assets) to declare the existence of same to the IRS.
The changes came about after considerable pressure was applied by tax payer groups concerned that various Americans (in particular long term expat Americans who would in any other tax system be regarded as non-residents for tax purposes), unaware of their obligations to report the existence of their Offshore Income, (or Offshore Company or Offshore Bank Account) could be treated the same way as criminal tax evaders.
The IRS has said that the changes are intended for US taxpayers whose failure to disclose their offshore assets was “non-willful,”. There are also other important modifications to the 2012 OVDP.
The original ie 2012 procedures were available only to non-resident non-filers, and taxpayer submissions were subject to different degrees of review based on the amount of the tax due and the taxpayer’s response to a “risk” questionnaire. Under the new arrangements, the procedures are available to a greater number of US taxpayers living outside the US who have unreported Offshore accounts and, for the first time, to certain American taxpayers residing in the US.
The changes include an elimination of the requirement that the taxpayer should have USD1,500 or less of unpaid tax per year; the abolition of the risk questionnaire; and a new requirement for the taxpayer to certify that previous failures to comply were due to non-willful conduct.
For eligible American taxpayers residing outside the US, all penalties are to be waived. For eligible US taxpayers residing in the US, the only penalty will be a miscellaneous offshore penalty equal to five percent of the foreign financial assets that gave rise to the tax compliance issue.
Since expatriating in 2001 I’ve met many Americans who, upon hearing that their non- American expat counterparts were not required to declare and pay tax at home on Offshore earnings, simply assumed the same rules applied to them (as indeed they should if they’ve permanently departed America though that’s an argument for another 60 seconds). Hence the changes as effect such US persons are to be applauded as a common sense approach given the lack of criminal or unlawful intent on the part of parties concerned.
As of 1 July however the US Foreign Account Tax Compliance Act will come into effect, at which time banks will begin to report to the IRS the existence of Offshore Bank accounts held by US persons. Persons who wish to avoid this reporting requirement should speak to their Lawyer or Offshore Company Provider or Offshore Bank Account Provider ASAP about setting up a Seychelles Private Interest Foundation (or an Offshore non FATCA effected bank account) as a potential means of avoiding US reporting requirements.