One June 4, 2014, I wrote a post speculating that that upcoming IRS amendments to the Streamlined and OVDP programs would likely provide relief for Green Card Holders resident in the U.S. This was based on a speech given by the IRS Commissioner of June 3, 2014. As was reported in numerous blogs (and given an enthusiastic review to Mr. Mopsick), the speech included:
Now, while the 2012 OVDP and its predecessors have operated successfully, we are currently considering making further program modifications to accomplish even more. We are considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don’t necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. For example, we are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives. We have been considering whether these individuals should have an opportunity to come into compliance that doesn’t involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas. We are also aware that there may be U.S.-resident taxpayers with unreported offshore accounts whose prior non-compliance clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn’t involve the threat of substantial penalties.
We are close to completing our deliberations on these respects and expect that we will soon put forward modifications to the programs currently in place. Our goal is to ensure we have struck the right balance between emphasis on aggressive enforcement and focus on the law-abiding instincts of most U.S. citizens who, given the proper chance, will voluntarily come into compliance and willingly remedy past mistakes. We believe that re-striking this balance between enforcement and voluntary compliance is particularly important at this point in time, given that we are nearing July 1, the effective date of FATCA. We expect we will have much more to say on these program enhancements in the very near future. So stay tuned.
IRS Newsroom – June 18, 2014
IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance
Information from the IRS site on OVDP 2014 is here:
Information on non-OVDP disclosure options is here:
Information on the new streamlined process is here:
Obviously you must check the above links to see how the information (as it always does) evolves.
The press release included:
“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.”
As predicted the IRS has announced changes to both the Streamlined and the OVDP programs. The effects (subject to the details) are generally as follows:
Streamlined Program – Opening the program up
1. Participants are not restricted to those who less than $1500 in tax;
2. There is no longer the “detailed questionnaire” to determine “low compliance risk”;
3. Taxpayers loving outside the United States (AKA “Americans abroad) can come into compliance WITHOUT PENALTIES by certifying that the lack of compliance was “non-willful”.
4. Taxpayers resident in the United States (Green Card Holders are you listening) can come into compliance by paying a 5% penalty on the “offshore account” which was the reason for the non-compliance.
5. The new streamlined program can also be used for “amended returns”. This is huge. It allows people to correct the inevitable mistakes associated with U.S. citizenship abroad. This does include those who have made “quiet disclosures”. Previous penalties assessed will NOT be abated.
Bottom line: Those Americans abroad who are so inclined may enter the U.S. tax system without fear of penalties provided that they certify their lack of compliance was “non-willful”.
OVDP (“Offshore Voluntary Disclosure Program”) – making it harder
The changes to the OVDP program are clearly designed to make it attractive ONLY to those whose conduct has clearly been willful. (In my view making it close to obsolete.)
As described here, the changes to the OVDP program reflect that:
… the IRS is reshaping the terms for taxpayers to participate in the OVDP. “This is designed to cover those whose failure to comply with reporting requirements is considered willful in nature, and who therefore don’t qualify for the streamlined procedures,” Koskinen explained. “These changes will help focus this program on people seeking certainty and relief from criminal prosecution. From now on, people who want to participate in this program will have to provide more information than in the past, submit all account statements at the time they apply for the program, and in some cases pay more in penalties than they would have done had they entered this program earlier.”
The basic changes to the OVDP program include:
1. The 5% penalty has been abolished. This reflects the changes to the Streamlined program.
2. More information, more detail and the penalty payment are required at the point of entry into the program.
3. The penalty on offshore assets has been raised from 27.5% to 50% IF THE ASSETS WERE HELD IN A BANK:
A. That was subject to DOJ prosecution; and
B. the OVDP disclosure took place after the prosecution had been announced.
This makes it clear that OVDP is appropriate ONLY for those who risk criminal penalties.
Bottom line for the average American abroad:
A preliminary response suggests that non-compliant and non-willful Americans abroad can come into compliance:
A. Without the payment of penalties.
B. But, they will have to pay the back taxes (presumably for the three years covered by the Streamlined program).
So, what does this all mean? The answer is:
For Americans Abroad there is good news and bad news:
First, the good news:
The IRS will be more “compliance friendly” making it easier for Americans abroad to come into compliance and “clean up” past problems.
Now, the bad news:
Americans abroad who come into compliance will still be subject to the incompatibility of U.S. tax laws and their lives abroad. They will still have the problems which include (but are hardly limited to): PFIC, tax on principal residence, phantom capital gains, TFSA, FBAR, 5471, 8938, 3520, 3520A and other assorted IRS paperwork, etc.
This is likely to fuel the surge in renunciations. With penalties “off the table” people will feel better about coming into compliance for the sole purpose of renouncing U.S. citizenship.
When it comes to the IRS …
The IRS has probably done all it can. It can’t change the tax laws. It can make the decision on penalties. The IRS has signaled that there will be no penalties for Americans abroad.
With penalties “off the table”, the IRS has effectively identified that it is the lawmakers (Congress) which is the problem for Americans abroad.
With the combination of:
– the enforcement of citizenship-based taxation via FATCA;
– and a tax regime that no American abroad can life under
more Americans abroad are likely to consider formally renouncing U.S. citizenship.
I have following these developments since 2011. The history of this unprincipled, unprovoked, unjustified and unparalled assault on Americans abroad is as follows:
2009 – The Reign of Terror Begins:
2009 – IRS creates the OVDP program of 2009. Half way through the program, they engaged in the “bait and switch”. Tax lawyers had believed that people could enter program and argue “reasonable cause”. IRS “shuts” down “reasonable cause arguments. Also, IRS discovers PFICs giving them a new vehicle to terrorize Americans abroad.
2010 – In March of 2010 Mr. Obama signs FATCA legislation in law. The stage is set for “FATCA Hunt” – the hunt for Americans abroad.
2011 – IRS remakes OVDP as OVDI making it clear there is no “agent discretion” in calculating penalties without an “opt out”.
Tax lawyers, accountants and media encourage innocent Americans abroad to enter OVDP.
OVDI ends in September 2011.
December 2011 – IRS release the infamous December 2011 FS. For the first time since 2009, the IRS notes that “reasonable cause” arguments are available. A Christmas present from the IRS that was ignored by the “cross border professionals”. At this point, it was difficult to know what to do. Americans abroad had a compliance problem and not a tax problem.
January 2012 – IRS brings back the OVDP. Basically the same as the 2011 OVDP with higher penalties (25% to 27.5%). Isaac Brock Society writes press release warning Americans abroad to stay away from this program. “Just Me” write the OVDI Classic: “OVDI Drudgery for Minnows“. In January of 2012, desperate Americans abroad wrote about how “their lives had been stoled from them by the IRS“.
September 2012 – IRS introduces the “Streamlined Compliance” program for ONLY Americans abroad. People were and continue to be wary of the program.
June 2014 – IRS introduces modifications to both Streamlined Compliance and OVDP. The bottom line appears to the that penalties but not tax will be waived.