IRS Commissioner Offers Commentary on Newest Changes to the OVDP
Last week, the IRS made a variety of changes to its Offshore Voluntary Disclosure Program (OVDP). These modifications are designed to give taxpayers incentives to disclose foreign accounts in greater numbers, a trend that already has been observed. People who comply with the OVDP need not fear the threat of criminal prosecution if they disclose any overseas accounts and pay the required penalty. This program was reinitiated two years ago following earlier versions of it in 2009 and 2011. Nearly 50,000 people have taken advantage of this program, from which the IRS has collected about $6.5 billion in a mixture of taxes, interest, and penalties.
The IRS Commissioner, John Koskinen, has noted that the changes to the OVDP contain a combination of carrots and sticks. More people will have a chance to disclose their accounts and pay what they owe, says Koskinen, if they were honestly unaware of what they needed to disclose. This may often be the case for U.S. citizens who are living in foreign countries and may not have stayed up to date with information on their tax obligations.
Streamlined filing compliance procedures can help these expatriates avoid the harsh penalties usually associated with tax violations. Koskinen has decided against launching overly punitive measures against them because people who have made innocent mistakes would be less likely to come forward and make disclosures. There will be no penalties at all for American citizens living in foreign countries who take advantage of this most recent OVDP. If someone living in the United States takes advantage of it, the penalty will be limited to five percent of the offshore assets giving rise to the non-compliance.
The criteria for participating in the OVDP also have been expanded. According to Koskinen, the IRS decided that applicants for the OVDP will not need to complete an additional questionnaire, and they will no longer be compelled to show that they have $1,500 or less in unpaid taxes each year. Of course, people who participate in the OVDP will need to remain compliant with IRS rules moving forward.
People who intentionally fail to keep up with tax obligations, however, still face penalties. These remain very harsh, sometimes comprising as much as 50 percent of the amount in the offshore account. Criminal prosecution and the possibility of a prison term also loom over people who intentionally refuse to comply. Koskinen believes that the contrast between stiffer penalties and a broader OVDP program will discourage potential and ongoing violators of tax rules from taking the risk of non-compliance.
These risks are becoming even greater as foreign institutions are increasingly willing to cooperate with the IRS. For example, as Koskinen noted, the Foreign Account Tax Compliance Act (FATCA) will become law at the start of next month. Under FATCA, foreign banks and other institutions must notify the IRS directly if American taxpayers are holding accounts with them. This will help the IRS identify people who are dodging the tax rules and refusing to take advantage of the OVDP protection. To this stage, nearly 80,000 banks around the world have registered under FATCA to stay in compliance with IRS rules.
In Koskinen’s words, then, “the day of hiding assets in accounts overseas are coming to an end.” As the cost of compliance falls and the penalties for non-compliance rise, people should have less and less reason to hide their assets from the IRS in foreign accounts.
Tax matters can be extremely convoluted and difficult to understand for the ordinary person. You should seek guidance from experienced tax lawyer William Hartsock if you are looking for advice on how to become compliant with IRS rules. Mr. Hartsock has helped many California clients disclose their offshore accounts or navigate through the tax system in other ways. Take the first step to starting a conversation with him by calling (858) 481-4844 today.