Melwani of 212 Tax applauds changes to IRS' disclosure program

Anil Melwani, CPA, managing partner at 212 Tax & Accounting Services, commends the United States Internal Revenue Service's (IRS) recent changes to its voluntary offshore compliance program. The revisions provide individuals with U.S. taxpayer obligations, who have not been willfully negligent of the current rules, another opportunity to come into compliance with U.S. tax laws and regulations. All U.S. citizens, resident aliens and in some cases even non-resident aliens are required to file tax returns with the IRS. This includes reporting worldwide income from all sources including foreign accounts. Affected taxpayers routinely disclose foreign accounts and the interest on those accounts on Schedule B and Form 8938 of their federal tax returns and another separate form now referred to as the FinCen-114. Failure to report offshore accounts and pay taxes on their interest can yield stiff penalties and possible criminal prosecution. But what if you had not complied with this rule, because you simply didn't know about it and/or you were not able to take advantage of previous voluntary offshore tax compliance programs because you were residing in the U.S. and not abroad? According to Melwani, "Up until recently, there were few options for taxpayers who had unwillingly violated the law. None of them was very appealing. One option was to contact the Criminal Investigation Division of the IRS and to apply for the Offshore Voluntary Disclosure Program. Under this program, penalties could be harsh. One is expected to pay back taxes, interest, a 20% accuracy penalty, failure-to-file and/or failure-to-pay penalties and an offshore penalty of 27.5%. Another option was a so-called quiet disclosure. This is when taxpayers amend back tax returns, most of the time for the last three years, and then file back FinCen-114 Forms, Report of Foreign Bank and Financial Accounts (FBARs). Or, yet another option was just to ignore the past and to file on a prospective basis. However, individuals going this route still risked criminal prosecution and investigation." The IRS realized that the previous Offshore Voluntary Disclosure Program with its 27.5% penalty may have been too harsh or restrictive for some taxpayers who had unwillingly violated the disclosure requirements. As of July 1, 2014, an expansion to the streamlined filing compliance procedures announced in 2012 and important modifications to the 2012 Offshore Voluntary Disclosure Program are easing the burden for U.S. taxpayers whose failure to disclose their offshore assets was non-willful. In addition, for the first time, The Streamlined Program has been opened up to taxpayers residing in the U.S. The original program applied to non-resident non-filers who had $1,500 in unpaid taxes each year. The taxpayer also had to submit a risk questionnaire that would be used to determine the level of review each submission received. These two requirements have now been waived. Under the Streamlined Program, taxpayers are not subject to the penalties imposed by the Offshore Voluntary Disclosure Program. Once disclosed, the taxpayer must pay a 5% miscellaneous offshore penalty based on the total amount of his/her foreign holdings and certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. At the same time, the changes to the Program are increasing the offshore penalty percentage from 27.5% to at least 50% if the IRS or Justice Department starts investigating an individual's offshore assets prior to the taxpayer's pre-clearance request. "Starting on 2010 tax returns, the IRS started asking: Do you have foreign bank accounts? Yes or no? Even if you have one penny on a foreign bank account, the obvious answer is yes," says Melwani. "However, you only have to report details if you have $ 10,000 or more in foreign accounts," continued Melwani. "If you don't disclose it on your tax returns, you are not in compliance with U.S. tax laws and face criminal prosecution. Unfortunately, many people who have a foreign bank account, perhaps because they used to work abroad or still have family assets in their country of origin, do not know about this rule. The expansion of the Offshore Voluntary Compliance Program is particularly timely as the withholding and account due diligence requirements of the Foreign Account Tax Compliance Act (FATCA) went into effect July 1, 2014. Under FATCA, foreign financial institutions are required to report on accounts held by U.S. taxpayers. Therefore, it is important to come into compliance now," said Melwani. According to the IRS, 45,000 taxpayers have come into compliance with the Offshore Voluntary Disclosure Program rules since their inception in 2009. Taxpayers, who have already taken advantage of the voluntary program, paid about $6.5 billion in taxes, interest and penalties.