Wednesday, June 18, 2014

IRS Issues More Liberal Streamlined Procedures and Makes Some Changes to OVDP (6/18/14)

The key documents on the changes are:
  • IRS Commissioner Koskinen's News Release is here.
  • IR-2014-73, June 18, 2014 is here; announces the changes.
  • OVDP 2012 (as changed 6/18/14), here.
  • Streamline Filing Compliance Process (as changed 6/18/14), here.  This is the description.  There are two types of Streamline filings:  Non-resident and Resident.  The Nonresident program -- referred to as Streamlined Foreign Offshore Procedures -- is described on a web page titled: U.S. Taxpayers Residing Outside the United States, here. The Resident program -- referred to as Streamlined Domestic Offshore Procedures -- is described on a web page titled U.S. Taxpayers Residing in the United States, here.
  • Delinquent FBAR Submission Procedures (as changed 6/18/14), here
  • Delinquent International Information Return Submission Procedures (as changed 6/18/14), here. (This relates to the Forms required for entities, such as CFC's, trusts,etc.)
  • IRS OVDP 2014 FAQs, here.  Note particularly par. 1.1 on the changes from the original OVDP 2012.
  • Transition Rules FAQs, here.
  • Foreign Financial Institutions or Facilitators List (formerly Bank and Promoter List), here.  This list is the basis for the 50% penalty in OVDP 2014 (See FAQ 7.2 in the OVDP 2014 FAQs, here.)  I should note that the description in FAQ 7.2 is not clear as to whether the key cut off date is the date listed on the bank and promoter list or the date of the public disclosure as defined in FAQ 7.2).  Readers should look at the list.  For those who have been watching this area, the institutions should be familiar.
The new procedures apply as follows:

1. Foreign residents (requiring only foreign residence in the 3 year period):  File 3 years of delinquent or amended returns and pay tax and interest.  No penalties (including FBAR or miscellaneous) will be assessed.  Must also complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S. certifying (i) eligibility for the procedure, (ii) filing of all required FBARs, and (iii) that the failure to file tax returns, report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct.

2.  Nonforeign residents (Domestic residents):  Must file 3 years of returns and pay tax and interest.  No penalties other than a 5% miscellaneous penalty on foreign financial accounts only will be assessed.  Must complete and Sign the Certification by U.S. Person Residing in the U.S. that (i) eligibility is met; (ii) all FBARs have been filed; (iii) "the failure to report all income, pay all tax, and submit all required information returns, including FBARs, resulted from non-willful conduct;" and (iv) that the miscellaneous penalty amount is accurate.

Nonwillful conduct for the purposes of #1 and #2 is:  "conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law; 

The taxpayers can be audited under the income tax audit guidelines but will not be automatically audited.

A couple of the material changes to OVDP 2012 are described in par. 1.1 of the FAQs as follows:
• A 50% offshore penalty applies if either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation. See FAQ 7.2.
• FAQ 7 has been modified to require that the offshore penalty be paid at the time of the OVDP submission.
I will be back with more later.


  1. In a kick in the teeth to those who went through OVDP it is not retro-active. Still much better than the old deal.

  2. Thanks for posting that Just_Me. I hope other readers will offer their views as well.

    I am not deep enough in the weeds on the point or the counterpoint other than some of his point would seem to be rather obvious errors that minimum diligence would have picked up.

    Perhaps he should consider posting a comment on the NYT article, because I would be fairly certain that the author would read the counterpoint and, if he felt so moved, respond to them. And other readers could respond as well. That would be a lively discussion, I suspect.

    Even so, I hope readers of this blog and the gentleman's comments will respond with their views as well.

    Jack Townsend

  3. By the way, Just_Me, have you reviewed the new Streamlined and FBAR procedures? If so, would you care to comment?

  4. jack i applied in OVDI pre clearence does this means that i will pay 50% penalties instead of 27.5%?

  5. The procedures are an improvement, however for those who would convert from OVDI to the new procedures, there is no information on how many years will be considered. My experience when I opted out into the 2012 Streamlined Program was that as I had made a "voluntary declaration" of all 8 years under OVDI, all 8 years would be considered. It would not be just three years that were looked at. This needs to be clarified for those who switch into the new programs from OVDI or OVDP.

  6. What does this means for someone who just went in Pre Clearence?

  7. The IRS has finally set up an easier way to comply, but the problems for US Persons who are long term residents outside of the US and have integrated into their local societies are not solved. Why would anyone want to comply with US taxes when faced with confiscatory PFIC taxes, lack of recognition of local pension plans, foreign trust filings, phantom gains and onerous filing procedures for setting up your own business abroad ?

    The IRS seems to have recognized that Americans resident long term abroad are not tax cheats. The next battle will be to get Congress to recognize that there are Americans long term resident abroad who may never come back to the US to live. I just had a discussion with my Congressman, who was trying to be helpful, but who ultimately failed to understand. The aides I spoke with all talked in terms of when I would “come home”. When I explained the various reasons why I would likely continue to reside abroad, the response was, “Oh you have a very complicated situation.” What this meant was that they had failed to grasp that a US citizen would actually choose to reside elsewhere and being out of the country was not just temporary. Until this is understood and the situations of Americans abroad are addressed in the tax code, it seems that the best reason for becoming compliant is to make it easier to renounce. Compliance with the onerous and punitive foreign reporting rules has few
    upsides for a person leading a normal middle class life outside of the

  8. I believe the Streamlined Domestic Offshore Procedures (SDOP) announced today is a game-changer. It is the first voluntary disclosure program (since the 2009 OVDP program and its progeny) that may attract interest of the tens of thousands (probably more) of smaller non-willful noncompliant taxpayers waiting for a realistic resolution to address their violations. The SDOP will significantly alter all future voluntary disclosures for residents and non-resident (who would will use the Streamlined Foreign Offshore Procedures (SFOP)) taxpayers alike.

  9. Thanks for asking...

    I am still digesting it, but from what I have read, I think it is a step in the right direction for the IRS. Obviously the new Commissioner has been listening to Nina Olson, and so a lot of our advocating that serious changes needed to be made to deal more prudently with the benign actor have finally been heard. If Shulman were still there NOTHING WOULD HAVE CHANGED, imho.

    However, the greater problem of dealing with the Citizenship Taxation issue still needs to be dealt with by Congress. For many this is still too onerous of a serfdom and puts them at a competitive disadvantage to every other resident in the world in a global economy .

    I am not sure how this call to come back into compliance without penalty threat will be received, as for long term Americans abroad the cost of compliance is still great, and the taxes on assets and activity unrelated to any benefit from America still seems like a bad proposition. Don't know if this stems the tide of renuniciations or not. We shall see.

    For those that now want to comply, it does provide a better route that is not so full of penalty fear. Why they couldn't have done this from the outset of the offshore Jihad, still amazes me. But, as IRS Bill Yates (the creator of the FATCA form) says, ' I realized we didn’t know anything about anything when it came to U.S. citizens working overseas, accidental or otherwise."

    and I might add, in spite of this major revision by the IRS, Congress still doesn't

    I was also pleased to see that they made provisions for a streamline for homelanders like new immigrants that is NOT so Draconian.

    On the downside, they still did NOT do the "right thing" for those minnows that came into compliance early on. If you have a signed 906, and paid your disproportionate penalties they will still keep the money, thank you, even though they have to know in their heart of hears, that it is NOT the right thing to do. Would not want to do anything that might give lie to the Huge Success in revenue collection they still boast about.

    In my case, had a waited and not tried to do the right thing when I figured out my non compliance, today, my decision to wait would have been rewarded. Wrong message to send, and it would build resentments if you allowed it to.

    On the positive side, the knowledge that I probably helped a few minnows escape the OVDP purgatory, pleases me. And the fact that those that are still languishing inside the processing factory now have hope of relief, well that doubly pleases me.

    Anyway, just a few quick thoughts. Thanks again Jack for allowing comments during this very difficult and taxing time for many. I might have more to say when I have fully absorbed the Simplified, SIMPLIFIED program. I am sure you will post about it, and I might add more there.

  10. I agree. Thanks for your comments.

  11. If I understand correctly, this will be a HUGE relief for people who are quite confident they would be determined to have been non willful, but would have still joined OVDP (and stayed in) because they were afraid that lots of non willful penalties (quite possibly one per account, per year -- which can really add up with multiple accounts) would still exceed the 27.5% (or possibly 5% or 12.5%) penalty. The IRM provides certain mitigation guidelines, but whether the IRS would choose to follow them is unclear.

    But take the case of someone (onshore) who does not consider himself willful, and who would be better off with however many non willful penalties, but would have joined OVDP (and been reluctant to opt out) due to the concern that the IRS might see things differently, and might therefore seek to impose one or more willful penalties. (And, in light of Zwerner, perhaps the risk of it being more than one is greater than one might previously have thought.) Does the new SDOP give this person any comfort? Isn't this person still at risk if he asserts qualification for OVDP and the IRS happens to audit and finds him to be willful? I'd like to think that the new guidance suggests a someone decreased zeal on the part of the IRS in presuming willfulness, but wishing to think something and feeling comfortable are two different things.

    Would love to hear others' thoughts on this issue.

  12. I am a little lost.. does the 5% i.e. the streamline procedure apply for minnows like me .. i am on VISA here for 12+ years.. sending after tax money to native country... accumulated 100K.. federal tax liability for past 6 years combined around 4K.. can someone please guide me?

  13. I predict that this will increase the number of long-term US expats renouncing US citizenship.

    For these people the cost of coming into compliance has dropped, but not to anything close to zero. Even if penalties are waived entirely there are still plenty of punitive and recurring costs: PFIC tax rules; the spectre of US estate tax; NIIT; capital gains tax on phantom currency gains and on gains that are not taxable in their home countries; US tax on the home country's retirement and tax favoured accounts; the difficulty of finding accounts at all thanks to FATCA, and of course costly help from accountants and tax advisers to work through the morass that is the US tax code.

    Long term expats and 'accidental' citizens now have a clear incentive to look at all of the above, choose to bite the bullet and come into compliance as a 'one time' hit, and then exit swiftly and cleanly via expatriation and form 8854. Many will have a good idea of the kind of nonsense congress is mulling for expats (exhibit A: the Ex-PATRIOT act) and will be keen to get out before things become even worse.

  14. I would be interested in this as well. Presumably, as long as one hasn't filed the actual application with attachments, then the choice to go streamlined is very much open. Question on other timings though: for example, what if someone filed the application but has not yet been accepted or prepared or provided any of the additional documents (such as the 8 years of returns). One would hope the IRS would be reasonable (since it is also in their interest to avoid taking cases through OVDP to end up with a 906 that refers back to streamlined procedures, given the resources required). Jack, any initial thoughts?

  15. From the description, anyone who has not signed a closing agreement is eligible. Although they do say that IRS agents will decide whether you are eligible to transfer, so it may be a less automated procedure than new submissions under streamline

  16. The FAQs for the transition to the new program for OVDI/OVDP participants are out and the only relief for them is the certainty of no penalties if their examiner or Central Committee approves them for this program. It seems that little will happen to improve waiting time as examiners must still be assigned to the cases and make determinations and 8 years are still in play.

  17. Yet to read all of it, but hopefully a wow moment :)

  18. totally agree......after I get this mess straighten out I am heading for the nearest embassy

  19. Maybe I'm a cynic, but I see this as just the latest IRS technique to squeeze offshore tax holders.

    1) Success in the Zwerner case means that willful evaders will be willing to take a 50% OVDP penalty rather than risk 100%+ penalties

    2) Success in defining taxpayers as willful simply because taxpayers checked 'No'/left blank the Schedule B question means that far more people are concerned about being found willful

    3) The new scheme offers 5% penalty to resident taxpayers who are non-willful, but it seems to me to be likely that the IRS will use the Schedule B question (and possibly a few other factors) to decide whether a submission under the Streamlined plan is eligible or not. If not eligible, the IRS could well ask taxpayers to join the OVDP and collect the higher penalty.

    So it seems to me that for anyone desiring absolute certainty on penalties, the OVDP is still the only game in town. For a US resident who has a really clean record/good story (recent visa entrant, inherited account), the streamlined process could work. For others, I remain doubtful

  20. I am not an expert, and I like everyone I am just now digesting all the new FAQs and guidance, but it appears that if you can certify 'non willfulness' and the IRS agrees, than your penalty for compliance under the new streamline rules would be 5% of the highest aggregate you have in accounts back in your home country. If that is $100K expressed in USD following their FX rates, than $4K would be the penalty.

    I would just read the rules VERY carefully yourself....

  21. Here are the transitional FAQs, and you knew there would be new FAQS, didn't you?

  22. It is a game changer, only if it is marketed correctly. What will be the actual outreach, other than to have the compliance complex repeat their story in many forums.

    Will there be any marketing campaign such as print, TV or Radio advertising? Will there be a 60 minutes, Meet the Press moment, or even 3 minutes on NBC world news today with Brian Williams explaining to the masses what is expected?

    Will there be inserts into passport applications? How about prominent notation on the 1040 regarding offshore accounts?

    How much effort will the IRS put into notifying American's abroad via mailings for those who are still NOT aware of CBT, FATCA or FBAR because they never bother reading the news or following the arcane procedures and complicated FAQs as published on the web site.

    How about some proactive actions to educate U.S. Persons around the world accidental or otherwise, that they can now avail themselves of this new compliance program or just give up their citizenship?

    How about full disclosure of offshore rules and citizenship taxation on birth certificates, and then again at the age of consent?

    How much new effort will the State Department expend in notifying new immigrants via the VISA process of the consequences of leaving money undeclared in home account, or might that scare some highly educated immigrants away?

    Will there be anything in the "Welcome to America" brochures that inform them of their lifetime world wide reporting now, even if they decide to go back home later?

    So far, even after 5 years of an offshore jihad, I have NOT seen ANY efforts in this regard other than a tab on the home page, which I guess assumes that everyone has this as their mandated default homepage when they launch their browser. Maybe we should make it a requirement subject to $10K non willful penalty per browser failure to do so.

    The U.S. government likes to lecture banks and business about disclosure rules and clear language so consumers are aware of the "fine" print. It is about time that it practices what it preaches.

    Frankly, as we have learned, it is a 'Buyer Beware' world out there when coming to dealing with any business selling a product, and the government and especially the IRS is no exception.

    It is time for America to do a little 'truth in advertising' about what it now means to be a U.S. Citizen from birth to death. As many Americans abroad are now learning, and was well said about another.... "We are the last generation of US emigrants to believe we were free to roam the earth, as wrong as we were to believe it."

    The choices are increasing black and white. With this administration and its war on offshore tax evasion, and with instituting of the global FATCA dragnet, it is now obvious what your choices are. Accept the lifetime burden of taxation (with the accompanying penalty risk) anywhere you live in the Universe, or relinquish your citizenship. It is that simple, but it has taken me 66 years to learn this painful fact.

  23. @gottaloveUStax1 Thought i posted this earlier im in CI Pre clearence i am wondering if i can just transfer to Streamline. I am wondering what the process is? Do i need to inform IRS can i just transfer automatically?

  24. Great comments.Exactly many folks follow the prominent news anchors you have mentioned. I cannot think of any prominent mass media advertising in the last decade I recall to reach common people. Most first generation immigrants in the last decade at least have no
    idea that global income (bank interest etc) is taxable in US. Fbar is
    not a term many have heard (recently found that this term fbar has
    existed since 70's).

  25. One good thing about the new streamlined procedures is that it pretty much kills the cash cow
    of many compliance tax lawyers as the procedure only involves filing a
    return. How the return should be marked and where to send it are clearly
    spelled out in the instructions. CPAs will likely still play
    role, but the need for advice from a tax lawyer is nil. I imagine many tax
    lawyers will still try to peddle their services by claiming you need
    their advice to determine if you are non-willful or not and to develop
    your certified statement. Nonsense. Those who are non-willful know it
    from Day 1. At this point, it also appears that a statement saying that
    one lived abroad and was unaware of US filing requirements, but was tax
    compliant locally seems like it would be sufficient. Eliminating
    complexity eliminates the need for a compliance industry professionals
    and that is a good thing for the pocketbooks of most of the people who
    would apply for this program.

  26. I agree completely. I was thinking about the bait and switch for the old 2099 plan, I think this is simialr .

  27. What about those who chose to go forward 3 years ago?
    Should they enter the new streamline procedure to straighten the first 3 years of failure to file FBARs?

  28. We found a huge trap in the new Streamlined procedure for
    snowbirds… it goes like this:

    Dual US/CDN citizen has house in Phoenix
    He hasn’t filed US returns because he didn’t know of
    his US filing obligations
    He spends 60 days per year at his house in Phoenix

    Under the new rules
    He doesn’t qualify for non-resident streamline
    He doesn’t qualify for resident streamline.. cause he
    hasn’t filed returns
    Only option is OVDP

    Really bad result.

  29. So for a US resident, what would be a simple statement to explain the non-compliance as required on page 5? I am concerned that I'll give the IRS an honest explanation, but my explanation could be construed as "willful", because I may not use the right words.

  30. Ditto. The test for willfulness may never be black/white.

    But someone here correct me if I am wrong:
    Under this new procedure for "Domestic", is someone in IRS even going to review the certification / your calculations in detail and give "all clear" letter at the end?

    I don't recall reading so, one might never know if they are in the all clear. (It says usual tax return audit procedures apply.)

    Here is copy paste of a paragraph from the instructions of the "domestic" procedure:

    " Even if returns properly filed under these procedures are subsequently
    selected for audit under *existing* audit selection processes, the
    taxpayer will not be subject to accuracy-related penalties with respect
    to amounts reported on those returns, or to information return penalties
    or FBAR penalties, unless the examination results in a determination
    that the original return was fraudulent and/or that the FBAR violation
    was willful."

  31. 2 months a year in a vacation home turns one into a tax-resident?!?!?! Ouch.

  32. I have no skin in this game, but I do have a hard time wrapping my head around a 5% penalty on assets (not owed taxes) for *non-willful* non-compliance. As I understand it, it would have been very easy for even the most honest immigrant to the US to have missed filing FBARs. So the notion that such a person should get a 5% whacking (on accounts that may be his in name only) seems far too heavy-handed.

    Or do I not correctly understand the new procedure?

  33. Roy,

    That is an unfortunate omission in the new guidance. Seems like an appropriate fact pattern for strongly considering a "non-program disclosure," i.e., submitting a few late returns (and perhaps FBARs) with a reasonable cause explanation. This doesn't sound like the type of fact pattern where the IRS really wants to impose penalties. And, by the way, I believe the 5% penalty is now gone, so there's all the more cost to OVDP starting July 1.

    But if you have clients in the fact pattern above, and if it's clear they need to go the OVDP route, I'd think they have a powerful incentive to get fully into the OVDP before July 1 to take advantage of the 5%, before the new FAQs take effect.

  34. "8% of the world's financial wealth" even if it includes tax-compliant funds, per the comments by Just Me's friend, seems high. Why? Because for most people who have savings the amount is too small to justify holding it in a tax haven. Thus the top 1-2% would have to have a huge part of their savings in tax havens. Keep in mind that typically those who hold foreign assets hold only a part of their wealth abroad and own real estate, businesses etc. in their home country.

    As far as liabilities exceeding assets that is true in any balance sheet because (assets + net worth) = liabilities. This must always be the case for a balance sheet to balance.

  35. Jack/All, A question about accuracy penalty in OVDP 2012 opt-out... If the taxes owed is less than 10% (or less than $5000) of the correct tax, in each amended return for the non-compliant years, will the examiner still impose accuracy penalties?

    Is the accuracy penalty in opt-out the 20% penalty or something different?


  36. You refer to the substantial understatement branch of the accuracy related penalty. The accuracy penalty includes negligence as well. Both branches of the accuracy related penalty are 20%, but only one can apply to a particular understatement.

    However, if you opt out, there should be no accuracy related penalty because the amended returns you submit in the OVDP are qualified amended returns.

    Jack Townsend

  37. Jack, Thank you for reply.

    Is opting out before submitting the OVDP final package unreasonable/unheard of?

    I ask because I am at the crossroad to submit OVDP final package or opt-out. The 27.5% of max aggregate is approximately 150K. The back taxes in total are less than 10K for all the OVDP years. There may be a chance to fare better under opt-out, and to just skip the OVDP process altogether. That is my thinking after reading other posts here.

    Thanks again.

  38. Jack, your explanation of the substantial understatement branch of the accuracy related penalty brings me to another subject . First let me tell everyone here how amazed I am that in 9/2014 we still have people here on this blog from the 2012 OVDP without a 906 or a finalized opt out. I know of cases were taxpayers after 2 years have not even been contacted by an examiner to start the process. I have a hunch that the IRS will use in many cases the 6 year SOL even outside of fraud for expats involved (tolled for the period of time a taxpayer is outside of the US) or the $5K substantial understatement for offshore accounts

  39. For #1, did you mean 25% omission or $5000+ omission of "income" or did you mean "income tax"? Below is what the link says:

    (d) Substantial understatement of income tax

    (1) Substantial understatement

    (A) In general

    For purposes of this section, there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds the greater of—

    (i) 10 percent of the tax required to be shown on the return for the taxable year, or

    (ii) $5,000.

  40. thank you summarize with the above facts the Civil Penalty Guide in the absence of fraud :
    IRC § 6651(a)(1), Failure to File Tax Return
    IRC § 6651(a)(3), Failure to Pay Tax (Not Shown on Return)
    IRC § 6654, Failure by Individual to Pay Estimated Income Tax
    IRC § 6656, Failure to Deposit Taxes
    but no IRC § 6662, Accuracy-Related Penalty because of QAR

    I just like to point out to readers that Jacks explanation is not complete and little bit misleading especially to the circumstances I mentioned with regards to FTC and AMT carry forwards. The FTF,FTP,FTD penalties do not apply if the failure is due to reasonable cause and not willful neglect. The type of tax itself also is taken into account.
    IRM §
    IRM §

    The IRM states that a “taxpayer may establish reasonable cause by providing facts and circumstances showing the taxpayer exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless was unable to comply with the law.
    For example in determining if the taxpayer exercised ordinary business care and prudence, the IRM directs IRS personnel to review available information including the following:
    · The Taxpayer’s explanation for the non-compliance and whether the dates and explanation of events causing the noncompliance correspond to the events upon which the penalty is based.
    · The Taxpayer’s compliance history for payment patterns and the taxpayer’s overall compliance history. The same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care.
    · The length of time between the event cited as a reason for the noncompliance and subsequent compliance.
    · Whether or not the taxpayer could have anticipated the event that caused the noncompliance
    With regards to reasonable cause :
    · Ignorance of the law.
    · Mistakes or oversight.
    · Reliance on competent tax advisor

  41. Yes the examiner will assess the 20 accuracy penalty. In fact you could not complete your 2012 submission without paying the tax, 20% accuracy penalty and interest with your submission. According to Jack if you opt out and you filed QAR with your submission, you should be entitled to get the 20% back.


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