Latest Offshore Voluntary Disclosure Initiative
Acknowledging that some overseas, delinquent taxpayers (including dual citizens) desire to become compliant, the IRS has announced an additional offshore voluntary disclosure initiative designed specifically for US nonresidents went into effect September 1, 2012. However, under the plan only individuals characterized as “low compliant risk” may generally file their past returns without penalties. Low compliant risk individuals are typically those with simple tax returns and who owe $1,500 or less in taxes. High compliant risk individuals are not eligible for the initiative, and may face late fees and penalties upon attempted participation.
High compliance risk factors include:
- Tax due in an amount exceeding $1,500,
- A large amount of assets,
- A sophisticated tax planning structure,
- Material economic activity in the US,
- The amount and type of US source income, and
- A history of noncompliance with US tax law.
Taxpayers who participate in the September 1, 2012 initiative must file delinquent tax returns for the past three years, file delinquent Foreign Bank and Financial Accounts (FBARs) for the past six years, and comply with forthcoming instructions. The new voluntary disclosure initiative does not preclude criminal prosecution by the IRS or the Department of Justice, if the taxpayer’s conditions warrant such action.
2012 Offshore Voluntary Disclosure Program (OVDP)
The 2012 OVDP, which the Internal Revenue Service (IRS) announced at the beginning of 2012, remains open and an option for US taxpayers with overdue FBARs and unreported offshore income. However, the IRS warns that the terms of the program could change or the program could end at any time. 2012 OVDP participants must look back eight years and file all original and amended tax returns to include unreported offshore income and make payment for back-taxes, interest, accuracy-related and/or delinquency penalties. In addition, the standard penalty for participants has increased to 27.5% (the 2011 offshore voluntary disclosure initiative was 25%) of the sum of (i) the participant’s highest aggregate balance of foreign financial accounts and (ii) the value of other includable foreign assets.
FATCA Reporting Regime
The Foreign Account Tax Compliance Act (FATCA), enacted as part of 2010 Hiring Incentives to Restore Employment (HIRE) Act, is a reporting regime designed to ensure US citizens and residents pay appropriate US taxes on specified foreign financial assets. FATCA focuses on foreign financial institutions, which include banks, investment management companies, and insurance companies. While phase-in of the FATCA program is scheduled to begin in 2013, it is not until 2014 that foreign financial institutions will be required to directly report the financial accounts of US taxpayers (and of foreign entities with substantial US ownership) to the IRS. Non-financial foreign entities will also be required to disclose any 10% US owners. FATCA’s direct-to-IRS reporting mechanism, similar to direct W-2 reporting, is regarded as unusually aggressive in the international setting.
Aside from the financial institution reporting, starting in 2012 (with respect to the 2011 tax year) an individual is required to file Form 8938 along with his or her US tax return if three requirements are met:
- The individual is a “specified individual.” Specified individuals include US citizens, US resident aliens (or resident aliens of American Samoa or Puerto Rico), and nonresident aliens who elect to be treated as resident aliens for purposes of filing a joint return.
- The individual has an interest in a specified foreign financial asset. Specified assets include financial accounts maintained by a foreign financial institution and foreign financial assets held for investments not in a foreign account (including, but not limited to, stocks or securities issued by a non-US person, any interest in a foreign entity, or any financial instrument or contract with a non-US issuer or counterparty).
- The aggregate value of the individual’s specified foreign financial assets exceeds a reporting threshold as of the last day of the tax year (or a 50% higher threshold at any time during the tax year). The thresholds are:
a. Unmarried or married but filing separately:
i. Living in the US: $50,000 (or $75,000 at any time during the tax year).
ii. Living abroad: $200,000 (or $300,000 at any time during the tax year).
b. Married and filing jointly:
i. Living in the US: $100,000 (or $150,000 at any time during the tax year).
ii. Living abroad: $400,000 (or $600,000 at any time during the tax year).
1. Taxpayers “living abroad” are US citizen or resident with a tax home in foreign country and either (1) bona ride residence in a foreign country for the entire tax year or (2) presence abroad for at least 330 days of the year.
The FATCA reporting regime places added pressure on US residents and US citizens residing abroad who owe tax under the US’s worldwide taxation system. This category includes individuals who have failed to submit Reports of FBARs.
About Roger Royse
Roger Royse has practiced tax and corporate law since 1984. He founded Royse Law Firm and provides services to a wide spectrum of clients, from newly formed startups to publicly traded multinationals, in a broad range of industries. He also practices in the area of angel and venture fund formation. Roger is widely published on technical tax topics, is a regular speaker for the California CPA Education Foundation and has been an adjunct Professor of Taxation (Property Transactions and International Taxation) for Golden Gate University. Check out the Royse Law Firm blog.