Non-Compliant US Taxpayers Take Note!
IRS Grants Significant Penalty Relief and Extensions Under the 2011 OVDI in Certain Circumstances
On June 2, 2011 the IRS updated the 2011 OVDI frequently asked questions webpage. FAQ 25, 51, and 52 were modified to allow an extension past the August 31, 2011 deadline and a significant reduction in penalties if certain elements are satisfied. The following is an overview of the modifications to the 2011 OVDI:
1. FAQ 25.1 allows a taxpayer to request an extension to complete his or her submission if the taxpayer can demonstrate a good faith attempt to comply with the August 31, 2011 deadline. Requests for the 90 day extension must include a statement of missing items, the reasons why they are missing, and the steps taken to secure them.
2. FAQ 52 now provides for significant offshore penalty relief for taxpayers who have resided in a foreign country (such as Canada), have been compliant with the tax laws in that foreign country, and have US source income of $10,000 or less per year. For these taxpayers, the 25% penalty (of the highest aggregate balance in foreign bank accounts/entities) shall not apply and will be eligible for the reduced 5% penalty. In addition, for these taxpayers only, the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the US or the country of residence. This exception applies if the income tax returns filed in the foreign country included the offshore-related taxable income that was not reported on the US tax return.
3. FAQ 51.1 provides examples where a taxpayer might consider opting out of the civil settlement structure of the 2011 OVDI. These examples include (1) unreported income but no tax deficiency, (2) unreported income and failure to file FBAR, and (3) unreported controlled foreign corporation. If the taxpayer opts out, penalties are significantly reduced and if reasonable cause can be proven then there is a possibility of no FBAR penalty.
4. Lastly, the IRS is accepting statements from taxpayers who participated in the 2009 OVDP and whose cases have been resolved and closed with a Form 906 closing agreement who believe the facts of their case qualify them for the 5% reduced penalty. Upon receipt, the case will be re-examined and a determination will be made.
The new provisions in the FAQs are a welcome relief to both taxpayers and practitioners. As stated in our May 27, 2011 blog, the previous penalty structure was extremely punitive for the non-willful US taxpayer. US citizens living abroad who have been non-compliant need to act quickly and take advantage of the new penalty structure. To reiterate the words of Commissioner Shulman, “As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing. This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them. The risk of being caught will only increase.”
Accordingly, US citizens resident in Canada should strongly consider this new program.
