The Internal Revenue Service has announced major changes in its offshore voluntary compliance programs, providing new options to help both taxpayers residing overseas and in the US who unintentionally fail to disclose their offshore assets.

The Internal Revenue Service has announced major changes in its offshore voluntary compliance programs, providing new options to help both taxpayers residing overseas and those in the US who unintentionally fail to disclose their offshore assets.

The IRS said it believes the move will significantly increase the number of people coming forward to report on their undisclosed foreign accounts.

The US revenue service said it was expanding the streamlined filing compliance procedures that were announced in 2012 to cover a much broader group of US taxpayers who have failed to disclose their foreign accounts but were not willfully evading their tax obligations. The agency said it will also be reshaping the terms for taxpayers participating in the Offshore Voluntary Disclosure Program (OVDP).

The changes include eliminating a requirement that the taxpayer has $1,500 or less of unpaid tax per year and doing away with a questionnaire that applicants were required to complete. For eligible US taxpayers residing outside the US, all penalties will be waived, while for those US taxpayers residing in the US, the only penalty will be a miscellaneous offshore penalty equal to 5 per cent of the foreign financial assets that gave rise to the tax compliance issue.

“In this rapidly changing environment, we listened to feedback from the tax community as well as the National Taxpayer Advocate about our voluntary programs. We have made important adjustments to provide opportunities for all US taxpayers to come in, including those who are not willfully hiding assets,” said IRS Commissioner John Koskinen.

Under the new rules, taxpayers that choose not to reveal their accounts could face far stiffer penalties. The IRS said it was increasing the offshore penalty percentage from 27.5 per cent under the previous rules to 50 per cent if a tax payer applies to the OVDP after it becomes public that a financial institution where the taxpayer holds an account is under investigation by the US authorities.

The OVDP allows individuals to avoid criminal prosecution if they disclose their foreign accounts and pay a substantial penalty. The current OVDP was launched in 2012 and is the successor to prior voluntary programs offered in 2011 and 2009. Koskinen said that since the launch of the first program over 45,000 taxpayers have come into compliance voluntarily, paying about $6.5 billion in taxes, interest and penalties.

“These changes will help focus this program on people seeking certainty and relief from criminal prosecution. From now on, people who want to participate in this program will have to provide more information than in the past, submit all account statements at the time they apply for the program, and in some cases pay more in penalties than they would have done had they entered this program earlier,” said Koskinen.

FATCA

The move comes less than two weeks before the implementation of the Foreign Account Tax Compliance Act. Set to take effect on July 1, it requires all financial institutions outside of the US to regularly submit information on financial accounts held by US persons to the IRS. When the act comes into force, those who are not compliant will suffer a 30 per cent withholding tax on income and gross proceeds, as of January 2015.

According to Treasury Department figures published in the Federal Register last year, 3,000 US citizens handed in their passports - three times the average of the past five years. While the Treasury has given no reasons for why they handed back their passports and green cards, many observers believe that the dramatic spike over previous years is due to them wanting to avoid paying taxes as a result of FATCA.

The IRS has been criticized for coming down disproportionately hard on taxpayers with small accounts and on those that may not understand the filing requirements.

Koskinen said that the aim was to get people to disclose their accounts, pay the tax they owe and get “right” with the government.

“At the same time, for important categories of these non-willful people with offshore issues, a compliance regime that is too harsh won’t net the desired result,” he said.