The IRS brought the Offshore Voluntary Disclosure Program (OVDP) to a close on September 28th, 2018. This program allowed U.S. taxpayers to bring foreign assets into U.S. tax compliance, pay for civil tax and penalties while avoiding harsh criminal referrals. This caused uncertainty for taxpayers with offshore assets, including savings accounts, businesses, trusts and estates who missed the deadline.
Fortunately, the window has not been closed for voluntary disclosures, but the rules have changed. The IRS released the new procedures for voluntary disclosures received after September 28th, 2018. Some changes to guidelines include increased penalties and a shortened disclosure period from eight years down to six. Most importantly, taxpayers who come forward voluntarily may still be able to avoid criminal prosecution.
Some penalties increased
The IRS has the freedom to impose higher penalties, but the total cost to taxpayers has not been disclosed. An agent can apply several penalties and has the power to choose the cost of some of those penalties depending on the circumstances.
It is clear that taxpayers face an increase from a 20 percent accuracy-related penalty to a 75 percent fraud penalty. People who neglected to disclose assets for several years will need to pay the penalty for the year with the highest tax liability.
Foreign Bank Account Reports (FBAR) penalties have changed. Typically, taxpayers face a willful FBAR penalty of 50 percent applied to the year with the highest offshore asset account balance during the disclosure period.
A litany of additional penalties may apply
IRS agents have quite a bit of wiggle room when it comes to what penalties to apply. IRS agents can alter willful FBAR penalties based on the individual’s circumstances, however, you may also choose to ask for a non-willful FBAR penalty. Additionally, IRS agents may choose to apply civil fraud penalties to more than one year during the disclosure period. While failure to file penalties do not automatically apply, an IRS agent can impose them. Unspecified penalties could also apply for other unpaid tax issues, such as business or estate taxes.
How new procedures could benefit you
The release of new procedures from the IRS gives taxpayers higher transparency and some relief in knowing they can safely disclose offshore assets without criminal prosecution. If you are unsure how to handle a foreign bank account or another asset, you can work with a tax law firm to find out the potential penalty, tax and interest. Together, you and a professional can determine the next best steps.