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On June 18, 2014, the U.S. Internal Revenue Service (“IRS”) announced changes to the 2012 Offshore Voluntary Disclosure Program (“OVDP”) and the Non-Resident U.S. Taxpayer Disclosure Program (now referred to as the “Streamlined Filing Compliance Procedures”). The changes are intended to ease burdens and help taxpayers come into compliance by extending the eligibility requirements for the Streamlined Filing Compliance Procedures to a wider population of U.S. taxpayers living outside of the United States, as well as to certain U.S. taxpayers residing in the United States. Further, the expanded Streamlined Filing Compliance Procedures eliminate the requirement that the taxpayer have no more than $1,500 of unpaid U.S. taxes per year. Conversely, for the OVDP, in circumstances where a taxpayer holds an account at a financial institution, or was assisted by a third party, that is being investigated by the IRS or the Department of Justice (“DOJ”), and that investigation becomes public knowledge before the date the taxpayer submits the request for preclearance, the taxpayer will be subject to a higher offshore penalty of 50%. The IRS has also revised the submission procedures for delinquent FBARs and delinquent international information returns. Background The current OVDP was launched in 2012 and is a successor to prior voluntary disclosure programs offered in 2009 and 2 011. The amendments to the OVDP and the Streamlined Filing Compliance Procedures are intended to reflect the growing awareness among U.S. taxpayers of their U.S. tax obligations related to foreign assets, as well as providing a new avenue of compliance for U.S. taxpayers whose failure to disclose foreign assets was non-willful. In addition, on July 1, 2014, the new information reporting regime introduced by the Foreign Account Tax Compliance Act (“FATCA”) will come into effect. Changes to the Streamlined Filing Compliance Procedures The changes to the Streamlined Filing Compliance Procedures will broaden the eligibility requirements for the program and accommodate a wider group of U.S. taxpayers who have unreported financial accounts. In particular, the changes include:

  • eliminating the requirement that the applicant be a non-resident of the United States;
  • eliminating the requirement that the applicant have at most $1,500 of unpaid U.S. taxes per year;
  • eliminating the required risk questionnaire.

In certain cases, the Streamlined Filing Compliance Procedures are available for taxpayers who have previously filed delinquent or amended returns (so called “quiet disclosures”), although penalty assessments previously made with respect to those filings will not be abated. Taxpayers applying for the Streamlined Filing Compliance Procedures will be required to certify that previous failures to comply were due to non-willful conduct. Non-willful conduct is defined as 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. For non-U.S. resident taxpayers eligible for the Streamlined Filing Compliance Procedures, all penalties will be waived. For U.S. resident taxpayers eligible for the Streamlined Filing Compliance Procedures, the IRS will apply a miscellaneous offshore penalty equal to 5% of the highest aggregate value of the foreign financial assets that give rise to the tax non-compliance. The penalty will be calculated by aggregating the year-end account balances and year-end asset values for the prior 6 years, and selecting the highest aggregate balance/value from among those years. An asset will be included in the 5% penalty if the asset should have been reported on an FBAR (now, FinCEN Form 114), Form 8938 or if the asset was properly reported on the FBAR and/or Form 8938 but gross income in respect of the asset was not reported on the income tax return. Taxpayers who have submitted a voluntary disclosure letter prior to July 1, 2014, but who have not yet executed an OVDP Closing Agreement (IRS Form 906), may be able to qualify for the favorable penalty structure of the Streamlined Filing Compliance Procedures. In these cases, taxpayers will be required to certify that previous failures to comply were due to non-willful conduct and will be required to submit all documents required under the voluntary disclosure program in which they are currently participating (2009 OVD P, 2011 OVDI, or 2012 OVDP). The IRS will consider the request in light of all the facts and circumstances, and must agree that the available information is consistent with the taxpayer’s certification of non -willful conduct. Changes to the OVDP The changes to the OVDP will increase the documentation requested from taxpayers seeking to apply to the OVDP, requiring applicants to provide as part of the preclearance request identifying information for all financial institutions at which undisclosed assets were held, and identifying information for all foreign and domestic entities through which the assets were held. In addition, the change s to the OVDP include:

  • eliminating the existing reduced penalty percentage (the 12.5% and the 5% penalties specified in the OVDP Frequently Asked Questions and Answers) for certain non-willful taxpayers;
  • requiring taxpayers to submit all account statements and pay the offshore penalty when submitting the OVDP package following receipt of the preliminary acceptance letter;
  • enabling taxpayers to submit voluminous records not requiring original taxpayer signature electronically rather than on paper;
  • increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or DOJ; is cooperating with the IRS or DOJ; or has been identified in a court-approved issuance of a summons seeking information about U.S. taxpayers who may hold financial accounts. The amended OVDP Frequently Asked Questions and Answers contain a list of ten foreign financial institutions meeting these criteria: (i) UBS AG; (ii) Credit Suisse AG, Credit Suisse Fides, and Clariden Leu Ltd.; (iii) Wegelin & Co.; (iv) Liechtensteinische Landesbank AG; (v) Zürcher Kantonalbank; (vi) swisspartners Investment Network AG, swisspartners Wealth Management AG, swisspartners Insurance Company SPC Ltd., and swisspartners Versicherung AG; (vii) CIBC FirstCaribbean International Bank Limited, its predecessors, subsidiaries, and affiliates; (viii) Stanford International Bank, Ltd., Stanford Group Company, and Stanford Trust Company, Ltd.; (ix) The Hong Kong and Shanghai Banking Corporation Limited in India (HSBC India); and (x) The Bank of N.T. Butterfield & Son Limited (also known as Butterfield Bank and Bank of Butterfield), its predecessors, subsidiaries, and affiliates.

Supplemental Guidance Issued by the IRS As part of the June 18 announcement, the IRS has issued supplemental guidance on the changes to the OVDP an d Streamlined Filing Compliance Procedures, including a revision of the OVDP Frequently Asked Questions and Answers and the Streamlined Filing Compliance Procedures Eligibility Requirements for U.S. Taxpayers residing in the United States and abroad. What Happens Next? It is critical that – as soon as possible, and in a ny event before July 1, 2014 – all U.S. taxpayers engaged in proceedings to regularize their undisclosed assets (regardless of whether they are filing pursuant to the OVDP, the Streamlined Filing Compliance Procedures or even if they have previously made a “quiet disclosure”) consider the potential consequences of these changes. Taxpayers who have not yet taken steps to regularize their offshore assets should immediately seek advice regarding the impact of these developments and how these changes may affect their position.


Marie-Thérèse Yates is a partner in the Wealth Management Group of Baker & McKenzie in Zurich. She frequently speaks on US tax and wealth planning matters, including related compliance issues, at conferences on international private banking and wealth management matters. Ms. Yates' practice covers international tax and wealth planning matters, with a focus on US tax, including the taxation of non-US trusts with US beneficiaries, US tax regularization (voluntary disclosure) and the relinquishment of US citizenship and US green card status. She also has experience advising non-US financial institutions on the Foreign Account Tax Compliance Act as well as on US regulatory matters, including US securities law issues.

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