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Unintentional failure to disclose foreign assets or foreign income such as offshore bank accounts may put US taxpayers in a dilemma. The traditional offshore voluntary disclosure programs (OVDPs) come with a negativism as they often place strict compliance and consequences for such unintentional behavior.

Relief is offered by the new “streamlined” procedures announced by the IRS in June 2014. Aside from being excused from criminal suit, deserving taxpayers might enjoy less penalties, or for some nonresidents, no penalties at all. There are, however, certain requirements before IRS considers the non-disclosure as “nonwillful”.

Read further to determine whether reporting your income and/or assets is best using the traditional OVDP or the revised streamlined procedures.

Adherence to Legal Bases
From 1970 to 1976, reporting of foreign assets or incomes was required. Specific requests to report if such accounts exist was started by IRS in 1976.

In the current U.S. Individual Income Tax Return Form 1040, Schedule B, Interest and Ordinary Dividends, line 7a inquires if an individual has a financial interest or a signature authority over a foreign financial account. If “Yes”, the form asks if you are asked to file FinCen Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

The queries are intended to make taxpayers with foreign account beyond $10,000 anytime during the taxable year to be responsible to file an FBAR. April 15 is the due date for filing for tax years starting on the first day of the year, with a six-month extension up to October 15.

Failure to file an FBAR imposes severe penalties from $10,000 up to $100,000 or 50% of the foreign account balance. IRS recently announced that willful non-filing will not exceed 50% of the over-all balance for all unreported accounts for the years under consideration. For non-willful non-filing, $10,000 per year for all unreported accounts is the maximum penalty.

The OVDP was IRS’s way to encourage reporting of offshore accounts. From March to October 2009, OVDP allowed taxpayers to disclose these accounts and non-disclosures were not served with penalties or criminal prosecutions. An “amnesty” was also provided from February to September of 2011. Then in June 2012, IRS utilized an OVDP without specified closure dates. These procedures resulted to a collection of about $6.5 billion tax and penalties from more than 45,000 taxpayers as of June, of 2014.

Section 6662 of the 2012 OVDP placed excuses from criminal prosecutions for non-compliance. In return, taxpayers have to file amended returns for six to eight years, file non-complied FBARs, and submit other pertinent forms. Taxpayers are also liable to pay a “miscellaneous offshore penalty” computed from the maximum over-all balance of the taxpayer’s assets for a single year.  The penalty is 20% in 2009 OVDP and increased to 27.5% in 2012 OVDP.

But in September 2012, IRS offered a “streamlined” reporting procedure wherein individuals who failed to file foreign tax returns since January 1, 2009 will be required to file only three years back tax returns instead of eight. Only individuals with “low compliance risk” are qualified.

Do-able Requirements for the Streamlined Procedure
To motivate as much offshore accounts holder to file tax returns, the traditional OVDP was discarded by the Service and replaced them with revised streamlined procedures known as Streamlined Domestic Offshore Procedures for residents and Streamlined Foreign Offshore Procedures for nonresidents.

To declare if an individual is low or high compliance risk, taxpayers are required to declare (under penalty of perjury) that their noncompliance was due to negligence or other unintentional mistakes arising from mere misunderstanding of the law. The individual must also be currently free from an IRS examination pertaining any type of audit.

Verification of submitted tax returns requires bank statements and other documents related to foreign financial organizations. These are needed for auditing and for confirmation of the completeness and truthfulness of the submissions.

Avoiding Penalties According to Residency
Taxpayers with residency outside the United States may be excused from all penalties related to their non-filing.

How could a nonresident determine if he is eligible for the streamlined procedures?  He must be a U.S. citizen or a lawful permanent resident (green card holder) who is physically outside the United States for at least 330 days. Section 911 specified that not having an “abode” in the country refers to its home or place of dwelling rather than place of business. It refers to where you sustain your family, economic, and personal engagements.

For non-U.S. citizens or lawful permanent residents, you can be considered a resident for the year through the substantial-presence test where an individual present in the U.S. for at least 31 days in a year and the total days present plus one-third of the days present in the following year, and one-sixth of the days present in the previous year is at least 183.

Requirements for “non-residents” to be waived of penalties include:

• Amended tax returns
• Indicate “Streamlined Foreign Offshore” in red on top of the first page of each return
• Signed and duly accomplished IRS Form 14653 with a detailed explanation of the reason/s for noncompliance
• Payments of tax and interests
• Individual Taxpayer Identification Number
• E-file delinquent FBARs
• May request extension in consideration to retirement or savings plans
• Send all documents in paper form and payments to Internal Revenue Service

Resident taxpayers of the United States who have not failed to submit to file returns in previous years may be eligible for the Domestic Streamlined Procedure.

Such eligibility excuses a resident from criminal and civil penalties except for a fixed 5% penalty based on the maximum six-year value of his financial assets. Failure to report the income from an asset on Form 8938 also entails a 5% penalty. No penalty will be imposed on unreported foreign real estate not held by an undisclosed foreign entity.

Requirements for domestic streamlined procedures include:

• Amended tax returns
• International information forms (even those not necessary for Form 1040)
• Indicate “Streamlined Domestic Offshore” in red on top of the first page of each return
• Completed and signed Form 14654 with detailed explanation of the reason/s for noncompliance
• Payments of tax and interests
• E-file delinquent FBARs
• May request extension in consideration to retirement or savings plans
• Send all documents in paper form and payments to Internal Revenue Service

Solving Delinquency
Filing delinquent FBARs can be without penalty if the taxpayer is not currently under IRS audit or has not been contacted by the IRS regarding the non-filing. This can be done by selecting the “Other” option in the BSA E-Filing system and indicating that certain criteria have been met.

The same requirement is called for failure to attach a form in your returns. Statement of the factual reasons must be attached to the documents to be submitted (except for Forms 3520 and 3520-A).

Summary
Strict reporting procedures call for wiser steps to undertake for both residents and non-residents U.S. taxpayers. IRS provides OVDP as the procedure to undertake but those wanting to avail of the streamlined provisions must do so promptly and accordingly in order to minimize or even avoid penalties.