If you are a United States citizen or tax resident living in the U.S. or abroad, you are required to file a U.S. income tax return to report to the IRS any income that you earn or receive from both inside and outside of the United States. This includes but is not limited to wages, investment income from foreign banks and securities, pensions, rental real estate, and/or interest in a foreign corporation or partnership. In addition, you are required to report any financial accounts held outside of the U.S. on the Foreign Bank Account Report (FBAR). Certain other foreign financial disclosures may be necessary. Failure to report income, the FBAR and required foreign disclosures may result in potentially harsh penalties. To further enforce the gathering of this information, the U.S. government implemented the Foreign Account Tax Compliance Act (FATCA) whereby the U.S. works bilaterally with over ninety other countries to identify assets/accounts held in those countries by U.S. taxpayers, essentially leaving “no place to hide money.”
While reporting of foreign income/assets is not a new requirement, it is one area in which many taxpayers are not knowledgeable and not in compliance. In response, the IRS implemented the Offshore Voluntary Disclosure Program (OVDP) several years ago to provide taxpayers with an opportunity to willingly get into compliance and reduce the potentially harsh penalties. However, the OVDP process is very onerous. Recognizing this, the IRS took OVDP a step further, and in 2012 and with revisions in 2014, they provided taxpayers with the option of voluntarily disclosing offshore assets through a “streamlined” program as long as the taxpayer can attest that the failure to disclose previously was “non-willful.” The challenge is that determining “willful” vs. “non-willful” conduct is a legal matter and not easily ascertained. If the taxpayer wrongfully claims “non-willful” status in an attempt to file a streamlined disclosure, the IRS penalties and costs of filing can be shocking.
However, if the taxpayer can rightfully claim “non-willful” status, there are some significant opportunities to the streamlined method. The chart below, while not comprehensive by any means, is a comparison of key differences between the full OVDP and the streamlined filing. Please note that there are further differences in the streamlined process for foreign/non-resident vs. domestic/resident filings.
|Willful vs. Non-willful||Willful||Non-willful|
|Delinquent or Amended Tax Returns Required||8 most recent years||3 most recent years|
|Foreign Bank Account Report (FBAR)||8 most recent years||6 most recent years|
|Offshore Asset Penalty %||27.5%*||5% (domestic only)|
|Income Tax Penalties||Late filing, late payment and accuracy related||None|
*The Offshore Asset Penalty will increase from 27.5% to 50% (beginning August 4, 2014) if the offshore financial institution or facilitator is under FATCA investigation.
Taxpayers must understand that each situation is different and needs to be reviewed on its own. Doing this requires well-versed professionals. With regard to determining “non-willful” status, Kerkering Barberio’s position is that the taxpayer needs an experienced attorney who specializes in these offshore disclosure programs to guide this part of the process. Whether the filing results in a full Offshore Voluntary Disclosure or the streamlined approach, both methods are complex and require a knowledgeable tax professional. Kerkering, Barberio & Co. has the team to do this. If you have questions on Offshore Voluntary Disclosure, streamlined filing or any of the associated issues, please contact Phoebe Trumpler at or Renea Glendinning at or call them at 941-365-4617.