On September 1, the IRS unveiled the details of a new program to encourage more offshore account holders to file U.S. income tax returns and the associated Reports of Foreign Bank and Financial Accounts (FBAR). This program is a departure from the current Offshore Voluntary Disclosure Program and its predecessors in at least one significant aspect – there are no mandatory penalties.
Taxpayers must meet a number of qualifications to take advantage of the initiative and avoid penalties. The new procedure is limited to non-residents subject to U.S. filing requirements who have not been filing U.S. income tax returns. Dual citizens meeting the non-resident, non-filing requirements also may participate. Qualifying taxpayers must have lived abroad since January 1, 2009 and not filed a U.S. tax return in that time.
Eligible taxpayers also must present a low level of compliance risk. All applications will be reviewed and the IRS will determine whether the taxpayer presents a low compliance risk. The determination will be made on the basis of returns filed under the procedure and a two-page questionnaire that each applicant must complete. High risk factors include material economic activity in the United States, ongoing IRS investigation or audit, and previously assessed FBAR penalties.
Applications will be processed in a streamlined manner if no high risk factors are present and the returns show tax due of less than $1,500 per year. The low tax liability may be within reach for many non-resident taxpayers if they are eligible for the foreign earned income and foreign housing cost exclusions under IRC Section 911.
Two important notes for taxpayers who may be considering this program. First, participation in the program does not provide protection from criminal prosecution. Second, once a taxpayer files a submission with this procedure they will no longer be eligible to participate in the Offshore Voluntary Disclosure Program (OVDP). Taxpayers interested in this program should contact a well-qualified tax professional to discuss their facts and the details of this program.