In recent years, the IRS has devoted vast resources to compel taxpayers to report and pay taxes on offshore assets. As a result of these efforts, the IRS has recovered billions in unpaid taxes. Perhaps the most widely-known tool the IRS uses is the Offshore Voluntary Disclosure Program, or OVDP. When taxpayers submit to the OVDP, they will have to file up to eight years of amended tax returns and Foreign Bank and Financial Account (FBAR) statements, while paying taxes, interest and a penalty of 27.5%, or up to 50%, of the highest balance of these accounts.
Another less publicized but still powerful tool at the IRS's disposal is the Streamlined Offshore Procedure. Qualifying taxpayers with undeclared foreign holdings could use either the Streamlined Domestic Offshore Procedure or the Streamlined Foreign Offshore Procedure. For taxpayers with undeclared foreign income, the Streamlined Domestic or Foreign Offshore Procedure may be an advantageous method to report this income. On the other hand, using these streamlined methods could have unintended negative consequences.
How do the Streamlined Offshore Procedures differ from the OVDP?
With the Streamlined Offshore Procedure, qualifying taxpayers must provide the following:
- Amended tax returns for the three most recent years in which they may have failed to report offshore income
- File any delinquent Foreign Bank and Financial Account (FBAR) statements for each of the past six years
- Pay a five percent "miscellaneous offshore penalty" tax. (Foreign filers do not have to pay this penalty)
The disclosures and penalties involved in the Streamlined Offshore Procedures are far less onerous than the penalties associated with OVDP. There are, however, critical differences that may make the Streamlined Offshore Procedures less attractive than the OVDP. When a taxpayer complies with the terms set forth in the OVDP, the IRS will not take further action. With a Streamlined Offshore Procedure, however, taxpayers have no such assurances, and could be subject to an audit.
In fact, if the IRS finds that the taxpayer willfully withheld information in an audit, the taxpayer could face substantial penalties and conceivably, criminal prosecution. Taxpayers who comply with the Streamlined Offshore Procedure must truthfully state the following or face the possibility of perjury charges.
- The reason for failing to declare the income
- How these failures were discovered
- The name of any tax professionals the taxpayer relied upon
Consequently, if the IRS finds any tax liabilities in an audit, the IRS may be inclined to believe such discrepancies were not inadvertent but were the product of an intentional effort to deceive the IRS. In short, the Streamlined Offshore Procedures may be appropriate in some cases, but taxpayers considering this option should tread carefully.
If you have undeclared foreign assets, it is critical to retain the services of tax attorneys who fully understand the best course of action for your specific situation. Based in Manhattan, the lawyers of Goldburd McCone LLP provide exceptional representation to taxpayers across the United States and the world.
Sources: Beware IRS Audits of Offshore Account Filings, Forbes.com, by Robert W. Wood, January 9, 2017, Eligibility for the Streamlined Domestic Offshore Procedures, IRS.com