“Penalties may be eliminated.”
In Tax Tip 11-05 we reported that the Internal Revenue Service had introduced the 2011 Offshore Voluntary Disclosure Initiative (“OVDI”) in an attempt to bring U.S. persons (no matter where they live), hiding income-producing assets offshore, into the tax system. This program ends on August 31, 2011 and may be the last U.S. “amnesty” program before the 2010 Hiring Incentives to Restore Employment (HIRE) Act forces non-U.S. financial institutions to “turn in” their U.S. clients in 2013 (see Tax Tip 11-06).
Many U.S. taxpayers are leery about the OVDI given the inflexible penalty of 25% of the highest balance in a foreign account. The more informal process of bringing filings up to date for “innocent” non-compliant filers usually results in no penalties but does not come with any guarantees. The battle of certainty-with-penalty versus uncertainty-but-no-penalty and the August 31, 2011 deadline for the OVDI has made deciding which method to use difficult.
There may be some relief. On June 2, 2011 the IRS updated their Frequently Asked Questions and Answers (FAQ) to imply that penalties may be eliminated (under the informal route) or reduced to 5% of the highest balance in a foreign account (under the OVDI), where there was no willful intent not to comply.
Question 51.1 of the FAQ describes a situation where a U.S. taxpayer did not report their foreign source income on their U.S. return and did not file the required Foreign Bank Account and Financial Report (FBAR). When the returns were amended to include the omitted income and the FBARs were filed, there was still no U.S. tax owing. The answer, in response to whether the taxpayer should use the informal route instead of the OVDI was that, if the corresponding failure to file the FBAR was not a willful violation and the taxpayer had a reasonable cause for not filing, the IRS will not impose the legislated penalty of $10,000 per omitted form under the informal program. If the OVDI was used, the penalty of 25% of the highest account balance (which replaces the legislated penalty of $10,000 per late filed form) might be reduced to 5%.
In their response to question 52, the IRS states that U.S. taxpayers who were fully compliant in Canada but failed to file any U.S. returns would be subject to a reduced penalty of 5% of the highest foreign balance under the OVDI if their U.S. source income was less than $10,000.
It seems that “innocent” non-compliant U.S. taxpayers may now become compliant with little or no penalties. However, there is still uncertainty as to which route is best so professional advice is important..
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.