IRS Changes to Offshore Voluntary Disclosure Programs
In 2014, the IRS made major changes to the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Voluntary Disclosure Program (SDP).
Note: These programs are not available to taxpayers already under an IRS audit that has been transferred to the IRS Criminal Investigations unit or whose non-compliance has already been identified by the IRS.
New Offshore Compliance Options
The new IRS 2014 offshore compliance programs offer taxpayers in a variety of circumstances the opportunity to disclose and fix prior tax non-compliance. The IRS offers three options:
- The Delinquent Information Return Program
- The New Streamlined Disclosure Program (SDP)
- For U.S. resident and non-resident taxpayers whose conduct is non-willful
- The 2014 Offshore Voluntary Disclosure Program (OVDP)
- For those who knowingly violated the law
A taxpayer’s individual facts and circumstances will determine which of the three options should be selected. It is important to discuss these in honesty and detail during your consultation.
FATCA Overview
FATCA (Foreign Account Tax Compliance Act) was enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts.
FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
FFIs are encouraged to:
- Register directly with the IRS to comply with the FATCA regulations (and FFI agreement, if applicable), or
- Comply with the FATCA Intergovernmental Agreements (IGA) treated as in effect in their jurisdictions.
FATCA Compliance Requirements
Under FATCA, to avoid being withheld upon, FFIs may register with the IRS and agree to report to the IRS certain information about their U.S. accounts, including accounts of certain foreign entities with substantial U.S. owners.
FFIs that enter into an agreement with the IRS to report on their account holders may be required to:
- Withhold 30% on certain payments to foreign payees if such payees do not comply with FATCA.
FATCA Exemptions
The FATCA regulations exempt many categories of FFIs from the requirement to register and report, including:
- Most governmental entities
- Most non-profit organizations
- Certain small, local financial institutions
- Certain retirement entities
Examples of FFIs
FFIs include, but are not limited to:
- Depository institutions (e.g., banks)
- Custodial institutions (e.g., mutual funds)
- Investment entities (e.g., hedge funds or private equity funds)
- Certain types of insurance companies that have cash value products or annuities
Consequences of Non-Compliance
Unless otherwise exempt, FFIs that do not both register and agree to report face a 30% withholding tax on certain U.S.-source payments made to them.
An FFI that registers on the FATCA Registration Website (“Website”), upon approval, will receive a Global Intermediary Identification Number (GIIN) from the IRS, unless the FFI is treated as a Limited FFI.
Frequently Asked Questions
What is the difference between the OVDP and the Streamlined Disclosure Program?
The OVDP is designed for taxpayers who knowingly violated U.S. tax laws, while the Streamlined Disclosure Program is intended for taxpayers whose non-compliance was non-willful. The streamlined program also distinguishes between U.S. residents and non-residents.
Can I participate in these disclosure programs if I’m already under IRS audit?
No, taxpayers who are already under IRS audit, especially if the case has been referred to the Criminal Investigations unit, are ineligible to use the voluntary disclosure programs.
What is FATCA and how does it affect foreign financial institutions?
FATCA, the Foreign Account Tax Compliance Act, requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers. Non-compliance can result in a 30% withholding tax on U.S.-source payments.
Are all foreign financial institutions required to register under FATCA?
No, several categories of FFIs are exempt from FATCA registration, including most government entities, non-profits, local financial institutions, and certain retirement funds.
What are the penalties for FFIs that fail to comply with FATCA?
Foreign financial institutions that do not register with the IRS and agree to report required information may be subject to a 30% withholding tax on specific U.S.-source payments.