Reflections on the End of the US “Offshore Voluntary Disclosure Program”
We recently sat down Mr. Patrick Evans, an American living in Switzerland, who is a CPA and runs his own practice here in Switzerland. His goal has always been to help fellow US taxpayers living in Switzerland and abroad with their US-tax compliance. America is typically a core subject, but on this occasion, we got on the subject of the upcoming termination of the IRS’s OVDP, or their “Offshore Voluntary Disclosure Program”.
For those unfamiliar with the OVDP, the US Internal Revenue Service describes it as “a voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to willful failure to report foreign financial assets and paying tax due in respect to those assets”. They continue that it “is designed to provide taxpayers with such exposure (1) protection from criminal liability and (2) terms for resolving their civil tax penalty obligations”.
The problem is, as with much of what the IRS and Treasury Department shares, it scares stiff any US person, or non-US person with US-tax exposure, thinking they haven’t done the reporting of their offshore investments correctly. That’s not even mentioning the expense of lawyers and CPAs that may be needed to help the process should one go down this path.
The good news is that there is something called the SFCP, or the “Streamlined Filing Compliance Procedures”, that, depending on the situation, offers an easier, less expensive and less demanding alternative getting a taxpayer up-to-speed with their reporting obligations.
We felt that this would be useful information to share with our readers, so we asked Patrick a few questions to help us understand the SFCP program a bit better.
Global Gold: What is the difference between OVDP and SFCP?
Patrick: I frequently speak with U.S. taxpayers who haven’t filed U.S. taxes since they have been living abroad and they are afraid of being arrested, having their bank accounts closed and paying an enormous amount in back taxes, penalties and fines. And why wouldn’t they, as the US Internal Revenue Service is quite clear on the penalties.
In 2012, the Internal Revenue Service (IRS) recognized there was problem with US taxpayers living abroad and created two compliance programs: one was called the Offshore Voluntary Disclosure Program (OVDP), and the other the Streamlined Filing Compliance Procedures (SFCP).
The programs primarily differentiate in the context of who qualifies and the penalty structure. Qualification for each program depends on whether the taxpayer willfully or non-willfully failed to comply with their U.S. tax obligations. The OVDP program is intended for individuals who willfully didn’t comply with their tax obligations, whereas the SFCP program is intended for individuals who non- willfully failed to do so.
Accordingly, the penalties under the OVDP program are significant, while the SFCP program has a much less severe penalty structure or only requires the taxpayer to pay interest on their late payments if tax is owed as differentiated by the domestic or foreign procedures.
How do I know if my failure to comply would be considered willful or non-willful?
You are “willful” if you knew you were supposed to report foreign assets and income but chose not to. On the other side, you are “non-willful” if you did not know you had a reporting requirement and unintentionally didn’t report your foreign assets and income. Many people living abroad will qualify for the SFCP program because they weren’t aware they had a filing requirement since they didn’t live in the U.S. and the U.S. is the only developed nation in the world with a citizenship-based taxation system vs. a residency-based, or a hybrid system.
What are the requirements of the SFCP program?
The SFCP requires taxpayers to back file tax filings for the previous 3 years (for which an extension hasn’t been filed), foreign bank account reports for the previous 6 years, pay any tax due and submit a “certification statement” as to why they didn’t file taxes in the past.
Also, there are two programs under SFCP:
- Streamlined Foreign Offshore Procedures: for individuals that meet the requirements of being a non-resident of the United States as being outside the country for 330 full days.
- Streamlined Domestic Offshore Procedures: for individuals that don’t meet the requirements of being a non-resident of the United States as being outside the country for 330 full days. Individuals in the domestic program must pay the miscellaneous Title 26 Offshore Penalty of 5% of the highest aggregate account balance for the covered 6-year FBAR period and the 3-year tax return period.
What facts need to be included in the Certification Statement (Form 14653) for Streamlined Foreign Offshore Procedures?
Form 14653 must be included in the filing package for the SFCP program and this is where the individual discloses why they didn’t file taxes in previous years (as based on their non-willful behavior). The IRS asks taxpayers to “include the whole story including favorable and unfavorable facts.”
The taxpayer should disclose:
- Personal background (when they moved abroad, etc.)
- Financial background (when they started working abroad, etc.)
- Source of funds in each financial account (where the money was derived from, e.g. job, inheritance, etc.)
- Contact with the account including withdrawals, deposits, and decisions regarding investment or management
How stringent is the IRS and are there follow-ups?
The IRS has become more stringent over the past several years. In 2016, they revised Form 14653 requesting that taxpayers provide more detailed information as to why they didn’t file taxes in the past. This is where speaking with a tax professional will add significant value and can assess whether you qualify or not. Normally, if you use a competent tax advisor who specializes in this area, you will not have any issues. Taxpayers whom I have assisted with the SFCP program have not had follow-ups, as I thoroughly review their situation in detail before we start the process to ensure they are successful.
However, I have had clients who entered the program by themselves and were rejected or faced penalties as the IRS rejected their claims. I have also had clients who inadvertently entered the OVDP program and the IRS penalized them severely, when they could have qualified for the SFCP program instead and would have paid no fine. This is where working with an advisor can save you literally tens of thousands of dollars (if not more). I can’t stress this enough: you should not enter into a compliance program without speaking to a professional, as mis-steps could cause significant issues if you are not fully aware of what you are doing.
Once I mail my taxes off via the SFCP program, how long will it take for them to be processed and approved?
This is where things get weird. The IRS will not actually send you correspondence to confirm that your taxes were approved. In the tax business, the saying “no news is good news” is particularly true. If you do receive a notice, it will likely be a rejection, request for more information, or notification that they adjusted your tax return and/or amount of the tax owed based on specific reasons.
However, based on my experience, they are normally able to process returns within 2 – 4 months from the date of mailing them. You should always keep proof of tracking information when you mail your tax filings - and any correspondence to the IRS for that matter - so you can prove that you did send the information and that they received it.
Does Forgetting to File qualify as non-willful behavior?
It would not qualify, as forgetting to file would not demonstrate that an individual wasn’t aware they had to file. It actually would prove that they were aware and didn’t. However, if an individual received information from an embassy, tax advisor, or other source saying they didn’t have to file, the individual relied on that information, and then later found out there was a filing requirement, this would likely qualify as non-willful. The individual could prove that they received bad information and relied on it.
A common example of this is when taxpayers earn less than $100,000 and are under the assumption that since the income would be excluded via the foreign earned income exclusion, they don’t need to file taxes. This is incorrect, and taxes should have been filed. But this would be a case to be filed through the SFCP program, making sure to indicate where they received the misleading information from.
Can I enter the SFCP program if I filed tax returns but made mistakes on them?
Normally, you would be able to enter the SFCP program and file amended returns for items which you weren’t aware needed to be declared and want to come into compliance with. Common examples of this are non-qualified retirement plan contributions, passive foreign investment company disclosure, foreign corporation disclosure, and FATCA disclosure. However, you will need to provide a statement as to why the items weren’t declared previously and you should consult with a CPA or attorney before entering a compliance program so your individual circumstances can be reviewed.
When will the SFCP and OVDP programs be terminated?