IRS Lets U.S. Residents Use OVDP Streamlined Program But Increases Penalty to 50%

For the first time, the IRS will permit resident U.S. taxpayers to participate in its streamlined filing compliance program, the agency announced June 18.

The change was one of several made to the Service's offshore voluntary disclosure program, including increasing the miscellaneous offshore penalty from 27.5 percent to 50 percent

The IRS announced the streamlined program, which was designed to aid U.S. taxpayers living abroad to come into compliance with reporting obligations, in June 2012.

Eligibility was limited to nonresident taxpayers who could demonstrate a low level of compliance risk and who did not owe more than $1,500 of tax for each of the three years covered by the program. Practitioner response to the streamlined program was initially positive but they soon raised questions about the program's usefulness to taxpayers.

In addition to permitting resident U.S. taxpayers to use the streamlined program, the IRS has also eliminated the $1,500 tax threshold and the risk questionnaire. Taxpayers must certify that previous compliance failures were not willful.

Under the revised program, all penalties will be waived for nonresident U.S. taxpayers and resident taxpayers will be subject only to a miscellaneous offshore penalty equal to 5 percent of the foreign financial assets that gave rise to the tax compliance issue.

OVDP Changes

The most significant change to the OVDP was an increase in offshore penalties from 27.5 percent to 50 percent. According to the IRS news release, the increased penalty applies "if, before the taxpayer's OVDP pre-clearance request is submitted, it becomes public that [the taxpayer's] financial institution" is under investigation by the IRS or Justice Department.

Other changes to OVDP announced by the IRS include requiring more information from applicants, submitting account statements and offshore penalty payment when the OVDP application is filed, permitting taxpayers to submit electronically, and eliminating the existing reduced penalty percentage for non-willful taxpayers.