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IRS Continues Pursuit of Undisclosed and Unreported Financial Accounts - Important New Developments

On Wednesday, the IRS announced substantial expansions of the 2012 Streamlined Filing Compliance Procedures and the 2012 Offshore Voluntary Disclosure Program (OVDP). 

The IRS first designed the 2012 Streamlined Filing Compliance Procedures to provide individual taxpayers who accidentally failed to report and pay tax on certain foreign financial assets with a clear pathway for filing amended or delinquent returns and for resolving tax and penalty obligations with the IRS. The IRS announcement substantially expanded the availability of relief under this program.

For example, the new procedures now accommodate U.S. residents who have unreported foreign financial assets, whereas the 2012 procedures were only available for non-resident, non-filers. In addition, the new procedures no longer restrict taxpayers who have over $1,500 of unpaid tax per year from qualifying for relief, and eliminate the risk assessment process associated with the 2012 streamlined filing compliance procedures. Finally, taxpayers who wish to take advantage of the streamlined procedures must certify that previous failures to disclose and pay tax on foreign financial assets were not willful.

As far as penalties are concerned, the new procedures waive the failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties for taxpayers who reside outside of the U.S. who meet the streamlined procedure’s requirements. Taxpayers who reside in the U.S. will be subject to a miscellaneous offshore penalty equal to 5% of the foreign financial assets that gave rise to the compliance issue. 

OVDP is similar to the Streamlined Procedures, but it is specifically tailored for those individuals who are worried about criminal liability in addition to substantial civil tax penalties and liability with respect to their foreign financial assets.

The new changes to the OVDP are effective for all new submissions made on or after July 1, 2014. These changes include requiring additional information from taxpayers who apply for OVDP and an increased offshore penalty of 50% (up from 27.5%) if it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice before the taxpayer starts the OVDP process. In addition, all taxpayers are required to submit account statements and pay the offshore penalty at the time of the OVDP application. Finally, the reduced 5% penalty percentage for non-willful taxpayers is eliminated as these taxpayers will not be covered by the expanded Streamlined Procedures.

Based on the IRS’ announcement and the fact that the Foreign Account Tax Compliance Act (FATCA) will begin requiring foreign financial institutions to report overseas accounts held by U.S. persons to the IRS effective July 1, it is a good time to evaluate whether you have any outstanding tax compliance issues with respect to your foreign financial assets.

Also, if you have already started the OVDP process by making an OVDP pre-clearance submission but have not yet executed closing agreements, you may be able to qualify under the new Streamlined Filing Compliance Procedures so that you would be subject to the 5% miscellaneous offshore penalty rather than OVDP penalties.

© 2020 Varnum LLPNational Law Review, Volume IV, Number 171


About this Author

Kaplin Jones, corporate attorney, Varnum

Kaplin leads the Corporate Practice Team and advises clients regarding business formation and transactions, including choice of entity, joint ventures and LLCs, mergers and acquisitions, private equity, shareholder and partner disputes, and tax planning. He structures tax-free reorganizations and like-kind property exchanges, phantom stock and deferred compensation plans for executives, and advises tax-exempt and nonprofit corporations.

In 2014, Kaplin led clients to two significant wins in the Sixth Circuit Court of Appeals: one holding that a client could deduct...

Thomas J. Kenny, Varnum, Tax Litigation Attorney, Franchise Income Lawyer


om is a partner on the firm's Tax Practice Team. His practice includes civil and criminal tax litigation. Previously employed by the Department of Attorney General, Tom acted as legal counsel to the Department of Treasury in litigation matters before the Michigan Tax Tribunal, Court of Claims, Court of Appeals and Supreme Court. Prior to his employment with the Michigan Attorney General, he was an assistant prosecuting attorney in Detroit and handled criminal litigation and appeals.

Tom's tax practice focuses on the representation of Fortune 1000 companies in State and Local Tax (SALT) litigation, which includes sales, use, corporate income, motor fuel, tobacco, real and personal property and Michigan Business Tax matters. He has represented clients before administrative agencies and courts in Michigan and around the country. The multistate representation includes tax cases in Indiana, New York, Ohio, Pennsylvania and Tennessee.

Michael J. Mulcahy, estate tax attorney, Varnum

Mike concentrates on estate planning, estate and trust administration, and estate taxation. He is frequently called upon as a valuation expert and spends a great deal of time reviewing and critiquing appraisals of closely held businesses and real estate. Prior to entering private practice, Mike worked for the Internal Revenue Service in the estate and gift area, serving as Estate and Gift Tax Manager and later as estate and gift tax Appeals Officer. As an Appeals Officer, it was his responsibility to settle unagreed estate and gift tax cases before they reached the Tax Court.

Eric M. Nemeth, Tax Planning Attorney, Varnum, Financial Controversy Lawyer

Eric is a partner and leads the tax team. He concentrates on tax and financial controversy (IRS and various States) from examinations appellate conferences, criminal investigations, witness representation and civil and criminal tax litigation. He works with government regulatory and general tax matters. He has served as Senior Trial Attorney for the District Counsel of the Internal Revenue Service and as Special Assistant U.S. Attorney for the Department of Justice. He is a frequent speaker on tax enforcement and has served as an expert witness and binding arbitrator....