The new wave of information reporting is shaping the way global economies work together to tackle tax avoidance and financial crimes. As a residual effect of this, internationally mobile executives and wealthy family groups with a U.S. taxpayer presence are increasingly and unwittingly coming afoul of information and reporting disclosure requirement with respect to non-US assets and financial accounts.
To address this issue, the Internal Revenue Service (IRS) has released a number of voluntary disclosure programs over the years to allow taxpayers that have failed to file tax returns, misreported global income or have unreported foreign assets, to get into compliance and limit or eliminate associated penalties. A key feature of these programs is that the IRS is able to close the programs at any time, which can leave taxpayers without any opportunity to mitigate penalties for non-compliance.
Members of wealthy Australian family offices that relocate to Australia or members of U.S based families moving to Australia, are often doing so without being fully aware of or advised about the stringent reporting and filing requirements on foreign assets, financial accounts and holdings they will be subject to upon becoming a U.S. person for tax purposes. This invariably results in the taxpayer seeking to enter into a remediation program to limit or mitigate penalty exposure on misreporting and non-compliance with the IRS.
In our previous article titled “Voluntary disclosure options for US taxpayers with Australian assets” posted in the The Tax Specialist in February 2017, we discussed the remediation programs available for U.S. taxpayers with Australian assets and the ability for the IRS to close the Offshore Voluntary Disclosure Program (OVDP) at any time. The OVDP was a voluntary disclosure program for taxpayers that do not meet the “non-wilful” requirement to be eligible for the Streamline Procedures and allowed taxpayers to come into compliance whilst avoiding criminal liability and limiting their penalty exposure. This program has since been closed by the IRS.
This IRS has since released an updated version of the program with some significant operational and procedural changes that can impact taxpayers both positively and negatively. The key question is determining which remediation process is right for a taxpayer remains: have you been willful?
There are some significant differences between the process involved with the UVDP and the OVDP. Importantly, the memorandum procedures allow for significant discretion to the IRS case agent with respect to penalties, so those with significant penalty exposure should consider a timely voluntary disclosure to mitigate potential penalties. The memorandum specifically states “Proper penalty consideration is important in these cases. A timely voluntary disclosure may mitigate exposure to civil penalties. Civil penalty mitigation occurs by focusing on a specific disclosure period and the application of examiner discretion based on all relevant facts and circumstances including prompt and full cooperation during the civil examination of a voluntary disclosure.”
The introduction of the UVDP provides a welcomed avenue for compliance in circumstances where the fact and circumstances of as particular taxpayer may be complex and determining willfulness is not straightforward.
Determination as to whether a taxpayer should file under the streamline procedures or the UVDP is an extremely important assessment and should be undertaken by an experienced international tax attorney. The professional fees, penalties and exposure to potential criminal liability of getting the application wrong far outweigh the cost of an initial assessment by an experienced advisor. An initial assessment should be undertaken to take a deep dive into a taxpayer’s particular fact pattern and circumstances to determine their eligibility to the various programs assist with the compliance.