IRS Revises a Limited-Amnesty Program for Offshore Accounts
The Internal Revenue Service announced changes to one of its limited-amnesty programs for U.S. taxpayers with undeclared offshore accounts. The revisions are to the “streamlined procedure,” which was announced in June and is for taxpayers who weren’t intentionally hiding money abroad.
Participants in the streamlined program who live in the U.S. are eligible for a 5% penalty on the balance of undisclosed accounts, and participants living outside the U.S. may owe no penalty at all. By contrast, taxpayers in a different program who confess to “willfully” hiding accounts owe a 27.5% penalty.
Experts say the clarifications contain good news and bad news for U.S. taxpayers concerning the streamlined program. “The clarity is good, but some people who think they don’t deserve harsh treatment will wind up on the wrong side of the fence the IRS has erected,” says Phil Hodgen, an international tax lawyer in Pasadena, Calif.
The IRS issued the guidance in question-and-answer format. Seven new questions are for U.S. residents and clarify what assets are and aren’t subject to the 5% penalty. For example, the penalty doesn’t apply to assets, such as a bank account, for which the taxpayer had “signature authority” but not beneficial ownership—that is, the right to use the assets.
One new question applies to U.S. taxpayers residing outside the U.S. and clarifies details of residency regarding the program. In effect, says Stow Lovejoy, a lawyer with Kostelanetz & Fink in New York, it holds that many Canadian “snowbirds” who regularly spend several months a year in the U.S. and are delinquent U.S. taxpayers—even if they didn’t know it—won’t qualify for a zero penalty.
Another clarification raises the bar for people who hope to avoid a penalty in the streamlined program. U.S. taxpayers who don’t owe taxes but haven’t filed paperwork will have to explain why they didn’t, and the IRS will have to accept the excuse, in order to escape a penalty.
Although the IRS’s streamlined program offers a welcome option for some people, there are other ways to cope with past noncompliance. Mr. Hodgen and others say that many taxpayers with smaller accounts—say, under $500,000—who weren’t aware of their noncompliance may be able address it simply by amending past tax returns and complying going forward.