Release date: November 25, 2015
Guest: Chantal Farrell-Carter
Running time: 10:06 minutes
In the second episode of our “US Offshore Voluntary Disclosure” series, Chantal Farrell-Carter looks at two of the options available under the offshore voluntary compliance programs, namely the Offshore Voluntary Disclosure Program (known as OVDP) and the Streamlined Filing Compliance Procedures. She discusses who is eligible, which program is most suitable depending on an individual’s circumstances, what’s required under each option, and the penalties for non-compliance.
Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.
You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.
Alison: Hi, this is Alison Cumming of PwC Canada. Welcome to another installment of our US Voluntary Disclosure podcast series. This is the first of two podcasts addressing the options available under the offshore voluntary compliance programs for individuals residing both inside and outside of the US.
Here with us today is Chantal Farrell-Carter. Chantal is a partner in our Toronto office and she specializes in cross border tax compliance, helping individuals with their Canadian and US tax filings, including assisting non-compliant US persons to become current with their US tax obligations.
Chantal: Thank you Alison.
Alison: Chantal, as you know, the implementation of FATCA and the ongoing efforts of the IRS and the Department of Justice to ensure compliance by those with US tax obligations have raised awareness of the US tax and information reporting obligations with respect to non-US investments. What are the current options available to individuals who have not met their US filing obligations?
Chantal: Compliance with US tax filings is definitely a focus in today’s media. Because the circumstances of taxpayers with non-US investments vary widely, the IRS currently offers 4 options for addressing previous failures to comply. These options are:
The first two options — the OVDP and the Streamlined Procedures — are for those who have not filed US tax returns or not declared all income from non-US assets on their returns, whereas the last two options — the Delinquent FBAR and the Delinquent International Information Return Procedures — are for individuals who have filed US income tax returns but they have not met all of their other foreign reporting obligations.
Alison: In this podcast, let’s focus on the first two options. Okay Chantal, how does someone determine which option of the two they should use?
Chantal: In general most Canadian individuals who have failed to file US income tax returns will qualify under the Streamlined Filing option. The OVDP is designed for taxpayers with exposure to potential criminal liability, for example evidence of tax evasion, or exposure to substantial civil penalties due to willful failure to report foreign financial assets.
Alison: So if my failure to file was due to non-wilful conduct, for example I was not aware that a US citizen was required to file annual income tax returns, I will qualify for the Streamline filing?
Chantal: Yes in most cases, that is correct. Where individuals are unsure if their actions were non-wilful, they should seek legal advice.
Alison: So, do I have to go back and file all my US income tax returns that I was required to file?
Chantal: No, Alison. If you qualify for the Streamlined Filing Procedures, you will need to submit the 3 most recent years of income tax returns along with any required information returns, and 6 years of the Report of Foreign Bank and Financial Account returns (more commonly referred to as FBARs).
If you are filing under the OVDP program, you are required to submit the most recent 8 tax years of income tax returns, along with 8 years of required information returns and FBARs.
In both cases the full amount of the tax and interest due in connection with these filings must be remitted with the income tax returns.
Alison: This seems like a lot of work. Why would someone make a voluntary disclosure?
Chantal: Well, Alison, a voluntary disclosure enables individuals to become compliant, avoid substantial civil penalties, and generally eliminate the risk of criminal prosecution for all issues relating to tax non-compliance. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties. As you mentioned earlier, the IRS remains actively engaged in identifying those with undisclosed foreign financial accounts and assets, for example through the implementation of FATCA. Once the IRS initiates an examination for any year, you will not be eligible to participate in any of the voluntary disclosure programs.
Alison: Chantal, you mentioned the word “penalties”. What are some of the penalties that might apply?
Chantal: Well, unfortunately there are a number of civil penalties that could apply if an individual does not come forward and disclose voluntarily. In addition to filing a US income tax return annually, there are a number of other information returns which apply to US persons owning foreign assets. Failure to timely file these forms carries significant penalties.
We will discuss some of these forms in part 2 of this podcast, however to give you an example, a very common form that applies to most US individuals is the FBAR filing. This form applies to US persons who have a financial interest in foreign bank accounts with an aggregate value over $10,000 at any time in the year. The penalty for failing to file the FBAR form is $10,000 per violation. Most other information returns also carry the $10,000 per violation penalty.
As you can see the penalties can add up very quickly.
Alison: Okay, so if I come forward under one of these programs, I will not be subject to any penalties?
Chantal: Well, if you qualify as a taxpayer that lives outside the US and you are eligible to use the Streamlined Filing Procedures, you will not be subject to failure to file and failure to pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties.
Under the OVDP there are penalties that will apply depending on your circumstances; however, the OVDP still offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk the detection by the IRS and possible criminal prosecution.
Alison: You mentioned a taxpayer who lives outside the US that is eligible to use the Streamlined Filing will not be subject to penalties. Is the Streamlined Filing Procedure available to US persons living in the US?
Chantal: Yes, the Streamlined Procedures are now available to both US individuals residing outside the US, and US individuals residing in the US. However, taxpayers residing in the US must pay a miscellaneous offshore penalty. The offshore penalty is equal to 5 percent of the highest aggregate balance or value of the taxpayer’s foreign financial assets during the years covered.
Alison: Is there a time limit as to when I can submit my voluntary disclosure?
Chantal: Great question Alison. Both the Streamlined Filing and the OVDP are open-ended presently; however, the IRS may end these programs at any time. We would expect there to be communications to the public if the IRS intended to close either program.
Alison: Well, Chantal, it definitely seems like the Streamlined Filing option is the best way to go if possible. Are there other things I need to know about making my disclosure?
Chantal: Yes, in order to proceed with a voluntary disclosure, US individuals require a valid taxpayer identification number. If you are a US citizen, you will require a Social Security Number (SSN) so if you do not have one, it should be applied for right away to avoid a delay in filing your voluntary disclosure. If you do not qualify for an SSN, an Individual Taxpayer Identification Number can be applied for with your voluntary disclosure submission.
Another thing to keep in mind is that you will need to go back a number of years and obtain financial information so your foreign financial assets can be accurately and fully disclosed. You will likely need to seek assistance from your financial advisors in order to gather some of this information.
Alison: Thank you for joining us today, Chantal, and providing information with respect to the options for US individuals to become compliant with their US tax filing obligations.
Chantal: My pleasure Alison.
Alison: For any questions, Chantal’s contact details are available on our PwC podcast website www.pwc.com/ca/taxtracks or also on the page dedicated to information about US voluntary disclosure at www.pwc.com/ca/usdisclosure.
I encourage our listeners to stay tuned for upcoming podcasts in this US Voluntary Disclosure series, including the second podcast on this topic that will cover the other two options available to individuals under the US Offshore Voluntary Compliance Programs.
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