23 March 2018
Recently the IRS released much-anticipated additional guidance in relation to the OVDP and related programs. The guidance purported to respond to certain concerns and questions raised by practitioners since the release of the new streamlined procedures and 2014 FAQs on June 18th. The guidance was released in the form of FAQs to the Streamlined Domestic Offshore Procedures (“SDOP”), the Streamlined Foreign Offshore Procedures (“SFOP”), and Delinquent International Information Return Submission Procedures, which are now in addition to the OVDP FAQs and Transitional FAQs. There were no additional FAQs issued in relation to the 2014 OVDP.
While the guidance falls far short of responding to all of practitioners’ unanswered questions, it does provide some clarifications as follows:
- Non-residency requirement for eligibility for the Streamlined Foreign Offshore Procedures: the Guidance clarifies that the reference to § 911 in the SFOP is intended to refer only to the definition of “abode” found in IRC § 911(d)(3) and Treas. Reg. § 1.911-2(b), and not, more broadly, to the definition of “non-resident.” A taxpayer must satisfy the definition of non-resident set forth in the SFOP to be eligible to make a streamlined submission under the non-resident procedures. A person who satisfies a definition of non-resident under IRC § 911 but who does not meet the definition set forth in the Procedures is ineligible for the Streamlined Foreign Offshore Procedures.
- Streamlined Filing Compliance Procedure for U.S. Residents: the Guidance further clarifies the penalty base to be used in calculating the 5% penalty under the SDOP. Specifically, for purposes of calculating the penalty, the penalty base does not include assets in which the taxpayer had no personal financial interest; or assets that are not reportable on an FBAR or Form 8938, such as income producing rental property. In addition, if the taxpayer owns a foreign corporation, the value of the stock rather than the value of the underlying assets is included in the penalty base, unless the corporation is a disregarded entity for federal income tax purposes (in which case the value of the underlying assets would be included). Lastly, for any year in which a foreign financial account was FBAR compliant and (for the most recent three years) in which a foreign financial asset was both Form 8938 and Form 1040 compliant, the addition to the miscellaneous penalty base will be zero.
- Delinquent International Information Return Submission Procedures: the Guidance clarifies that the Delinquent Information Return Procedures are intended to be different from 2012 OVDP FAQ 18, which gave automatic penalty relief to taxpayers who reported all the income attributable to foreign assets but who failed to file all appropriate international information returns. Under the new procedure, there have been two significant changes. First, a taxpayer who has unreported income is not, per se, precluded from participating in the Delinquent Information Return Submission Procedures. However, in all cases the taxpayer is required to certify that there was reasonable cause for the failure to file the information returns. Second, unlike former OVDP FAQ 18, penalties may be imposed under the Delinquent International Information Return Procedures if the IRS does not accept the taxpayer’s explanation of reasonable cause.
Please find below some additional unanswered questions which have been discussed with the National Office, and for which we had hoped guidance would be provided:
- Does FAQ 10 require a PFIC to be “marketable” in order to be eligible for an election to use the alternative mark-to-market methodology in the OVDP? There does not appear to be an express requirement of marketability under the FAQ, but we have encountered IRS agents who have maintained that unmarketable stock is not eligible for FAQ 10 relief.
- Whose intent is relevant for purposes of a streamlined submission made by an estate, the decedent’s or the fiduciary’s? Does the answer change if a disclosure was initiated by the taxpayer but is being completed by the estate, compared to a disclosure initiated by the fiduciary of an estate?
- Are the Delinquent FBAR Submission Procedures intended to replace former OVDP FAQ 17, or is a reasonable cause statement required with the submission of delinquent FBARs? Is penalty relief automatic? Is a taxpayer precluded from using the Delinquent FBAR Submission Procedures if there was unreported income attributable to the accounts?
For further information about the OVDP and related programs described in this Stop Press, please speak to your primary Withers Bergman lawyer.