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IRS announces new disclosure program for offshore accounts

The Internal Revenue Service's inquiry into offshore tax evasion is a multi-pronged effort. While the IRS and the Department of Justice apply pressure to foreign governments and financial institutions, the IRS is also creating initiatives for U.S. taxpayers--living here in California or residing abroad--to come back into compliance with reporting requirements.

These initiatives have included three iterations of the Offshore Voluntary Disclosure Program. The third version of OVDP is currently in effect and offers taxpayers the chance to settle delinquent offshore accounts with lower penalties than they would otherwise face if they did not come forward voluntarily. Last month, the IRS enacted a new initiative aimed at getting those U.S. taxpayers with dual citizenship or those who reside abroad current with their tax obligations.

The initiative is called the Streamlined Filing Procedure. In short, the IRS wants taxpayers who have not lived in the U.S. for the last three years or filed a tax return during that time to provide past returns and Reports of Foreign Bank and Financial Accounts, or FBARs. In return, the IRS is offering those who are deemed a "low compliance risk" freedom from penalties or subsequent prosecution. Any back taxes and interest must be paid, however.

But not everyone will be deemed low risk. Those who do not meet the criteria for low risk will be unable to participate in the SFP and could face penalties. Such taxpayers could include those with high incomes or assets, those who appear to have engaged in advanced tax avoidance strategies and those who are undergoing an IRS audit. Taxpayers who have been denied admittance into the OVDP cannot use the SFP.

Like other disclosure programs, the SFP has a number of complicated rules that taxpayers should examine carefully to see if the program presents an attractive option for their tax situation. The knowledge of an experienced tax attorney can help taxpayers sort through the applicable rules and unlock the often byzantine language of IRS pronouncements.

Source: Forbes, "New Streamlined Filing Compliance Procedures for Non-Resident U.S. Taxpayers," Charles Rettig, Sept. 18, 2012

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