On Jan. 9, 2011 IRS Announced Reopening of Tax Amnesty Program For Undisclosed Foreign Financial Accounts
On January 9, 2011 the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.
The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.
“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”
The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.
“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”
The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.
In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.
The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.
For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.
Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.
Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.
The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.
More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.
The IRS Issues Guidance on International Tax Reporting For U.S. Citizens or Dual Citizens Residing Outside of the United States
The Internal Revenue Service (U.S. Federal Tax Administration) issued guidance (in the form of Fact Sheet FS 2011-13) on international tax reporting requirements for U.S. citizens or dual citizens residing outside of the United States.
In essence, the Guidance provides that U.S. citizens or dual citizens living and working abroad with (1) no tax balance due on their U.S. income tax returns (due, for example, to foreign tax credits for foreign taxes paid on their unreported foreign income earned in a foreign country, which offsets any U.S. tax due on that income, or U.S. foreign earned income exclusion excluding from U.S. tax certain employment income earned outside of the U.S.) or (2) a tax balance due but where the failure to report foreign income and pay associated residual U.S. taxes on it was due to reasonable cause (lack of proper advice or knowledge about the duty to report and tax such income), can file delinquent or amended tax returns and rectify past mistakes and will not be assessed late filing or late payment payment penalties. In addition, there will be no penalties assessed on those same individuals with respect to late filings of their Foreign Bank Account Reports reporting foreign financial assets if their failure to file was also due to reasonable cause.
The Guidance includes two examples: one where the income tax return results in no balance due and the other where a balance is due, with an explanation of reasonable cause for failure to file resulting in no penalty for late filing of income tax return, late payment of income, or late filing of FBAR.
In general, in order to establish reasonable cause for failure to file or report foreign income, the taxpayer must show that the failure was not due to negligence and that “ordinary business care and prudence in meeting tax obligations” were exercised. The IRS will evaluate the facts and circumstances of each case and, depending on the taxpayer’s situation, a lack of knowledge or proper advice of U.S. filing obligations may constitute reasonable cause.
It should be noted by taxpayers covered by this guidance that, beginning with 2011, individuals with greater than $50,000 in foreign financial assets will need to include IRS Form 8938 with their individual tax returns. Form 8938 is due with the U.S. tax return within the same deadline and it is separate and in addition to the FBAR.
Italy's new foreign real estate property tax
Recent legislation enacted by the Italian government to improve Italy's budget and stem the sovereign debt crisis introduced a new tax on real estate properties located outside of Italy. The tax is charged at the rate of 0.76%, calculated on the purchase price of the property as appearing from the purchase documents or alternatively on the fair market value of the property. A tax credit is granted, reducing or offsetting the Italian tax due, for any property taxes paid to the country in which the property is located. Individual taxpayers residing in Italy for tax purposes are liable for the tax. This include Americans and other foreign nationals who work and live in Italy and file Italian individual tax returns as Italian residents. Based on the language of the statute, properties owned or managed through offshore or foreign entities are not subject to the tax. Taxpayers who directly own rental or investment properties outside of Italy are encouraged to restructure their investment and own and actively manage those properties through a foreign owing or managing entity to avoid the application of the tax.
2012 New U.S. Reporting Requirements for Foreign Financial Assets
Starting with the tax year 2011, the new IRS Form 8938 must be filed by all U.S. persons if total foreign financial assets exceeded $50,000 at any point during the year. Form 8938 will be in addition to the long-standing Treasury Department FBAR (Foreign Bank and Financial Accounts Report) required for financial assets abroad that exceed $10,000 and shall have to be filed together with the federal income tax return for the year. U.S. persons include American citizens living in Italy and Italian national living in the U.S. pursuant to a green card or a temporary resident non-immigrant visa.
Furthermore, Form 8621 (Passive Foreign Investment Company – PFIC) must now be filed every year for each separate PFIC investment where as previously it was only required to be filed in years that distributions were made from the PFIC investment. Finally, the statute of limitation for IRS audits of returns listing foreign sourced income has been extended to 6 years (previously 3 years).
Where non-compliance is “non-wilful,” failure to file form 8938 results in a minimum $10,000 penalty but may rise to as much as 40% of the value of the asset or account. This is in addition to the tax due and interest due. Non-compliance deemed “wilful” may result additionally in criminal prosecution.
While FATCA does not change the existing penalties resulting from failure to properly report such as the FBAR and Form 8621 (PFIC report), FATCA will result in a dramatically increased enforcement of these rules and therefore U.S. citizens and residents (including American citizens living abroad and in Italy and Italian and other foreign nationals living in the U.S. as green card holders or temporary resident non-immigrant visa holders) should become familiar with the very significant penalties associated with these and other reporting requirements.
Trust and family and succession planning
Trusts are very important tools for family and succession planning. Italy enacted specific provisions on the tax treatment of trusts for income tax and indirect (transfer) tax purposes. However, Italy does not have specific legislation on trusts, and trusts for Italian clients or Italian assets must be formed and operated in accordance with the legislation of a foreign country that contemplates rules on trusts. Among the most reliable and sophisticated legislations on trusts are those of the States of the United States, including Delaware and New York. Every time the settler, beneficiaries and trust assets sit in different countries (Italy and abroad) the coordination of the tax treatment in Italy and in the foreign country poses daunting issues but also offers interesting planning opportunities. We refer below to a recent article appeared on Italia-Oggi in which we provide our perspective on our experience in forming and managing trusts for Italian clients:
http://www.lawrossi.com/images/stories/docs/Italia_Oggi_Trust.pdf
