US government prepares more generous amnesty for accidental offshore non-compliance

Koskinen told a tax conference in Washington this week that residents and expatriates with unreported offshore accounts whose non-compliance was clearly unintended will ‘in the very near future’ be offered a means of coming into compliance without risking substantial penalties.

The IRS's first Offshore Voluntary Disclosure Initiative (OVDI) was launched in 2009, at the height of the UBS prosecution affair. It invited US citizens to voluntarily reveal their undisclosed offshore accounts, pay a financial penalty, and avoid prosecution. Further voluntary programmes followed in 2011 and 2012. Since 2009, said Koskinen, they have resulted in more than 43,000 voluntary disclosures from individuals who paid more than USD6 billon in back taxes, interest, and penalties.

However, many practitioners and taxpayers have criticised the various OVDIs as being ungenerous to the many Americans who did not realise until too late that they should have reported their foreign bank accounts to the IRS. This applies particularly to US citizens who are no longer resident in the country.

An especially influential criticism came from the official US National Taxpayers' Advocate, Nina Olsen, in her annual report to Congress earlier this year. She said the OVDI programmes impose ‘excessive’ penalties on taxpayers whose failure to file is not deliberate. The average offshore penalty in the 2009 programme was nearly four times the additional tax assessed for taxpayers with average account balances, and nearly six times the tax assessed for taxpayers with the smallest account balances. Taxpayers who opted out of OVDI fared better but still faced penalties of nearly 70 per cent of the tax and interest. These Draconian penalties may deter other taxpayers from coming into compliance, and is one of the IRS's most serious problems, she commented.

The IRS has also been accused of luring expatriate American taxpayers into applying to use the OVDI, but then refusing them eligibility and hitting them with the highest available penalty. This happened in the Bank Leumi affair in September 2013, although the IRS subsequently backed down to some extent. There have also been many recent reports of a very rapid increase in the number of Americans who have renounced their citizenship, presumably for tax reasons – including, of course, the Foreign Account Tax Compliance Act (FATCA).

The IRS, under its new commissioner, appears to have taken these criticisms on board. ‘We are considering whether our voluntary programmes have been too focused on those wilfully evading their tax obligations and are not accommodating enough to others who don't necessarily need protection from criminal prosecution because their compliance failures have been of the non-wilful variety,’ admitted Koskinen. He cited the example of US citizens who have resided abroad for many years, perhaps even the vast majority of their lives – and who are still liable for US taxes under the country's unique citizenship-based tax system.

‘We have been considering whether these individuals should have an opportunity to come into compliance that doesn't involve the type of penalties that are appropriate for US-resident taxpayers who were wilfully hiding their investments overseas,’ he said. ‘We are also aware that there may be US-resident taxpayers with unreported offshore accounts whose prior non-compliance clearly did not constitute wilful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn't involve the threat of substantial penalties.’

The IRS is close to completing its discussions on this matter and will soon put forward modifications to the existing OVDI programme, he said. Re-striking the balance between enforcement and voluntary compliance is particularly important with the approach of the effective date of FATCA, namely 1 July.

‘We expect we will have much more to say on these programme enhancements in the very near future,’ he said.