Updates on Offshore Financial Account Compliance and Small Business Audit Considerations

Streamlined Filing Program Will Not Last Forever

Recently, IRS officials, including Commissioner John Koskinen, have stated that the streamlined filing program for the disclosure of previously unreported foreign financial accounts would not last forever and would end at some point. The streamlined filing program was introduced in June of 2014 and is designed to bring U.S. taxpayers with offshore holdings (e.g., foreign bank accounts and other income-producing assets) into compliance with the U.S. tax and reporting regime with a little less paperwork. Since its inception, according to the IRS, more than 20,000 taxpayers have come forward to voluntarily disclose their offshore financial accounts through the program. Although the IRS has not yet designated an exact date when this program will end, IRS officials have repeatedly made clear that at some point, the program would end, because the IRS assumes that eventually taxpayers with offshore holdings will have received enough notice to voluntarily come forward for compliance.

As a reminder, one of the key requirements of the streamlined program is that the taxpayer must establish that his/her failure to report all the income, pay all taxes and submit all required information returns, including FinCEN Form 114 (formerly known as Foreign Bank Account Report or FBAR) is "non-willful"– a standard that does not have a fixed meaning but depends on the facts and circumstances of each case.

Note, however, even if the streamlined program comes to an end, taxpayers who would like to come forward to fix their offshore non-compliance issues still have other options to report previously undisclosed foreign accounts and income-producing assets, such as participating in the offshore voluntary disclosure program, which the IRS has announced will last indefinitely.

Possible Audit Insight for Small Businesses

The IRS has also announced that it was considering how to use the data it collected from receipts of business credit cards to develop guidance – so called "practice units" - for its field agents as to what revenue, expense and taxable income metrics may be useful screens in determining whether small business taxpayers are complying with their income tax reporting obligations. IRS Commissioner Koskinen indicated that such "practice units" would probably be released to the public to provide some guidance to small business taxpayers and their tax preparers as to when it might be worthwhile to double-check tax returns and tax return positions to ensure compliance with the law.

Increased Budget Allocation to IRS

Last, it should be noted that for the first time in six years, Congress approved a budget allocation increase for the IRS - in the amount of approximately $290 million. According to the IRS, the budget bump would be used to increase taxpayer service and to fight identity theft. However, it is certainly possible that the budget increase also could lead to an increased number of taxpayers being audited.

Action Items

• Taxpayers with undisclosed offshore accounts and other foreign income-producing assets should timely come forward to bring themselves into compliance while the streamlined filing program might still be a viable option.
• Small business owners should stay tuned for revenue, deduction and taxable income metrics that the IRS might develop and release to help such taxpayers and their tax preparers better evaluate the appropriateness of tax return positions before filing.