Editor’s Note: The Offshore Voluntary Disclosure Program was ended in 2018. Nevertheless, the IRS stated it “will continue to hold taxpayers with undisclosed offshore accounts accountable after the program closes.” More guidance around Options Available For US Taxpayers with Undisclosed Foreign Financial Assets can be found at IRS.gov
On June 26, 2012, the Internal Revenue Service released guidance regarding the 2012 Offshore Voluntary Disclosure Program announced in January of this year. The Program makes modest changes to the process by which taxpayers will make a voluntary disclosure but otherwise retains many of the requirements and features of the 2011 Offshore Voluntary Disclosure Initiative (“2011 OVDI”) which closed September 9, 2011.
One of the most significant changes is that, unlike the 2009 Offshore Voluntary Disclosure Program and the 2011 OVDI, the 2012 Offshore Voluntary Disclosure Program (“2012 OVDP”) may be closed by the Internal Revenue Service at any time. The IRS has expressly reserved the ability to change the terms of the 2012 OVDP. “For example, the IRS may increase penalties or limit eligibility in the program…at any point.” (FAQ 3, 2012 OVDP)
Essential Features. The tax, interest, and penalties imposed on taxpayers who participate in the 2012 Offshore Voluntary Disclosure Program are generally the same as those applicable to taxpayers participating in the 2011 OVDI.
- Taxpayers will be required to file eight years U.S. income tax returns and all applicable information returns (including Foreign Bank Account Reporting (“FBAR”) Forms).
- Taxpayers will be required to pay the full amount of
- unpaid U.S. income tax due,
- a 20% understatement penalty,
- penalties for failure to file and failure to pay,
- interest on the tax and preceding penalties, and
- an offshore penalty for any unfiled information returns.
Offshore Penalty. The offshore penalty under the 2012 Offshore Voluntary Disclosure Program may be as great as 27.5% of an amount equal to the highest fair market value of the taxpayer’s foreign assets (including real estate and artwork) and the taxpayer’s highest balances in all foreign financial accounts. U.S. persons living abroad may qualify for an offshore penalty of only 5% imposed solely on the highest account balances in foreign financial accounts (and exclude all other foreign assets) if three conditions are met. For each of the eight years the taxpayer must have
- resided outside the United States,
- been fully compliant with the revenue laws of the country in which the taxpayer resided and paid in a timely manner all taxes due, and
- had no more ten thousand dollars of U.S. source income in any year.
RRSP and RRIF Relief. As part of the guidance released for the 2012 Offshore Voluntary Disclosure Program, the IRS has established a procedure by which participants may exclude income earned by investments in Canadian RRSP and RRIF accounts from the computation of taxable income and may exclude the account balances in RRSP and RRIF accounts from the computation of the offshore penalty.
New Compliance Procedures. In separate guidance, the Internal Revenue Service has announced new filing compliance procedures for non-resident U.S. taxpayers who satisfy certain requirements. Taxpayers who represent a “low compliance risk” may be able to file as little as three years income tax returns and six years information returns to avoid all penalties if the returns submitted show less than $1,500 of U.S. income tax due in each year. Taxpayers will not be able to take advantage of the new filing compliance procedures until September 1, 2012 and will not be eligible to participate in the 2012 Offshore Voluntary Disclosure Program.
Other Options. The guidance for the 2012 OVDP is also consistent with the 2011 OVDI in that it is clearly hostile to “quiet disclosures” in which a taxpayer reports and pays tax currently on income from foreign accounts and assets without addressing prior years’ noncompliance. However, taxpayers who take the admonition of the IRS to heart are not left without alternatives. The tax and penalty regime in the 2012 OVDP is rigid. Recourse to IRS Appeals is not available. Taxpayers willing to risk examination may opt out of the 2012 OVDP in order to present arguments based on reasonable cause, lack of willfulness, or other circumstances which may merit mitigation of penalties.
The 2012 OVDP is an important opportunity for US citizens with foreign compliance issues to address those issues in a structured settlement program. It may not be appropriate for everyone.