2012 Federal Tax Alert: Offshore Voluntary Disclosure Program Updates
On June 26, 2012, the Internal Revenue Service released new frequently-asked questions (“FAQs”) regarding the 2012 Offshore Voluntary Disclosure Program (“OVDP”) previously announced in January. Additionally, the Service announced a plan for certain low-risk nonresident United States taxpayers with little to no underreported taxes to catch up with past tax filing obligations.
Taxpayers who may be considering participating in the 2012 OVDP and certain other taxpayers with delinquent tax and international related information returns.
The 2012 OVDP is currently in progress, and the FAQs are effective immediately. While there is no established filing deadline or expiration, the terms of the program could change prospectively at any time. The new catch-up filing procedures will be effective on September 1, 2012.
2012 OVDP FAQS
The Service announced on January 9, 2012, a reopening of the OVDP to encourage individuals with undisclosed income from hidden offshore accounts to become current with their federal tax obligations. As with the 2011 OVDP, taxpayers who otherwise qualify for the voluntary disclosure initiative can avoid uncertain criminal or severe civil penalties by taking advantage of the Service’s renewed initiative. Unlike the 2011 OVDP, the 2012 version does not have an established deadline for taxpayers to apply. However, the terms of this program could change at any time. For example, the Service may increase penalties or limit eligibility in the program for all or some taxpayers or defined classes of taxpayers, or decide to end the program entirely at any point. The overall penalty structure for the new program is the same as it was for 2011, except for the highest penalty category. For the 2012 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 taxable years prior to the disclosure. That penalty is up from 25 percent in the 2011 program. Some taxpayers will be eligible for five- or 12.5-percent penalties; these remain the same in the new program as in 2011. Individuals whose offshore accounts or assets did not exceed $75,000 in any calendar year covered by the new OVDP may qualify for the 12.5-percent rate. As under the prior programs, taxpayers may opt out of the OVDP and instead be subject to examination. 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.
A new comprehensive set of FAQs was issued concurrently with the announcement. The 2012 OVDP Web site, www.irs.gov/newsroom/article/0,,id=254187,00.html, contains the new FAQs as well as other information about the OVDP. Similar to the 2011 FAQs, the 2012 FAQs provide a procedure for taxpayers with no underreported income who have inadvertently missed certain foreign information returns, such as Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (the so-called “FBAR” form); Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations; and Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and similar forms to submit the delinquent forms without penalty (FAQs 17 and 18).
New Catch-up Filing Procedures
The Service announced new compliance procedures effective September 1, 2012, for nonresident United States taxpayers who have failed to timely file income tax returns and FBAR forms and who present lower compliance risk to the Service than those who might seek relief under the OVDP. More information about the new procedures may be found at www.irs.gov/businesses/small/international/article/0,,id=256772,00.html.
The new procedures will allow taxpayers who present low compliance risks to the Service to become current with their tax filing requirements without facing penalties or additional enforcement action. The Service also announced that the new procedures will allow resolution of certain issues related to certain foreign retirement plans (such as Canadian Registered Retirement Savings Plans). In some circumstances, tax treaties allow for income deferral under United States tax law, but only if an election for deferral is made on a timely basis. The streamlined procedures will be made available to resolve low compliance risk situations even though this election may not have been made on a timely basis.
Submissions from taxpayers that present higher compliance risk will be subject to a more thorough review and potentially subject to an audit, which could cover more than three taxable years.
Any taxpayer claiming reasonable cause for failure to file tax returns, information returns, or FBARs will be required to submit a dated statement, signed under penalties of perjury, explaining why there is reasonable cause for any previous failures to file. Any taxpayer seeking relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by a relevant treaty will be required to submit certain other information.
Taxpayers who would have been ineligible to participate in the OVDP are similarly ineligible to utilize the new intermediate procedures. The government reserves the right to reject a taxpayer’s submission under these procedures if it is determined that criminal prosecution is nonetheless warranted. As with anyone contemplating making a voluntary disclosure, legal advice should be sought before proceeding with any filing or disclosure.