By Ken Berry
Without a great deal of fanfare, the IRS has reopened its Offshore Voluntary Disclosure Program (OVDP) for taxpayers with foreign bank accounts. A similar program that was initiated in 2011, and modeled after a 2009 program, closed down on September 9, 2011 (extended beyond its initial deadline of August 31, 2011, due to Hurricane Irene). The IRS has collected more than $4.4 billion from these two programs.
The OVDP is aimed at encouraging taxpayers who have stashed assets in undeclared bank accounts in foreign countries to declare outstanding tax liabilities. In exchange, the IRS agrees to "take it easy" on these taxpayers, imposing penalties under a predetermined rate structure. What isn't being said directly: The IRS intends to ratchet up efforts to catch those with secret bank accounts, so you're better off paying less now instead of more later. Also, tax evaders may face criminal sanctions if they do not come forward.
"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 2012 program is similar to its predecessors, but with a few key differences:
- There is no deadline for applying for relief. Thus, the program will continue for the indefinite future.
- The terms of the new program could change at any time. For example, the IRS might increase the penalties or suspend or cut off applications without any warning.
- The penalty on the highest aggregate account balance in a taxpayer's foreign bank accounts is increasing from 25 percent in the 2011 program to 27.5 percent under the new OVDP.
Otherwise, the 2012 OVDP closely resembles the 2011 program. A taxpayer with offshore accounts or assets of less than $75,000 in any calendar year will qualify for a 12.5 percent penalty rate. Some taxpayers will benefit from a 5 percent rate in limited circumstances (e.g., when a foreign resident is unaware that he or she is a US citizen).
Furthermore, as was the case with the 2011 program, participants must file all original and amended returns for the tax years in question and pay back taxes and interest for up to eight years, plus any appropriate accuracy-related and delinquency penalties.
The taxpayers who face the highest penalty are those who are required to file a Report of Foreign Bank and Financial Accounts (FBAR) with the IRS. The FBAR is required because financial institutions in foreign countries may not have the same reporting rules. This device helps the US government identify individuals who may be relying on foreign financial accounts to circumvent the law.
Under the 2011 program, the IRS did not impose a penalty for failing to file FBARs if there were no underreported tax liabilities and the delinquent FBARs were filed in a timely fashion. Presumably, it will follow the same procedure in the 2012 OVDP. More details will be available soon on the IRS website. In addition, the IRS will be updating its Frequently Asked Questions (FAQs) about the program.
If you have clients who might participate in the program, be sure to present all the issues and contingencies while maintaining your professionalism and integrity. In all respects, you must adhere to the prevailing laws. When it is warranted, seek guidance or assistance from other professionals, such as a tax attorney, who has expertise in this area.