Press Room: Tax Release

July 13, 2012

IRS Updates Offshore Voluntary Disclosure Program

IRS Updates Frequently Asked Questions and Answers (Q&As) for Latest Offshore Voluntary Disclosure Program (OVDP) and Announces Forthcoming Program to Bring Certain U.S. Citizens Living Abroad into U.S. Tax Compliance.

Late last month IRS released updated Q&As for the latest OVDP announced earlier this year (OVDP 2012). OVDP 2012 is a continuation of earlier OVDPs initiated by IRS in 2009 and 2011, providing a standardized penalty structure for taxpayers who come forward voluntarily and report previously undisclosed foreign income, certain foreign assets and interests in certain foreign entities. In the news release announcing the updated Q&As for OVDP 2012, IRS stated that 33,000 taxpayers came forward in the two prior OVDP programs, with the government collecting more than $5 billion.

OVDP 2012 is structured similarly to the prior OVDPs, where taxpayers pay income tax, interest, a 20%  accuracy penalty and an additional penalty on the highest value of foreign financial accounts, certain foreign assets (directly and through certain foreign entities) in lieu of penalties that would otherwise apply for not filing Form TD F 90-22.1 (Report of Foreign Bank and Financial Report, or FBAR) or other U.S. foreign information returns (Offshore Penalty), for the tax years subject to the OVDP (up to eight tax years where the due date has not already passed, e.g., 2003-2010, where a 2011 income tax return has been extended). The Offshore Penalty rate in OVDP 2012 has been increased to 27.5% (up from 25% in 2011, and 20% in 2009 in the prior OVDPs), although similar to the prior OVDPs  a 5% or 12.5% Offshore Penalty rate applies in certain limited cases.

While the content and structure of the Q&As for OVDP 2012 are largely similar to the Q&As under the prior OVDPs, highlighted differences include Q&A 21 and Q&As 54 and 55. Q&A 21 provides that U.S. taxpayers that challenge a foreign government’s disclosure of tax information by that foreign government through the foreign country’s judicial system must notify the U.S. Justice Department of that challenge in order to qualify for entering OVDP 2012. Q&A 54 provides that taxpayers with certain Canadian retirement plans (e.g., RRSPs or RRIFs), that failed to make an election under the U.S.-Canada Income Tax Treaty to defer income earned by the RRSP or RRIF can effectively make the election as part of OVDP 2012, or as an effective part of the two prior OVDPs for taxpayers participating in those programs. Q&A 55 suggests IRS is willing to entertain similar relief for taxpayers that have other foreign retirement plans.

At the same time IRS released updated Q&As for OVDP 2012, IRS announced a forthcoming program, New Filing Compliance Procedures for Non-Resident U.S. Taxpayers, which will go into effect on September 1, 2012. This new program is intended to allow taxpayers that represent smaller, lower compliance risks (generally, taxpayers with simple tax returns that owe $1,500 or less in tax) to get current with their tax filing requirements without facing penalties or IRS enforcement action. Taxpayers that are eligible for this new program will be required to file delinquent income tax returns and information returns for the last three years and delinquent FBARs for the last six years.