Press Room: Tax Release

January 12, 2012

Offshore Voluntary Disclosure Program Round 3

On January 9, 2012, IRS reopened its Offshore Voluntary Disclosure Program (OVDP) after announcing the collection of more than $4.4 billion to date from the prior OVDP Programs in 2009 (Round 1) and in 2011 (Round 2). IRS indicated that OVDP Round 3 will remain open for an indefinite period until otherwise announced. IRS, however, indicated that the new program could change in the future, noting that the penalty rate(s) could be increased (for certain categories of taxpayers) or the program might even be cancelled.

Key features of OVDP Round 3 are as follows:

  1. The penalty structure is the same as in OVDP Round 2, except for taxpayers falling in the highest penalty category, where the penalty is raised to 27.5% (up from 25% in OVDP Round 2) of the highest aggregate balance in foreign financial accounts/values of certain foreign assets and entities (collectively, offshore accounts) during the eight tax years prior to the disclosure.
  2. Similar to OVDP Round 2, smaller unreported offshore accounts (where the offshore accounts did not exceed $75,000 in any calendar year covered by OVDP Round 3) will qualify for a 12.5% penalty. Taxpayers in certain limited situations will qualify for a 5% penalty.
  3. As under OVDP Round 2, taxpayers who come forward but feel that the penalty rate for their situation is too high may “opt out” and have their case transferred to IRS exam.
  4. Taxpayers who have come forward under the normal IRS voluntary disclosure program after the conclusion of OVDP 2 are eligible to be treated under OVDP 3.

IRS indicated that its recent successes in offshore tax enforcement and in the prior OVDPs have raised public awareness of U.S. tax filing obligations. In particular, IRS noted that this awareness includes increased awareness by dual citizens and others (e.g., U.S. citizens living outside of the U.S.) who may be delinquent in their U.S. tax filing obligations, but owe little or no U.S. tax (for example, after the application of the foreign earned income exclusion and/or foreign tax credits). In particular, this includes a reported significant number of U.S. citizens living in Canada. IRS indicates that they are developing a set of procedures by which these taxpayers may come into compliance with U.S. tax laws, presumably under some form of standardized/low (no) penalty administrative framework.

IRS will provide more details next month and will be updating the frequently asked questions related to OVDP Round 3 on the IRS website.