New FAQs and Rules for Offshore Voluntary Disclosure Program

From the IRS

The IRS said June 27 that it has collected more than $5 billion in its offshore voluntary disclosure programs (IR-2012-64), the third of which was announced in January this year. At the same time, it also released 55 questions and answers updated for the 2012 program.

On Jan. 9, the IRS announced that it was starting its third program for taxpayers with undisclosed foreign accounts to come forward, pay reduced penalties, and avoid criminal prosecution (IR-2012-5). At the time, the IRS also announced that the new program, unlike the earlier initiatives in 2009 and 2011, had no deadline to apply, although the program’s terms could be changed or the program ended entirely at any time.

The new program handles penalties the same way the 2011 program did, except that the penalty on the highest aggregate account balance in the taxpayer’s foreign bank accounts during the years at issue is increased from 25% in the 2011 program to 27.5% in the new program. Individuals with offshore accounts or assets of less than $75,000 in any calendar year covered by the new initiative will qualify for a 12.5% penalty rate. Some taxpayers will qualify for a 5% rate, but only in narrow circumstances, including in the case of foreign residents who are unaware that they are U.S. citizens.

Also, as in the 2011 program, participants must file all original and amended returns for the affected years and pay back taxes and interest for up to eight years and pay accuracy-related and/or delinquency penalties.

In the latest release, the IRS noted that it had closed what it called a “loophole” in the current program. Under existing law, a taxpayer who challenges a disclosure of tax information in a foreign court is required to notify the U.S. Justice Department of the appeal, but failure to do so did not disqualify the taxpayer from participating in the disclosure program. Now, if a taxpayer fails to disclose this information, he or she will be ineligible for the disclosure program.

Under the 2012 program, the IRS may also announce that certain taxpayer groups that have (or have had) accounts at specific financial institutions will be ineligible for the disclosure program because the U.S. government is taking actions in connection with those financial institutions. In the news release, the IRS put taxpayers on notice that their eligibility for the disclosure program could be terminated in these circumstances.

New Compliance Procedure for Current Nonresidents

In related news, the IRS announced a new option to help some U.S. citizens and others residing abroad who have not been filing tax returns to provide them a chance to catch up with their tax filing obligations if they owe little or no back taxes. The IRS is promising to release more details, but under the new procedure, taxpayers would be required to file delinquent returns for the past three years and delinquent FBARs (Forms TD F 90-22.1, Reports of Foreign Bank and Financial Accounts) for the past six years and to pay any related federal tax and interest due. After reviewing the returns, the IRS may not assert penalties or pursue follow-up actions, if it deems the taxpayer to present a “low compliance risk.” The new rules went into effect on Sept. 1, 2012.

There are also new procedures for taxpayers who have foreign retirement plans (such as Canadian Registered Retirement Savings Plans) to resolve certain issues. In some circumstances, under tax treaties these plans qualify for income deferral if a timely election is made. The “streamlined procedures” help taxpayers who failed to make the election (IR-2012-65, see also OVDP FAQs 54–55).