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Offshore Voluntary Disclosure Program Reopened Indefinitely

On January 9, 2012, the IRS announced that it is reopening its offshore voluntary disclosure program (the “OVDP”) for U.S. taxpayers who have failed to report income and/or make the required information filings in respect of their offshore financial accounts or other foreign assets. The IRS first announced a voluntary disclosure program in respect of offshore accounts on March 23, 2009, which program ended on October 15, 2009.  The IRS subsequently announced a second offshore voluntary disclosure initiative on February 8, 2011 which was a somewhat modified version of the 2009 program.  The 2011 program ended on September 9, 2011.  The IRS claims that over 33,000 voluntary disclosures resulted from the 2009 and 2011 voluntary disclosure programs and that it has thus far collected $4.4 billion from program participants. 

The IRS has reopened the OVDP, citing continued strong interest in the program from taxpayers and tax practitioners.[1]  According to the IRS brief written release regarding the re-opening of the OVDP, the OVDP will follow the same framework as the 2011 program.  Thus, in very general terms, a participant will be required to file amended tax returns and returns on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (the “FBAR”), for the previous eight years, and will have to pay any additional income tax reflected on the amended returns.  In addition, a participant must pay an accuracy-related penalty equal to 20% of any additional tax due (or failure-to-file and -pay penalties if returns were not originally filed), and a miscellaneous offshore penalty imposed based upon the highest aggregate value during the eight years of the participant’s unreported offshore accounts and other offshore assets related to tax noncompliance (e.g., assets that generated income on which the required tax was not paid or were acquired with untaxed funds).  The miscellaneous offshore penalty under the new OVDP is generally equal to 27.5% (increased from 25% under the 2011 program), but may be reduced either to 5% in certain extremely limited circumstances or to 12.5% if the value of the offshore accounts/assets has continuously been less than $75,000.  By participating in the OVDP, a participant will have amnesty from criminal prosecution and will not be subject to the more onerous potentially applicable penalties for fraud (75% of the additional tax), failing to file FBARs (up to 50% of the amount in the accounts for each failure) or failing to file certain other required information returns.  A detailed description of the 2011 OVDP can be found in the IRS guidance titled “2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers” on the IRS website at http://www.irs.gov/businesses/international/article/0,,id=235699,00.html.

In many cases, taxpayers seeking to come into compliance with their U.S. tax obligations regarding non-U.S. accounts would be well served by entering into the OVDP and agreeing to the penalty regime indicated above.  Such taxpayers should consult a competent U.S. tax adviser for the purpose of obtaining assistance in navigating their way through the OVDP.  However, there are situations in which a taxpayer should consider whether alternatives to the OVDP might produce a better result than the application of the OVDP penalty regime.  These situations could arise, for example, if a taxpayer has been living abroad for a number of years, has little or no contact with the U.S. and has been tax compliant in his or her country of residence.  Other situations may also exist where alternatives to the formalities of the OVDP are likely to produce a better result.  Taxpayers who find themselves technically out of compliance with their U.S. tax obligations should consult experienced U.S. tax counsel to assist them in selecting the proper course that best suits their facts.

The OVDP will remain open indefinitely until such time as the IRS decides to terminate and/or modify it.  The IRS has stated that it will provide additional details and specifics on the OVDP, and will update its Frequently Asked Questions and Answers in the coming months.

 

Dual Citizens and U.S. Citizens Living Abroad

     U.S. citizens are taxable on their worldwide income and are generally required to file U.S. income tax returns and other applicable information filings, including FBARs in respect of their non-U.S. financial accounts, regardless of whether they reside in the United States.  Many U.S. citizens who have lived abroad throughout most of their lives (e.g., certain dual citizens) or for many years (e.g., citizens who have worked and lived abroad for a long period) were unaware of these U.S. tax and filing requirements prior to the significant publicity about the IRS’s voluntary disclosure programs and its efforts to crack down on offshore tax evasion.  In many cases, these U.S. citizens are paying income tax on their non-U.S. earnings in their home countries at rates equal to or greater than the U.S. tax rates, and, through application of the foreign earned income exclusion or foreign tax credits, would not owe any significant U.S. tax.  Given that they did not willfully fail to file tax returns or other filings and may not owe U.S. income tax, these individuals have understandably been reluctant or unwilling to enter into and pay the significant offshore penalty associated with the offshore voluntary disclosure programs.  Although many of these individuals would be willing to come into compliance with their U.S. tax obligations if there were no or minimal cost in doing so, the cost of the disclosure programs and the uncertainty regarding the application of penalties outside the context of the programs, not to mention the cost of return preparation for numerous past years, has resulted in many of these individuals simply taking no action in respect of their U.S. tax obligations.

     In December, 2011, the IRS released a “fact sheet” that recognized that many dual citizens and U.S. citizens living abroad may not have made their required U.S. tax and information filings.  The fact sheet summarized the filing requirements for U.S. citizens and the rules under which penalties for failing to make such required filings are not applicable.  Although the fact sheet was a departure from the harsh tone of previous IRS publications regarding offshore compliance, it was “for information purposes only” and did not provide any assurances that penalties would not be imposed in any particular circumstances. 

     The IRS release in which the third round of the OVDP was announced noted that the IRS is currently developing procedures by which persons who have delinquent filings but owe no U.S. tax may come into compliance with U.S. tax law.  There is no indication as to what these procedures might entail or whether any such specialized procedures could extend to U.S. citizens who might owe some U.S. tax but who were nonetheless reasonably unaware of their U.S. tax and filing obligations.  One would hope that the IRS would adopt reasonable and simplified procedures for past and future compliance with U.S. tax obligations for U.S. citizens living abroad, particularly those who are tax compliant in their country of residence.

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[1] Based on our experience and discussions within the tax community, much of this continuing interest may be from U.S. taxpayers, particularly U.S. citizens living abroad, who became aware of their U.S. filing requirements only recently because of publicity surrounding the previous disclosure programs and the IRS’s high-profile crackdown on certain offshore tax evaders.  These individuals may consider the OVDP to be far too expensive a compliance option for their perceived level of culpability and they may come into compliance only if a simpler and less expensive option is made available.  See Dual Citizens and U.S. Citizens Living Abroad above.


[1] Based on our experience and discussions within the tax community, much of this continuing interest may be from U.S. taxpayers, particularly U.S. citizens living abroad, who became aware of their U.S. filing requirements only recently because of publicity surrounding the previous disclosure programs and the IRS’s high-profile crackdown on certain offshore tax evaders.  These individuals may consider the OVDP to be far too expensive a compliance option for their perceived level of culpability and they may come into compliance only if a simpler and less expensive option is made available.  See Dual Citizens and U.S. Citizens Living Abroad below.