The Internal Revenue Service announced Jan. 9th, the reopening of its successful Offshore Voluntary Disclosure Program (OVDP), designed to encourage people hiding offshore accounts to pay what they owe and avoid potentially ruinous penalties and possible criminal prosecution. While similar to the agency’s two previous programs, the new OVDP includes several important differences for taxpayers.
The penalty for high income individuals has increased. Those who chose not to participate in the two previous opportunities to come into compliance will pay for that decision. The new penalty structure requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities and the value of foreign assets during the eight full tax years prior to the disclosure. That is an increase from 25 percent in the 2011 program and 20 percent in the 2009 ODVP.
Unlike previous programs, no end date was announced — yet. The IRS could withdraw the OVDP, change the terms at any time or continue it for months. Stay tuned. The agency will eventually have to announce a deadline. Historically, voluntary disclosure programs are given an end point to encourage people to participate before the deadline.
Just as under the 2011 program, some taxpayers can qualify for a 5 percent penalty under certain circumstances, including some individuals who did not open the accounts, but inherited them. Taxpayers with smaller offshore accounts will be subject to a 12.5 percent penalty. Individuals whose overseas accounts or assets did not exceed $75,000 in any calendar year covered by the new program will qualify for the lesser 12.5 percent penalty rate.
Those who came in after the close of the 2011 program will be processed under the new OVDP.
Why Choose Voluntary Disclosure?
Why disclose overseas income, particularly if you’ve managed to fly under the federal radar for years? Aside from the ethical considerations, the risk of detection has increased significantly as the IRS strengthened its enforcement efforts. Continuing to hide or simply not report overseas assets is a gamble many have lost, along with large sums in penalties as a result.
Just as importantly, IRS enforcement is about to take a giant leap forward.
With the enactment of the Foreign Account Tax Compliance Act (FATCA) in 2010, foreign financial institutions (FFIs) will enter into agreements with the IRS in 2013 that will require them to report to the agency on their U.S. account holders. FATCA will be phased in so that by 2014, the FFIs will begin the due diligence requirement for identifying new and pre-existing U.S. accounts. In 2015, FFIs will have to report on U.S. accounts, and begin withholding and paying to the IRS, 30 percent of U.S. source income.
Between now and 2015, it is possible that the IRS will continue enhancing the maximum penalty percentage so that by 2015 when FFIs begin reporting, the maximum penalty could reach 50 percent, the amount applied to those who “willfully” fail to file the required Report of Foreign Bank and Financial Accounts (FBAR).
Those who participate in the program by coming into compliance are treated better by the IRS than those who don’t. People who voluntarily disclose their overseas accounts and assets generally receive lesser penalties and greatly reduce their risk of incarceration. After an investigation has begun, the option of voluntary disclosure is off the table.
Voluntary disclosure is also a win win for the IRS, which saves money on investigations when people choose to come forward. It also adds dollars to the government’s coffers.
While the fairness of the program has been questioned by the Taxpayer Advocate Service, an oversight arm of the IRS, my experience and those of other legal and financial professionals with whom I work, has been different. In its annual report, the Advocate Service charged that the IRS had failed to cap penalties in some cases of taxpayers who were hiding overseas assets. In my experience, those who are not intentionally or “willfully” violating the law have received better treatment.
The agency’s move to reopen the program was not unexpected given the success of previous voluntary disclosure programs. As the agency announced the reopening of the program, it also touted the collection of more than $4.4 billion so far from its two previous offshore programs. The IRS has collected some $3.4 billion so far from people who participated in the 2009 offshore program. The agency has collected an additional $1 billion from payments required under the 2011 program. However, the number will increase as the agency continues to process 2011 cases.
Who is Affected by Penalties for Non-Compliance
Many people are surprised to discover that they are considered U.S. taxpayers under the Internal Revenue Code. Anyone who fits any of the following descriptions is a U.S. taxpayer:
A U.S. passport holder
Green Card holder
Individual who spends 183 days in the U.S. in one year or
122 days a year for 3 consecutive years
They must report their foreign financial accounts, income, trusts, corporations and assets, or be subject to the same penalty regimen for failure to file those forms.
How To Participate in OVDP
Voluntary disclosure is a process that can not only bring you into compliance but offer you peace of mind. However it is also complicated. To protect your financial interests, voluntary disclosure requires an attorney and a CPA, both of whom specialize in international tax matters and have considerable experience with voluntary disclosures. The accountant who advised you when you were non-compliant is in a conflict of interest with respect to Voluntary Disclosure, and should not assist you with that process. Likewise, even a good, qualified CPA will not attempt to assist you without an attorney. A CPA will not be bound under the terms of attorney-client privilege, unless he or she is hired by your attorney.
With a new program, the IRS has signaled that it is not only willing to negotiate, but has laid out the terms. For many people with a lot to lose, 2012 is the year to come into compliance – before penalties rise or the agency widens its net.