IRS Targets Tax Evaders: 7 Takeaways from Newest Offshore Voluntary Disclosure Program

On January 9, 2012, the Internal Revenue Service announced its third Offshore Voluntary Disclosure Program, designed to curb tax evasion, add to the $4.4 billion in tax revenues captured in the first and second iterations of the program, and otherwise ease the transition for delinquent taxpayers who wish to enter into compliance. For your reference, here are six things you should know about the IRS’s latest Offshore Voluntary Disclosure Program:

1. Penalties for delinquent taxpayers are set at 27.5%:

“For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. This number has increased from 25 percent in the 2011 program.” (Offshore Voluntary Disclosure Program Reopens by Katten Muchin Rosenman LLP) 

2. Some taxpayers may qualify for reduced penalties:

“As with the prior initiatives, there is a limited opportunity for some taxpayers in certain situations to qualify for a five percent (5%) penalty. In addition, as with the 2011 initiative, the new initiative allows a penalty of twelve and one-half percent (12.5%) for certain taxpayers whose offshore account or assets did not surpass $75,000 in any of the relevant years.” (The Third Time’s The Charm – IRS Announces Third Opportunity For Voluntary Disclosure Of Offshore Accounts by Lowenstein Sandler PC) 

3. IRS efforts to rein in delinquent taxpayers are only picking up steam: 

“With the recent finalization of the Form 8938, Statement of Specified Foreign Financial Assets, and the issuance of the corresponding temporary and proposed regulations, along with the fact that the U.S. Government is attempting to settle with eleven foreign banks in Switzerland, Liechtenstein and Israel to obtain information on U.S. citizen and resident account holders, now is a key time for U.S. citizens and residents to determine the best avenue to become compliant prior to an IRS examination.” (The Pursuit of International Tax Compliance; IRS Reopens Offshore Voluntary Disclosure Program by Akerman Senterfitt) 

“’We’re gaining momentum in our international efforts and the word is spreading across the globe,’ IRS Commissioner Doug Shulman told reporters on a conference call recently. Similar comments were made by Senator Carl Levin (D-Michigan), head of the Permanent Subcommittee on Investigations when he said the statistics show ‘how enormous the offshore tax evasion problem is’. In a recent press release, Levin said, ‘Taxpayers are turning themselves in because federal prosecutors have finally begun to go after the individual tax-haven banks, bankers and other financial professionals helping them cheat on their taxes.’” (Another IRS Voluntary Disclosure Program by Darrin Mish, Tampa Tax Attorney) 

4. The program is open-ended, but could be changed or terminated by the IRS at any time:

“… there is no set deadline for taxpayers to enter 2012 OVDP. However, taxpayers are cautioned that the IRS may change the terms of 2012 OVDP at any point, including by increasing penalties or ending the program entirely.” (The IRS Announces a Third Offshore Voluntary Disclosure Program by Snell & Wilmer L.L.P.)

“The program is similar to the 2011 program, but there is presently no deadline to apply (unlike prior programs which had a fixed expiration date). However, taxpayers with an interest should not unduly delay, since the IRS has reserved the right to close the program or increase penalties at any time.” (IRS Opens 3rd Offshore Voluntary Disclosure Program by Charles “Chuck” Rubin) 

5. Conditions are right for going into compliance for those with unreported foreign income: 

“For many taxpayers with undeclared foreign accounts or unreported foreign income, the specified penalty structure under the OVDP may be extremely favorable in comparison with the civil penalties that could otherwise be imposed.” (IRS Announces New Off-Shore Voluntary Disclosure Program Without A Deadline by Bryan Cave) 

“Under the 2012 OVDP, taxpayers with previously undisclosed foreign accounts, assets, and income may be able to avoid criminal prosecution and limit their exposure to civil penalties if they meet certain requirements, including filing all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.” (IRS Offshore Voluntary Disclosure Program Reopens by Morrison & Foerster LLP) 

6. Disclosing via the program could be more costly than through traditional means:

“A taxpayer contemplating a voluntary disclosure also may want to consider the differences in the financial consequences of participating in the new program, opting out of the new program or making a traditional voluntary disclosure. In many instances, the 2012 OVDP would involve more years, higher taxes and significantly larger penalties than a traditional voluntary disclosure. Taxpayers participating (willingly or not) in the 2012 OVDP may face an IRS unwilling to negotiate, notwithstanding facts supporting the reduction or elimination of penalties.” (New 2012 Offshore Voluntary Disclosure Program; Taxpayer Advocate Criticizes IRS “Bait & Switch”; Current Offshore Enforcement Initiatives by Duane Morris LLP) 

7. Taxpayers with foreign accounts but no foreign income may want to wait:

“Of course, taxpayers who received no income from their foreign accounts or who reported their offshore accounts but failed to file an FBAR may do better to opt out of the program and file a traditional voluntary disclosure. For now, the IRS is only saying that it will provide more guidance shortly. (New 2012 IRS Offshore Tax Amnesty Program Announced by Brian Mahany) 

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