IRS Re-Opens Offshore Voluntary Disclosure Program (1/9/12)

In IR 2012-5, here, the IRS announces that it is "Reopening" its Voluntary Disclosure Program.  For now, I will just refer readers to the Notice and make comments later if appropriate.  The key features of the program (IRS puffing omitted).

Issue Number:    IR-2012-5 

IRS Offshore Programs Produce $4.4 Billion to Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens 

WASHINGTON — The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs. 

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The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point. 

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In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program. 

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category. 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. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011. 

Participants must file 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. 

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

JAT Comments:

1. After OVDI 2011, the IRS announced that it would accept voluntary disclosures for offshore account matters pursuant to its long-standing voluntary disclosure policy.  I understand that the IRS had determined to process such disclosures pursuant to the procedures developed in the OVDP and OVDI programs.  Hence, the formal announcement of a 3rd or "re-opened" program seems to add only the penalty amount (27.5 percent rather than 25% in OVDI 2011).  And, that penalty presumably could rise in the future for those who tarry.  So, the key point added by the new announcement is the penalty amount (including confirming the mitigated penalty amounts from OVDI 2011 in limited circumstances).

2.  The community buzz is that this new announcement may precede some development related to a settlement with some Swiss banks.  See e.g., Marie Sapirie, IRS Announces Open-Ended Third Offshore Voluntary Disclosure Program, 2012 TNT 6-1 (1/10/12) (including practitioner speculation about this).

3.  Taxpayers with offshore accounts (or who, having now closed them, who had them in the lookback period) and have not yet joined the programs might want to consider or re-consider what to do now.  Those taxpayers' names could well dribble into the IRS whether from a settlement with the Swiss banks or otherwise (and there is plenty of otherwise opportunities for the IRS to obtain information about previously below-the-radar U.S. taxpayers).

4.  As I have discussed before, those whose situations would justify an opt out if they were to join the program might seriously consider not joining the program at all.  The reason is simple.  On an opt out, they will be subject to an audit in which income tax adjustments and penalties could be asserted for open years (usually just three if they indeed would benefit from an opt out).  If they do nothing and are audited (by no means a certainty and probably not even a likelihood for most), they will be audited and, providing that they would have been good candidates for opting out, they will get the same result on audit anyway.