Third IRS Offshore Initiative Offers Taxpayers Another Chance to Come Clean as IRS Increases its International Tax Enforcement
On January 9, 2012, the Internal Revenue Service (IRS) announced a third voluntary disclosure program to encourage taxpayers with undisclosed offshore accounts and assets to come into tax compliance without criminal tax exposure. This new voluntary disclosure program is the third program administered by the IRS since 2009. The first two programs, in 2009 and 2011, were very successful, producing approximately 33,000 voluntary disclosures with tax collections of at least $4.4 billion.
The new voluntary disclosure program will be similar to the 2011 program, with some key differences. (See New IRS Offshore Initiative Offers Taxpayers a Second Chance to Come Cleanfor details regarding the 2011 program.) To participate in the new program taxpayers will be required to file amended tax returns and Forms TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) for the last eight years disclosing the foreign accounts/assets and reporting the income generated from them. They will also have to sign extensions of the statute of limitations allowing the IRS to assess the income tax, interest, penalties and FBAR penalties, similar to what taxpayers in the 2011 program were required to do.
The new penalty structure will be the same as in the 2011 program except participants will now be exposed to a 27.5 percent offshore penalty (instead of the 25 percent penalty for the 2011 program) on the highest balance in foreign bank accounts and assets over the eight-year period. This penalty is in lieu of other penalties that could be asserted by the IRS, such as the failure to report a foreign financial account on a FBAR which carries penalties as high as 50 percent of the value of the account in each year. The new program will continue the reduction of the offshore penalty to five percent of the highest balance in certain limited situations and the reduction to 12.5 percent where the accounts do not exceed $75,000. The first two programs were open for a limited period of time and were announced with guidance in the form of frequently asked questions and answers (FAQs).
Taxpayers who did not submit their disclosures by the listed deadline were generally not accepted into the programs. Unlike the prior programs, however, the IRS announced that the new program will not have a set deadline. The IRS retains the right to terminate the program at any time and to change its terms. It is expected that any person who made a voluntary disclosure after the deadline of the 2011 program will be included into this new program. The IRS will issue more information regarding the program’s details, including an updated FAQ, within the next month.
The announcement of this new program comes at a time when the U.S. is increasing its intense focus on international tax compliance through enforcement and enactment of new laws requiring increased disclosures of foreign financial accounts and imposing obligations on foreign financial institutions to file information returns concerning US taxpayers. (See Internal Revenue Service Requires New Disclosure Form for Specified Foreign Financial Assets in the New Yearand Recent Legislation and IRS Guidance Greatly Impact Foreign Account Reporting and Compliance; Confirm Government's Focus on Offshore Activities).
The U.S. government is currently negotiating with several foreign banks to obtain the release of account information of its U.S. customers. In addition, the U.S. has also increased its pursuit of criminal prosecution of international tax evaders and their bankers and advisors. Earlier this month, the Justice Department announced the indictment of three bankers at a Swiss bank for assisting U.S. taxpayers in hiding assets.
As more information about the third voluntary disclosure program becomes available, we will update you. In the meantime, this IRS effort is a welcome opportunity for taxpayers with undisclosed accounts to come into tax compliance without fear of criminal prosecution and with a clear understanding of what penalties will be imposed.