On January 9, 2012, the Internal Revenue Service reopened the Offshore Voluntary Disclosure Program (OVDP), which allows taxpayers to come forward and become fully compliant for unreported foreign income, bank accounts, entities, and other assets. The program follows two similar IRS initiatives in 2009 and 2011 that resulted in the collection of over $4.4 billion in taxes, interest, and penalties. The IRS has reopened the OVDP due to continued interest from taxpayers after the closure of the previous programs. The 2012 program will be open for an indefinite period.
In the announcement of the latest program, IRS Commissioner Doug Shulman said that there have been 33,000 voluntary disclosures from the previous two OVDPs. After the expiration of the last program in September of 2011, hundreds of additional taxpayers have come forward desiring to be included in the program. Commissioner Shulman remarked that the IRS is following more leads and that the risks for people who do not come forward continue to increase.
The IRS voluntary disclosure programs represent a portion of a larger push by the US government to identify United States taxpayers with undeclared foreign income and assets. Following the highly publicized crackdown on UBS AG, the IRS has been using data obtained through the 2009 OVDP to investigate other foreign financial institutions that have conspired with clients to hide offshore funds. While focusing current efforts on Swiss banks, the IRS is also becoming increasingly interested in banks in Hong Kong and Singapore.
While the 2012 program follows the same format as the 2011 OVDP (announced on February 8, 2011), the new program has no set deadline.
Participating taxpayers must pay a 27.5% penalty on the highest aggregate value of their undeclared foreign bank accounts or assets during the eight tax years prior to the disclosure. This is up from 25% in the 2011 program. Under limited circumstances, taxpayers may be eligible for a reduced penalty of 5%. Taxpayers with smaller accounts (not exceeding $75,000) may qualify for a 12.5% penalty.
Participants are required to amend their tax returns for the past eight years and pay back taxes, interest, and penalties on unreported income. Participation in the initiative also requires preparing and filing TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), for the past eight years to disclose offshore bank accounts and assets. The maximum civil penalty for a failure to file an FBAR for taxpayers outside the program is 50% of the highest account value for each year that the form is not filed.
While the new program has no deadline, the IRS could change the terms of the program at any time. The IRS treats taxpayers who come forward voluntarily to fix past problems much more leniently than those who wait and are caught. Taxpayers who do not participate in the initiative may face much stiffer penalties or criminal prosecution.