2012 Offshore Voluntary Disclosure Program –Third Time’s The Charm
On January 9, 2012, the IRS reopened the Offshore Voluntary Disclosure Program (2012 OVDP), its third offshore voluntary disclosure program, due to continued strong interest in the program. The 2012 OVDP follows on the success of the 2009 Offshore Voluntary Disclosure Program (2009 OVDP) and the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI), both of which have since closed. The 2012 OVDP is similar to its predecessors in that it allows certain taxpayers to voluntarily disclose hidden offshore accounts without the risk of criminal prosecution and also provides for reduced civil penalties for prior noncompliance with offshore account reporting requirements. The risk of the IRS discovering a taxpayer’s undisclosed offshore accounts increases every day. The consequences for failure to comply with proper disclosure and filing requirements may lead to audits, severe financial penalties, and in some cases, criminal prosecution.
The structure of the 2012 OVDP is based on that of its predecessor (the 2011 OVDI), with a few key differences. The 2012 OVDP penalty framework requires participants to pay a penalty of 27.5% (up from 25% under the 2011 OVDI) of the highest aggregate balance in unreported foreign accounts during the eight full tax years prior to the disclosure. Some taxpayers will be eligible for reduced 5% or 12.5% penalties instead; the eligibility requirements for these reduced rates remains the same as in 2011 OVDI. Thus, a taxpayer with offshore accounts or assets that, in the aggregate, did not exceed $75,000 in any calendar year during the eight year look-back period will qualify for a reduced 12.5% rate. The reduced 5% rate will apply in certain limited circumstances (e.g., in the case of foreign residents who were unaware that they were U.S. citizens). Taxpayers participating in the 2012 OVDP must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years, as well as pay any accuracy-related and/or delinquency penalties. Taxpayers who have come forward to make voluntary disclosures since the closure of the 2011 OVDI will be treated under the provisions of the 2012 OVDP.
Unlike the 2011 OVDI, there is no set application deadline for taxpayers under the 2012 OVDP. However, it is important to note that the IRS can change the terms of the 2012 OVDP at any time. Thus, the IRS may increase penalties in the program for all or certain taxpayers or decide to end the program altogether at any time.
More details on the 2012 OVDP will be available within the next month. The IRS will be providing additional specifics on the 2012 OVDP and updating key Frequently Asked Questions on its website.
If you would like to discuss how any of these changes may affect your business or personal income tax situation, or have any other tax or estate planning questions, please contact, Scott Borsack (215.864.7048), Bill Hussey (215.864.6257), Kevin Koscil (215.864.6827) or Suzanne Prybella (215.864.7188).
Please note that unless Congress takes some action before the end of the 2012 calendar year, the exemption against the federal estate and gift taxes will be reduced from the current $5 million ($10 million for a married couple) amount to $1 million ($2 million for a married couple) and the tax rate will increase from 35% to 55%. Tax rates on ordinary income, capital gains and dividends will rise as well. The 2012 calendar year promises to be filled with much activity with a Presidential election, Congressional elections and the wrangling that will undoubtedly take place over federal taxes. The Tax and Estates Practice Group at White and Williams is committed to keeping our clients and friends up to date with important tax developments. For current information, please refer to the Tax and Estates page on our website, www.whiteandwilliams.com.
IRS Circular 230 Notice: To ensure compliance with certain regulations promulgated by the U.S. Internal Revenue Service, we inform you that any federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code, or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein, unless expressly stated otherwise.