Private Client Services Update – IRS Has Two Smash Hits and Releases Offshore Voluntary Disclosure Program III

    By Alison V. Lennarz, Estate, Trust & Wealth Transfer

    On January 9, 2012, the IRS reopened its successful Offshore Voluntary Disclosure Program to encourage taxpayers with undisclosed offshore accounts to come into compliance with U.S. laws. A previous program, known as the Offshore Voluntary Disclosure Initiative (OVDI), was announced on February 8, 2011, and expired on September 9, 2011, following an extension due to Hurricane Irene. The Offshore Voluntary Disclosure Initiative followed the 2009 Offshore Voluntary Disclosure Program (OVDP), which was open to taxpayers from March 2009 through October 15, 2009.

    Unlike the earlier programs, the current Offshore Voluntary Disclosure Program (OVDP III) is available to taxpayers for an indefinite period, until otherwise announced. The penalty structure under OVDP III, however, is similar to that of the OVDI. It requires taxpayers to pay a penalty of 27.5% (up from 25%) of the highest aggregate balance in foreign bank accounts or entities, or the value of foreign assets, during the eight full tax years prior to the disclosure. As with the OVDI, some taxpayers are eligible for reduced penalties of 12.5% (available for accounts that have not exceeded $75,000 in any calendar year during the eight-year period) or 5% (available for a very limited class of inherited or similar accounts meeting certain criteria). Taxpayers who feel the program penalties are disproportionate may opt out of the penalty structure, and the decision to opt out is irrevocable. Participants in the program also must file all original and amended tax returns for the eight year period and include payment for unpaid taxes, interest, and accuracy related or delinquency penalties. On top of those payments, the cost of accountants’ and attorneys’ fees for assisting a taxpayer with compliance may be onerous. Above all, taxpayers and their advisors should be aware that the terms of OVDP III may change at any time. Additional details regarding OVDP III should be available on the IRS website in the coming weeks.

    Along with its announcement of the new voluntary disclosure program, the IRS announced that it had collected more than $4.4 billion from approximately 33,000 disclosure filings under the two prior programs, and moreover, that since the expiration of the 2011 OVDI, hundreds of taxpayers have come forward to make voluntary disclosures and avoid criminal prosecution. In addition to the revenue generated by the delinquent taxes, interest, penalties, and future taxes on income and gain resulting from taxpayers’ disclosures, the IRS has obtained a trove of information about specific foreign financial institutions, bankers, financial advisers, and others who have aided U.S. taxpayers in establishing and maintaining undeclared foreign accounts. The IRS clearly has discovered an effective tool to promote tax compliance and raise money for the nation’s coffers.

    Any non-compliant U.S. taxpayers who have not yet declared foreign accounts or other reportable assets should be aware of the increasing enforcement efforts of the Criminal Investigation Division of the IRS and growing cooperation among international institutions and tax authorities. While the civil penalties, other compliance costs and overall financial pain may be high, OVDP III offers U.S. taxpayers the opportunity to disclose and comply before penalties increase further, as well as the inestimable benefit of avoiding criminal prosecution.

    Alison Lennarz is of counsel at Kaufman & Canoles in the firm’s Williamsburg office. Her practice includes estate planning and administration, tax planning and compliance, as well as counseling small businesses and non-profits.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.