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Analysis of the new 2012 Offshore Voluntary Disclosure Program (OVDP)

- By : Parag Patel Date : 10-Jan-12

Yesterday the Internal Revenue Service opened its Offshore Voluntary Disclosure Program (OVDP) to encourage more taxpayers with assets in undeclared foreign bank accounts to come forward.  While the OVDP was not expected by most tax lawyers and professionals, it may be welcomed by many of our clients who missed the recently closed 2011 OVDI program.

The IRS has introduced a series of voluntary disclosure programs in recent years. The OVDP follows on the success of the 2009 Offshore Voluntary Disclosure Program (the 2009 OVDP) and the 2011 Offshore Voluntary Disclosure Initiative (the 2011 OVDI), which were announced many years after the 2003 Offshore Voluntary Compliance Initiative (OVCI) and the 2003 Offshore Credit Card Program (OCCP) (there was low participation in the 2003 programs).

The many voluntary disclosure initiatives typically offer reduced penalties in exchange for taxpayers voluntarily coming into compliance before the IRS is aware of their prior tax indiscretions. In part, the success of such initiatives often depends on the perception that they will be followed by strong government tax enforcement efforts.

One reason for new OVDP program is the IRS’s ongoing well-publicized efforts with the Justice Department to pursue criminal prosecution of international tax evasion. Last year they charged a half dozen Americans with HSBC accounts with tax evasion. They also recently charged a trio of Swiss bankers with conspiring with U.S. taxpayers to hide more than $1.2 billion in assets from the IRS. There is ongoing summons activity (including the subpoena issued to HSBC India) seeking to force foreign financial institutions to deliver account-holder information to the U.S. government as well as possible indictments of foreign financial institutions. Recently, several foreign institutions have advised their account holders to consult U.S. tax advisors regarding the IRS voluntary disclosure program and their U.S. tax reporting relating to their foreign financial accounts. The institutions will likely take whatever action is necessary to avoid being indicted, beginning with the delivery of information regarding account holders to the U.S. government. In summary, the IRS is vigorously shaking the tax evasion tree, and fruits (i.e., tax evaders) are falling out.

The new 2012 OVCP 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, the IRS cautioned. 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.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category. The 2012 OVDI is patterned after the 2011 OVDI but increases the maximum “FBAR-related” penalty from 25% to 27.5% 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% in the 2011 program (the IRS has to give some incentive to previous taxpayers who earlier came forward; the 2009 program penalty was 20%). Some taxpayers will be eligible for 5 or 12.5% penalties; these remain the same in the new program as in 2011.

It is uncertain how the 2012 OVDP affects pending 2011 OVDI applications. It is possible that some 2012 OVCP filings could have resulted in a lesser (or greater) penalty, depending on account balances during the relevant disclosure period.

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.

Under the 2011 OVDI, the IRS agreed not to impose a penalty for the failure to file the delinquent FBARs if there were no underreported tax liabilities and the FBARs were filed by August 31, 2010 (FAQ 17). Presumedly, the IRS will follow the same course under the 2012 OVDI since those with no underreported tax liabilities are not truly within the range of taxpayers the IRS is trying to identify.

The ability of a U.S. taxpayer to maintain an undisclosed, “secret” foreign financial account is fast becoming impossible. Foreign account information is flowing into the IRS under tax treaties, through submissions by whistleblowers, from others who participated in the 2009 OVDP and the 2011 OVDI who have been required to identify their bankers and advisors. Additional information will become available as the Foreign Account Tax Compliance Act (FATCA) and Foreign Financial Asset Reporting (Form 8938 and new IRC § 6038D) become effective.

It is likely that the U.S. government will require foreign financial institutions doing any business in the United States (that may include any wire transfer activity, which is almost all institutions) to disclose account holders having relatively small accounts and earnings. There have been tax rumors of disclosure discussions regarding accounts having a high balance of the equivalent of $50,000 at any time between 2002 and 2010. U.S. persons having interests in foreign financial accounts should not be comfortable that their foreign financial institution will somehow refrain from disclosing very small accounts in the current enforcement environment. We do know how the unpredictable IRS will react to discovered undisclosed small account balances.

Taxpayers with undisclosed foreign accounts should consult a competent tax lawyer before deciding to participate in the 2012 OVDI. Although the 2012 OVDI penalty regime may seem overly harsh for many, the decision to participate should include an economic analysis of the taxpayer’s projected future earnings that could be generated from the foreign funds.  If a taxpayer is discovered before any voluntary disclosure submission, there could be harsh criminal (in addition to civil) penalties.  The risks may outweigh the benefits.

Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.

 

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