IRS Releases Anticipated Guidance for 2012 Offshore Voluntary Disclosure Program; Announces New Compliance Procedures for Low-Risk U.S. Citizens Residing Abroad
In a continued effort to combat offshore tax evasion and increase international compliance, on June 26, 2012, the Internal Revenue Service provided updated guidance to the 2012 Offshore Voluntary Disclosure Program (the “2012 OVDP”), and announced that new compliance procedures will be available for certain non-resident taxpayers effective September 1, 2012.
The 2012 OVDP
The IRS previously implemented offshore voluntary disclosure initiatives in 2009 and 2011 (the “2009 OVDP” and the “2011 OVDP”) to allow taxpayers with undisclosed foreign accounts or entities to become compliant with U.S. tax law, avoid certain civil penalties, and, in most cases, eliminate the risk of criminal prosecution. A significant distinction between these prior initiatives and the 2012 OVDP is that there is no set deadline for U.S. persons to enter into the 2012 OVDP. Notwithstanding the apparent indefinite deadline for participation in the 2012 OVDP, the IRS has indicated that it may change the terms of the program (for instance, by increasing the penalties or limiting eligibility), or terminate it altogether at any time.
At the same time, the IRS released updated FAQs (Frequently Asked Questions and Answers), providing guidance to taxpayers who came forward after the 2011 OVDP ended and to those still considering coming forward. As highlighted in the FAQs, the disclosure period is the most recent eight tax years for which the due date for filing a return (including extensions) has expired. For example, if a taxpayer filed his/her 2011 tax return on or before April 15, 2012, the applicable disclosure period under the 2012 OVDP would be 2004-2011. In the event the taxpayer is able to establish that during the applicable disclosure period he/she timely filed original, as opposed to amended, compliant returns (i.e., original returns fully reporting all income, accounts, and assets), prior to making the voluntary disclosure, then the disclosure period will not include such compliant years.
The FAQs also indicate that the IRS may, in the future, deem certain groups of taxpayers ineligible to participate in the 2012 OVDP. In particular, the FAQs explain that “if a taxpayer appeals a foreign tax administrator's decision authorizing the providing of account information to the IRS and fails to serve the notice [on the Attorney General of the United States] as required under existing law, . . . the taxpayer will be ineligible to participate.” Additionally, the FAQs provide that “the IRS may announce that certain taxpayer groups that have or had accounts at specific financial institutions will be ineligible due to U.S. government actions in connection with the specific financial institution.” To date the IRS has not made any such “announcement,” but any taxpayer aware of U.S. government investigations or indictments involving a foreign financial institution with which he/she maintains an account should be on notice that the IRS could deem him/her ineligible to participate in the 2012 OVDP at any time.
New Compliance Filing Procedures, Effective September 1, 2012
Along with the release of the 2012 OVDP FAQs, the IRS concurrently announced a separate, new forthcoming procedure (the “Compliance Procedure”) designed to help U.S. citizens residing abroad, including but not limited to dual citizens, in becoming compliant with U.S. federal tax filing obligations without participating in the 2012 OVDP. This Compliance Procedure is intended for low compliance risk taxpayers that have failed to file federal income tax returns or Foreign Bank and Financial Accounts (“FBARs”) (for our client alert discussing the taxpayers required to submit an FBAR, please click here), who recently became aware of their filing obligations and who would like to become compliant.
Taxpayers seeking to take advantage of this new Compliance Procedure must submit delinquent federal income tax returns (along with the applicable related information returns) for the previous three years and must file delinquent FBARs for the past six years. The level of IRS review accorded to these submissions will vary based on the compliance risk of the submission.
Low compliance risk submissions will generally not be subject to penalties or other IRS action; however, higher compliance risk submissions will be ineligible for the Compliance Procedure and will become subject to a more thorough review and possibly full examination. For these purposes, a submission will be considered “low risk” if the filed returns are “simple” and report less than $1,500 in tax due in each of the years. Generally, an applicant's risk level rises with increased income and assets, evidence of sophisticated tax planning or avoidance, or indications that the applicant conducts material economic activity in the U.S.
Of particular note, once a taxpayer submits an application under the Compliance Procedure, he/she will no longer be eligible to participate in the 2012 OVDP. Thus, a taxpayer who seemingly qualifies for both the 2012 OVDP and the Compliance Procedure must carefully consider which voluntary disclosure program is more advantageous, taking into account his/her particular facts.
More details about the Compliance Procedure are expected to be released prior to the September 1, 2012, effective date.
Relief for Qualifying Retirement or Education Savings Plans
Both the 2012 OVDP and the Compliance Procedure provide relief for those who have failed to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by relevant income tax treaty. Individuals seeking this type of relief must follow various procedures to regain compliance. These procedures include: (1) providing a statement requesting an extension of time to make an election to defer income tax; (2) filing Forms 8891 for the applicable tax years; and (3) signing a statement under the penalties of perjury that describes (i) the events that led to the failure to make the election, (ii) the events that led to the discovery of the failure, and (iii) if the taxpayer relied on a professional advisor, the scope of the advisor's engagement and responsibilities.
Consult Your Attorney
This Alert is necessarily a summary and does not provide a comprehensive discussion of all the requirements for participation in either initiative. Your individual facts and circumstances will determine whether you are eligible to participate in the 2012 OVDP or the Compliance Procedure, as well as the decision as to whether to participate in either initiative. You should seek the advice of counsel in determining whether your situation is appropriate for either the 2012 OVDP or the new Compliance Procedure.
Circular 230 Disclosure: To ensure compliance with requirements imposed by Treasury and the IRS, we inform you that any federal tax advice contained in this communication (including attachments) is not intended or written to be used and cannot be used for the purpose of (i) avoiding tax penalties that may be imposed under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another person any transaction or matter addressed herein.
This Alert has been prepared for general informational purposes only and is not intended as specific legal advice and no legal or business decision should be based solely on its content.