IRS has announced that it has reopened the offshore voluntary disclosure program (OVDP) with some changes. It also noted that it has collected over $4.4 billion under the two prior programs.

 The first OVDP was announced by IRS in 2009 and applied to those that voluntarily and timely disclosed unreported offshore income for 2003 - 2008. In February, 2011, IRS unveiled a second OVDP to give taxpayers with undisclosed income from hidden offshore accounts for the 2003 - 2010 period the chance to get current with their taxes. The 2011 OVDP was originally available through Aug. 31, 2011 but was extended through Sept. 9, 2011. It carried higher penalties than the original disclosure program but the penalties could be mitigated under certain circumstances.

New program. IRS says the new the new program is similar to last year's program in many ways. However, it stresses that there are a few key differences. Unlike last year, there is no set deadline under the new program to apply. IRS cautions, however, that it could change the terms of the program at any time. For example, it could increase penalties for all or some taxpayers or defined classes of taxpayers. In addition, it may 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. Under the new program, individuals must pay a penalty of 27.5% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years before the disclosure (up from 25%). As under the 2011 program, some taxpayers will be eligible for 5% or 12.5% penalties under the new program.

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% penalty, but taxpayers in limited situations may qualify for a 5% penalty. Smaller offshore accounts face a 12.5% penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP qualify for this lower rate. Taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

IRS says more details will be available within the next month on its website. In addition, it will be updating key FAQs and providing additional specifics on the offshore program.

News Release 2012-5, 01/09/2011

IRS Offshore Programs Produce $4.4 Billion to Date for Nation's Taxpayers; Offshore Voluntary Disclosure Program Reopens

IR-2012-5, Jan. 9, 2012

The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation's taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation's tax system.”

The 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. 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.

“As we've said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent 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 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

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.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.

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A willful attempt to evade or defeat any tax or the payment of tax is punishable under Code Sec. 7201 as a felony. The IRS will consider voluntary disclosure along with all other factors in an investigation in determining whether criminal prosecution will be recommended. This voluntary disclosure practice creates no substantive or procedural rights for taxpayers because it is simply a matter of internal IRS practice, provided solely for guidance to IRS personnel. Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution. Internal Revenue Manual, Part 9, 9.5.11.9(1), 12/2/2009.

A voluntary disclosure will not automatically guarantee immunity from prosecution, but a voluntary disclosure may result in prosecution not being recommended. This practice does not apply to taxpayers with illegal source income. Internal Revenue Manual, Part 9, 9.5.11.9(2), 12/2/2009.

A disclosure is timely if it is received before the IRS has done any of the following:

(1) initiated a civil examination or criminal investigation of the taxpayer, or notified the taxpayer that it intends to begin such an examination or investigation. Internal Revenue Manual, Part 9, 9.5.11.9(4)A., 12/2/2009.

(2) received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer's noncompliance. Internal Revenue Manual, Part 9, 9.5.11.9(4)B., 12/2/2009.

(3) initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer. Internal Revenue Manual, Part 9, 9.5.11.9(4)C., 12/2/2009.

(4) acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena). Internal Revenue Manual, Part 9, 9.5.11.9(4)D., 12/2/2009.

 A taxpayer planning to make voluntary disclosure in any tax matter that might involve criminal charges should consult an attorney because of the attorney-client privilege. There is no similar privilege for communications with non-attorney tax practitioners in such cases. The privilege for accountants and other non-attorney practitioners under Code Sec. 7525 does not extend to criminal tax matters or proceedings.

The 2011 offshore voluntary disclosure initiative.

The IRS provides a special voluntary disclosure initiative (the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI)) designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. It succeeded an earlier voluntary disclosure program, discussed below, that closed with 15,000 voluntary disclosures on Oct. 15, 2009. In the period after that and before the Feb. 8, 2011 announcement of the 2011 OVDI, more than 3,000 taxpayers came forward to the IRS with bank accounts from around the world. These taxpayers are also eligible to take advantage of the 2011 OVDI. The 2011 OVDI includes several changes from the 2009 program. The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting. However, the 2011 OVDI does add features not found in the 2009 offshore voluntary disclosure program and has a different penalty framework from the 2009 program. Under the 2011 OVDI, individuals pay a penalty equal to 25% of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. A reduced rate of 12.5% is available for taxpayers whose offshore accounts did not exceed $75,000 during 2003-2010. Taxpayers are generally eligible for the 5% penalty if they did not open the account, had minimal contact with the account, did not withdraw more than $1000 in any year covered by the 2011 OVDI, and can establish that taxes were paid on funds deposited in the account. In addition, foreign residents who did not know they were U.S. citizens can avail themselves of the 5% reduced penalty. All 2011 OVDI participants also must pay back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. Taxpayers participating in the 2011 OVDI were originally required to file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by an Aug. 31, 2011 deadline. But, on June 2, 2011, a 90 day extension was provided for taxpayers who made a good faith effort to comply. On Aug. 26, 2011, IRS announced that taxpayers would be allowed to participate if they submitted certain information on or before Sept. 9, 2011. IR 2011-14, 2/8/2011; , 2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers.

Prior law.

Before Feb. 8, 2011, the 2011 OVDI had not been announced. IR 2011-14, 2/8/2011. However, the 2011 OVDI has retroactive effect. Thus taxpayers who made voluntary disclosure after Oct. 15, 2009 (i.e., after the 2009 VDP closed) may apply to participate in the 2011 OVDI. IR 2011-14, 02/08/2011.

IRS offshore disclosure program for voluntary disclosures made in the period from Mar. 23, 2009 until Oct. 15, 2009.

In 2009, the IRS centralized the civil processing of offshore voluntary disclosures and offered a uniform penalty structure for taxpayers who voluntarily came forward. , FAQs on Voluntary Disclosure Process and Undisclosed Offshore Account, Q&A 1, May 6, 2009. Taxpayers had until Oct. 15, 2009 to make voluntary disclosure under these rules. IR 2009-84, 9/21/2009. Taxpayers with undisclosed foreign accounts or entities could make a voluntary disclosure that enabled them to become compliant, avoid substantial civil penalties, generally eliminate the risk of criminal prosecution and calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. , FAQs on Voluntary Disclosure Process and Undisclosed Offshore Account, Q&A 3, May 6, 2009. Participating taxpayers paid back-taxes and interest for six years and either an accuracy related or delinquency penalty. But, in lieu of all other penalties that may apply, including FBAR and information return penalties, the IRS assessed a penalty equal to 20% of the amount in foreign bank accounts or entities in the year with the highest aggregate account or asset value. , Authorization to Apply Penalty Framework to Voluntary Disclosure Requests Regarding Unreported Offshore Accounts and Entities, Mar. 23, 2009. An alternative to statutory passive foreign investment company computations was offered in connection with this program. , Offshore Voluntary Disclosure Initiative: Passive Foreign Investment Computations, September, 2010.

Prior law.

Before March 23, 2009, the 2009 offshore voluntary disclosure program did not apply. , FAQs on Voluntary Disclosure Process and Undisclosed Offshore Account, Q&A 16, May 6, 2009.

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