I.R.S. Offshore Voluntary Disclosure Program Update – Tax Client Alert

Jan. 11, 2012 | Law Alerts

The Internal Revenue Service (“IRS”) announced on January 9, 2012 that it was reopening its offshore voluntary disclosure program for taxpayers with previously undisclosed foreign financial accounts.  This new program allows taxpayers to become compliant with their international tax reporting, following the success and closure of the 2009 and 2011 programs.  The previous two programs yielded 33,000 submissions and the IRS collected more than $4.4 billion.

The terms of the new program remain similar to the 2011 program, with two notable differences.  Under the prior program, the maximum penalty was 25 percent, and the taxpayer was required to submit documentation to enter the program by a specified deadline.  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 and foreign assets during the eight full tax years prior to the disclosure.  Also, the new program does not have a submission deadline and will remain open for an indefinite period of time.  The IRS cautions that the terms of the new program could change at any time, including an increase in the penalty framework for taxpayers or defined classes of taxpayers.  The IRS can also end the program entirely at any point.

Many tax practitioners expect that this announcement foreshadows a major deal between the IRS and international banks.  The U.S. government has been investigating 11 international banks and offered these banks a global settlement on December 16, 2011.  The new program also reopens months before U.S. taxpayers will be required for the first time to disclose on their 2011 income tax returns interests in foreign financial assets (e.g. foreign accounts, interests in foreign entities, etc.) exceeding $50,000.  The disclosure of foreign financial assets was enacted by Congress in 2010 and supplements a taxpayer’s annual FBAR filing requirement.

Participants in the new program must file original and amended tax returns and include payment for back taxes, penalties and interest for up to eight years.  Participants must also submit FBARs, relevant information returns and other required documents for the covered years.

If you have additional questions regarding these new developments or have a client that may benefit from a consultation, please contact Brendan Lund at blund@carr-mcclellan.com or your Carr McClellan attorney at (650) 342-9600.