New procedures allow taxpayers to become current
The use and abuse of foreign accounts and assets has increased as investing and business activity become more global. As a result, the federal government has been focusing on foreign assets and investments held by U.S. taxpayers. The Department of Justice and the Internal Revenue Service have stepped up their enforcement of international reporting requirements and have pursued non-filers or those who have omitted foreign income from U.S. tax returns.
For the 2011 tax return filing season (for returns due in 2012), the introduction of a new form (Form 8938) requires many U.S. individuals with foreign assets to report the existence, ownership and value of the assets in some detail with their Form 1040 tax filings.
In 2009 and again in 2011, the IRS announced voluntary disclosure programs to allow taxpayers to come forward and disclose offshore accounts and omitted income under a specific program that had defined penalties (in many cases, lower than the penalties and sanctions that could be imposed if the program was not in existence). The 2011 program ended last September.
More than 30,000 taxpayers participated in the programs, and the government collected nearly $5B in taxes, interest and penalties as a result. Earlier this year, the IRS announced it would make the offshore disclosure process a more permanent initiative.
On June 26, the IRS released new frequently asked questions regarding the 2012 Offshore Voluntary Disclosure Program previously announced in January. The FAQs serve as the outline for the rules of the operation of the OVDP. Additionally, the IRS announced a plan for certain low-risk nonresident United States taxpayers with little to no underreported taxes to catch up with past tax-filing obligations.
The 2012 OVDP is currently in progress, and the FAQs are effective immediately. While there is no established filing deadline or expiration, the terms of the program could change prospectively at any time. The new catch-up filing procedures will be effective Sept. 1, 2012.
As with the 2011 program, taxpayers who otherwise qualify for the voluntary disclosure initiative can avoid uncertain criminal or severe civil penalties by taking advantage of the IRS’s renewed initiative. Unlike the 2011 program, the 2012 version does not have an established deadline for taxpayers to apply for relief. However, the terms of this program could change at any time. For example, the IRS may increase penalties or limit eligibility 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 as for 2011, except for the highest penalty category. For the 2012 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 taxable years prior to the disclosure to the IRS of the accounts and income. The 27.5 percent penalty is up from 25 percent in the 2011 program. Some taxpayers, in special circumstances, will be eligible for 5 or 12.5 percent penalties; these penalty amounts remain the same in the new program as in 2011. Individuals whose offshore accounts or assets did not exceed $75,000 in any calendar year covered by the new OVDP may qualify for the 12.5 percent rate. As under the prior programs, taxpayers may opt out of the OVDP and instead be subject to examination. 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.
A new comprehensive set of FAQs was issued concurrently with the announcement. The 2012 OVDP website — www.irs.gov/newsroom/article/0,,id=254187,00.html — contains the new FAQs as well as other information. Similar to the 2011 FAQs, the 2012 FAQs provide a procedure for taxpayers with no underreported income who have inadvertently missed certain foreign information returns, such as Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (the so-called “FBAR” form); Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations; and Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and similar forms to submit the delinquent forms without penalty (FAQs 17 and 18). The ability to file missed international forms (or amend past filings that may be incomplete) such as Forms 5471 and 3520 without penalty (if there is reasonable cause) is an opportunity for many taxpayers to catch up on missed or incomplete filings.
The IRS also announced June 26 new compliance procedures effective Sept. 1, 2012, for nonresident United States taxpayers who have failed to timely file income tax returns and FBAR forms and who present lower compliance risk to the IRS than those who might seek relief under the OVDP. More information about the new procedures may be found at www.irs.gov/businesses/small/international/article/0,,id=256772,00.html
The new procedures will allow taxpayers who present low compliance risks to the IRS to become current with their tax-filing requirements without facing penalties or additional enforcement action. The IRS also announced that the new procedures will allow resolution of certain issues related to certain foreign retirement plans (such as Canadian Registered Retirement Savings Plans). In some circumstances, tax treaties allow for income deferral under U.S. tax law, but only if an election for deferral is made on a timely basis. The streamlined procedures will be made available to resolve low compliance risk situations even though this election may not have been made on a timely basis.
Submissions from taxpayers that present higher compliance risk will be subject to a more thorough review and potentially subject to an audit, which could cover more than three taxable years.
Any taxpayer claiming reasonable cause for failure to file tax returns, information returns or FBARs will be required to submit a dated statement, signed under penalties of perjury, explaining why there is reasonable cause for any previous failures to file. Any taxpayer seeking relief for failure to timely elect deferral of income from certain retirement or savings plans where deferral is permitted by a relevant treaty will be required to submit certain other information.
Taxpayers who would have been ineligible to participate in the OVDP are similarly ineligible to utilize the new intermediate procedures. The government reserves the right to reject a taxpayer’s submission under these procedures if it is determined that criminal prosecution is nonetheless warranted. Anyone contemplating making any type of voluntary disclosure should consider seeking legal advice before proceeding with any filing or disclosure.
William F. Roth III is a tax partner with the local office of BDO USA LLP. The views expressed are those of the author. The comments are general in nature and not to be considered specific tax or accounting advice.