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As discussed further below, participants in the Internal Revenue Service's 2012 Offshore Voluntary Disclosure Program ("OVDP") may need to take action before July 1, 2014 to reduce their OVDP "offshore" penalty from 27.5% to 5% or even zero.
Background
In 2012 the Internal Revenue Service ("IRS") commenced the OVDP with the aim of inducing US taxpayers who had not reported income from foreign financial accounts ("FFAs") and had not filed annual reports disclosing those accounts "(FBARs") to come forward and voluntarily correct these delinquencies. The OVDP was a successor to similar IRS programs in 2009 and 2011.
Under the 2012 OVDP, a participant needed to file amended tax returns and FBARs for the last 8 years of delinquency. By entering into a closing agreement under the OVDP, delinquent taxpayers could settle their tax obligations for the years involved and avoid possible criminal prosecution. Under the 2012 OVDP, a participating taxpayer must normally pay a so-called "offshore" penalty equal to 27.5% of the highest aggregate value during the 8-year reporting period of the taxpayer's FFAs and certain other assets related to tax avoidance.
5% Penalty and Zero Penalty under New IRS Streamlined Compliance Procedures
On June 18, 2014, the IRS issued Streamlined Domestic and Foreign Offshore Compliance Procedures, which will be discussed in more detail in a subsequent client alert. Under these procedures, the "offshore" penalty may be reduced to 5% for qualifying U.S. taxpayers residing in the United States, and qualifying U.S. taxpayers residing abroad may not be liable for any offshore penalty.
Eligible taxpayers currently participating in the OVDP may request that the reduced penalty be applied. The reduction is not automatic, but requires IRS approval. Together with his or her request for a reduced penalty, the taxpayer must submit to the IRS a certification under penalties of perjury that his or her failure to report income on FFAs and to file FBARs was not willful. It is not clear whether there is any deadline to submit this certification.
Importantly, in order to be eligible for the reduced penalties, a taxpayer must have mailed to the IRS its Voluntary Disclosure Letter and attachments prior to July 1, 2014. It is not sufficient that a taxpayer requested pre-clearance to participate in the OVDP prior to this date. If a U.S. taxpayer has received pre-clearance to participate in the OVDP, but the deadline for submitting the Voluntary Disclosure Letter falls after June 30, 2014, the opportunity to request a reduced penalty would have to be preserved by expediting the filing of the Voluntary Disclosure Letter.
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This summary is intended to provide general information only on the matters presented. It is not a comprehensive analysis of these matters and should not be relied upon as legal advice.
We have discussed the 2012 OVDP in our client alert dated January 17, 2012. Please consult this alert for relevant background.
For further information about the new OVDP rules or the new Streamlined Offshore Compliance Procedures, please contact Charles E. Chromow 212-509-4712 or by email at [email protected] or Harold Ullman 212-509-6312 or by email at [email protected]
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Circular 230 Disclosure: Pursuant to regulations governing practice before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.
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