On 9 January 2012, the US Internal Revenue Service (“IRS”) issued a new notice creating the Offshore Voluntary Disclosure Program (“OVDP”) under terms that differ only slightly from the recently completed 2011 Offshore Voluntary Disclosure Initiative (“2011 OVDI”). The most important difference is that the OVDP does not include an expiration deadline, though IRS reserves the right to bring the program to a close at any time.
Under the new OVDP, individuals who failed to report income from offshore assets will face an “in lieu of” penalty rate of up to 27.5% (up from 25% in the 2011 OVDI) on their highest offshore account balance or offshore asset value over the last 8 years. However, many clients will qualify for a reduced 5% or 12.5% in lieu of penalty.
The in lieu of penalty applies to asset/account values rather than US taxes owed and has been particularly burdensome for non-US resident US citizens or green card holders (expatriates) who have diligently paid their taxes in their home countries, but have failed to file US federal income tax returns as a result of poor advice or mere lack of understanding. Many of these taxpayers will qualify for a 5% in lieu of penalty.
In addition to the in lieu of penalty, taxpayers electing to use the OVDP must pay back US taxes and interest for 8 years. Program participants will also face penalties based on the amounts of unpaid US tax. For many US expatriates, the US taxes/interest/penalties owed are greatly reduced after taking into account foreign tax credits for income taxes paid in their home countries, so the in lieu of penalty often comprises the bulk of a US expatriate participant’s total US liability.
As in prior voluntary disclosure programs, taxpayers who apply voluntarily generally avoid criminal prosecution. However, taxpayers are only eligible for the OVDP if they submit their applications before IRS learns of their nonpayment from another source. Swiss authorities are currently sifting through US clients of Swiss banks whose names will be turned over to IRS. Such clients should take advantage of the OVDP immediately or risk much higher penalties and potential criminal prosecution when the Swiss authorities divulge their identities to IRS.
In the same notice, IRS also announced that it has collected US$4.4 billion so far from its 2009 and 2011 offshore voluntary disclosure initiatives.
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