IRS Opens Third Version of Voluntary Disclosure Program
Written by: Steven J. Fromm, J.D., LL.M. (Taxation)
The IRS reopened its offshore voluntary disclosure program in early 2012 in response to what the government described as strong interest among taxpayers. The reopened program, the third of its type in recent years, encourages taxpayers with unreported foreign accounts to make full disclosures in exchange for a reduced penalty framework. Like its predecessors, the terms and conditions of the reopened program are very complex. The IRS has promised to provide more details. In the meantime, the prior offshore disclosure programs are guides to how the IRS intends to implement the third, reopened program.
Previous Two Disclosure Programs
The IRS launched two previous offshore disclosure initiatives: one in 2009 and another in 2011. I had previously discussed the second amnesty program in the article entitled Hidden Offshore Bank Accounts: IRS Offers A Second Chance To Come Forward. Both of these programs offered reduced penalties in exchange for full disclosure.
In early 2012, the IRS reported it received 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. The government has collected over $4.4 billion from the 2009 and 2011 programs. The IRS predicted it will collect more revenue as it continues to work cases.
New Reopened Third Program
The reopened program operates very similarly to the 2009 and 2011 programs but with some key differences. The previous programs were temporary. The 2011 program ended in mid-September 2011.
The reopened program has no set end date. The IRS cautioned, however, that it could close the program at some future date. The decision to end the program is solely at the discretion of the IRS.
Requirement of the Third Amnesty Program
The reopened program has the following requirements. Taxpayers must:
- File all original and amended tax returns
- Include payment for back-taxes and interest for up to eight years
- Pay accuracy-related and/or delinquency penalties.
- Additionally, taxpayers must 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. Note that the highest penalty in the 2011 program was 25 percent. IRS officials have said that the penalty was increased because the agency does not want to reward taxpayers who did not participate in the 2009 or 2011 disclosure programs because they anticipated that a future penalty would be lower.
Special 12.5 Percent Penalty
In limited circumstances, taxpayers may qualify for a 12.5 percent penalty. Generally, taxpayers whose offshore accounts or assets did not surpass $75,000 in any calendar year may qualify for the 12.5 percent penalty.
Special 5 Percent Penalty
The requirements for the five percent penalty are very narrow. The taxpayer must meet the following four conditions to be eligible for this reduced penalty:
- The taxpayer did not open or cause the account to be opened;
- The taxpayer exercised minimal, infrequent contact with the account, for example, to request the account balance, or update account holder information such as a change in address, contact person, or email address;
- Except for a withdrawal closing the account and transferring the funds to an account in the United States, the taxpayer did not withdraw more than $1,000 from the account in any year for which the taxpayer was non-compliant; and
- The taxpayer can show that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).
IRS Offers No Guarantees That Penalty Rates Will Not Be Changed Over Time
The penalty amounts in the reopened program are not set in stone, the IRS cautioned. It may eventually increase penalties in the program for all or some taxpayers or defined classes of taxpayers.
So Called "Quiet Disclosures"
One goal of the three programs is to caution taxpayers against so-called “quiet disclosures.” A quiet disclosure occurs when a taxpayer files an amended return and pays any tax delinquency without making a formal voluntary disclosure. The IRS warned taxpayers making quiet disclosures that they risked being sanctioned to the fullest extent allowed by law.
Problems, Concerns and Critics
The offshore disclosure programs were not without their critics. The National Taxpayer Advocate recently told Congress that the IRS should streamline what is a very complicated process. The National Taxpayer Advocate also reported that IRS examiners were assuming that all violations were willful unless a taxpayer presented evidence to the contrary. It is possible that the IRS may revisit some of the terms and conditions of the reopened program in light of the National Taxpayer Advocate’s report.
Please do not hesitate to contact this office if you have questions or need assistance.