On June 26, 2012, the IRS released new frequently asked questions (FAQs) on the 2012 Offshore Voluntary Disclosure Program (OVDP) that was announced in January. Apart from increasing the maximum penalty (now set at 27.5 percent) and imposing no deadline, the 2012 OVDP is substantially similar to the 2011 initiative. The latest FAQs present some additional changes.
Under the latest OVDP, beginning with 2011, a taxpayer who does not disclose and is examined by the IRS could be subject to penalties for failure to fi le Form 8938, Statement of Specifi ed Foreign Financial Assets. The new guidance also specifi cally provides that taxpayers participating in the OVDP must report undisclosed tax liabilities from domestic sources, as well as from offshore accounts and assets. Two new FAQs address taxpayers with certain foreign retirement or pension plans. Taxpayers who have particular Canadian retirement or pension plans (such as RRSPs or RRIFs), but did not timely elect under the U.S.-Canada income tax treaty to defer U.S. tax on the undistributed income earned by those plans, may be able to make the election under the FAQs’ procedures. Taxpayers who have a non-Canadian, foreign retirement or pension plan, for which they believe there is no U.S. reporting obligation and that they believe should be excluded from the offshore penalty base, are instructed to contact the OVDI hotline.
Furthermore, the IRS added two ways in which a taxpayer may become ineligible for the program. First, if a taxpayer appeals a foreign tax administrator’s decision authorizing the provision of account information to the IRS and fails to notify the U.S. attorney general as required by law, the taxpayer is ineligible for the OVDP. Second, the IRS said that it may announce that certain taxpayer groups that had or have accounts at specifi c fi nancial institutions will be ineligible due to U.S. government actions related to those institutions.
The updated IRS website for the 2012 OVDP also reveals some changes to procedural elements of the program. The IRS has reformatted the Offshore Voluntary Disclosure letter. Moreover, the letter now requires an attachment, for each offshore account being disclosed, asking detailed information about the account, affi liated individuals and entities, and communications about the account.
While the IRS has tightened some of the OVDP guidelines, the program demonstrates the IRS’ encouragement of taxpayers to come clean about offshore accounts and income. The guidance further prompts taxpayers to disclose sooner rather than later, as the IRS states that it may change the OVDP rules at any time.