On January 9, the Internal Revenue Service (“IRS”) reopened its Offshore Voluntary Disclosure Program (“OVDP”) for U.S. taxpayers holding undisclosed foreign bank accounts. The OVDP permits eligible taxpayers with secret foreign bank accounts, and unreported income associated with those accounts, to obtain amnesty from criminal prosecution in return for the payment of back taxes, interest, and penalties.
Two previous IRS programs for taxpayers with foreign bank accounts, which ran in 2009 and 2011, brought in more than $4.4 billion in taxes from tens of thousands of U.S. taxpayers, according to the IRS. “Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman in a statement. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”
The new OVDP is similar to the 2011 program in several ways, with a few significant differences.
First, the third program will be open for an indefinite period of time until otherwise announced. However, the terms of the program could change at any time. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.
Second, the overall penalty structure for the new program is the same as for 2011, except for the taxpayers in the highest penalty category. The penalty framework requires individuals to pay a penalty of 27.5 percent, up from 25 percent in the 2011 program, 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. Like the 2011 program, this penalty may be reduced to either 12.5 or 5 percent under limited circumstances.
Participants must generally pay back taxes and interest for the past eight years, as well as accuracy-related and/or delinquency penalties of 20 percent of the taxes due. Participants must also file all original and amended tax returns, and pay all taxes, interest, and penalties. Taxpayers who made voluntary disclosures since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP.
It is widely believed that many U.S. taxpayers did not seek amnesty under the first and second programs and are still on the fence regarding whether to report their offshore assets. Individuals who continue to hide assets offshore and choose not to participate in the 2011 OVDI can face substantial civil penalties as well as the possibility of criminal prosecution. “As we’ve said all along, people need to come in and get right with us before we find you,” Commissioner Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”
To date, federal prosecutors have criminally charged more than thirty individuals with violating U.S. law by maintaining secret foreign bank accounts. A number of foreign bankers, attorneys, and advisors have also been criminally charged, and many foreign financial institutions, including banks in Switzerland, Israel, and India, are under investigation as the U.S. government continues its global crackdown on offshore tax evasion.
Individuals with questions about foreign bank accounts, or who are considering making a voluntary disclosure to the IRS regarding foreign bank accounts, should consult experienced tax counsel to understand the benefits and risks of the voluntary disclosure process.