The U.S. Internal Revenue Service has continued to offer to taxpayers targeted programs aimed at allowing certain persons to become compliant with their U.S. tax and informational reporting obligations. One example is the 2012 Offshore Voluntary Disclosure Program ("OVDP") currently in place and which was closely modeled after the 2011 Offshore Voluntary Disclosure Initiative. By participating in the OVDP, taxpayers can clear up past tax noncompliance, including the failure to annually report interests in foreign financial accounts on a Form TD F 90-22.1 (commonly referred to as the "FBAR") (as required by provisions of the Bank Secrecy Act and accompanying regulations), as well as any failure to report income with respect to such foreign accounts. Other informational reporting failures can also be cleared up, such as failure to file forms reporting interests in foreign entities.
OVDP provides two important incentives: the first is that by participating, the IRS may forgo recommending criminal prosecution for certain compliance failures; the second is the certainty provided as to the monetary penalties that may be imposed for failures to file certain informational returns. Penalties imposed under the OVDP for failure to file informational returns, such as Forms TD F 90-22.1, 5471, 926, etc., are limited to a maximum of 27.5% of the highest aggregate account and asset balance during the disclosure period, which covers eight years. For example, if a taxpayer makes a disclosure for the 2004 through 2011 taxable years, and during those years held an unreported foreign account that had a maximum balance of $100,000 during 2009, the penalty for not reporting the account for all years covered by the disclosure would be $27,500. Outside the OVDP, the penalties for not reporting the account could substantially surpass the 27.5% OVDP penalty. It is important to note that tax would also be owed on any underpayments for years covered by the OVDP. Penalties and interest on such underpayments would also be due.
In sharp contrast to the OVDP is a recently implemented procedure, announced on June 26, 2012, for non-resident U.S. taxpayers that have resided outside the U.S. since January 1, 2009 and who have not filed a U.S. tax return since that time, including dual citizens. This program is directed at taxpayers that the IRS considers as presenting a "low compliance risk." For example, taxpayers that would have filed relatively simple returns and whose tax liability for each year was less than $1,500, would be considered as presenting a low compliance risk. A number of other factors are also taken into account in determining whether a particular taxpayer should be subject to a more thorough review. For low compliance risk taxpayers, no penalties would be imposed for the filing failures, and the returns required to be filed would be processed on an expedited basis.
Because of the increasing scope of informational reporting obligations being imposed on U.S. taxpayers, persons with unresolved compliance issues should take into consideration the above programs. Many persons in South Florida, with strong ties to Latin America, may not be aware of all of the various reporting obligations to which they are subject, such as Form TD F 90-22.1 and the newly issued Form 8938 (Statement of Foreign Financial Assets). And to make things more complicated, the continuing implementation of the Foreign Account Tax Compliance Act of 2010 by the IRS will only work to provide the U.S. government with a wealth of information on U.S. taxpayers' foreign holdings.