On January 9, 2012, the IRS announced the reopening of its offshore voluntary disclosure program (now in its third iteration) to assist people who have been hiding offshore accounts in becoming compliant with their tax liabilities. The 2012 offshore voluntary disclosure initiative (OVDI) offers reduced penalties for a taxpayer who failed to report non-us financial accounts and assets on an FBAR (IRS form TD F 90-22.1, "Report of Foreign Bank and Financial Accounts") and who failed to report income from those accounts and assets on his or her us income tax returns, but who comes forward before the IRS identifies them. The IRS is expected to release further guidance about the 2012 OVIN on its website (www.irs.gov). The IRS will also update its FAQ guidance from 2011.

In 2009 and 2011, the IRS offered similar voluntary disclosure programs. The 2012 OVDI is a response to the success of the 2009 and 2011 programs and to the continued interest on the part of taxpayers and practitioners. Those who came forward after the 2011 OVDI, which ended on September 9, 2011, are eligible for the 2012 OVDI. Those who come forward under the 2012 OVDI can mitigate their risk of criminal prosecution. Unlike the 2009 and 2011 OVDI programs, the 2012 OVDI has no set deadline for an application. However, the IRS has indicated that the terms of the program could change at any time. Moreover, the IRS may decide to end the program at any time.

The civil penalty scheme under the 2012 OVDI is as follows: (1) a one-time 27.5 percent penalty on the highest aggregate annual balance in the unreported accounts during the lookback period (an increase from the 20 percent penalty under the 2009 program and the 25 percent penalty under the 2011 program); and (2) a 20 percent accuracy-related penalty or delinquency (late filing and late payment) penalties on the amount of us income tax that should have been paid during the lookback period on any unreported income. The lookback period for the 2012 OVDI is eight years.

A taxpayer with offshore accounts or assets that, in the aggregate, did not surpass $75,000 in any calendar year covered by the 2012 ovDi qualifies for the 12.5 percent rate on the highest aggregate annual balance in unreported accounts (the same rate offered under the previous programs). A 5 percent rate may also apply in limited circumstances, including for a long-term non-US resident who earned a de minimis amount of US-source income and who has been compliant with his or her tax obligations in his or her country of residence.

The potential penalties that the IRS could impose on a person who does not come forward under the 2012 OVDI include the civil fraud penalty (75 percent of unpaid tax); penalties for failure to file various information returns (such as form 5471); and penalties for willful failure to file the FBAR (the greater of $100,000 and 50 percent of the foreign account balance). All of these penalties apply annually.

A taxpayer who participates in the 2012 OVDI must submit all original and amended tax returns and information returns (including FBARS) for the last eight years and must pay taxes owing, interest, the applicable one-time penalty on the highest aggregate annual balance in the unreported accounts, and the 20 percent accuracy-related penalty or delinquency (late filing and late payment) penalties. As was the case under the 2009 and 2011 programs, a person who believes that the applicable penalty under the 2012 OVDI is disproportionate may opt out of the program and instead undergo an examination in order to persuade the IRS to impose a lesser penalty.

The IRS recently indicated that it is currently developing procedures by which dual citizens and others who are delinquent in filing but who owe no us tax can come into compliance with US tax laws. On December 7, 2011, the IRS released Fact Sheet FS-2011-13, which provides guidance to us citizens who reside outside the United States and who have failed to file US tax returns and information returns, including FBARs. The fact sheet recommends that those taxpayers file returns for the previous six years and indicates that the IRS may consider reasonable-cause arguments for the waiver of penalties for failure to file US tax returns and FBARs.

In announcing the 2012 ovm, Commissioner Douglas H. Shulman warned taxpayers that the IRS is "following more leads and the risk for people who do not come in continues to increase." However, there are still many unanswered questions about the 2012 OVDI, particularly with respect to dual citizens and other non-residents who were unaware of their us tax and information reporting obligations. US citizens living in Canada should carefully consider their options for coming forward, including whether to proceed with the filing of six years of returns (as suggested by the fact sheet) if they have a reasonable cause for not filing previously.