As 2012 OVDP (Offshore Voluntary Disclosure Program) enters its second tax season, it is important to review once again the reasons behind the existence of the program, what it offers to the IRS and how it may benefit currently non-compliant U.S. taxpayers.
Focus on International Tax Compliance
Since 2003, the IRS has conducted a number of voluntary disclosure programs for U.S. taxpayers with undisclosed foreign accounts or entities and undisclosed income. It is important to emphasize that these programs were not part of the traditional IRS voluntary disclosure program with respect to domestic income. The focus of each offshore voluntary disclosure program is on international tax compliance, particularly Report on Foreign Bank and Financial Accounts (the “FBAR”) and other informational returns such as Forms 5471, 8865, 8868 and so on.
It is important to note that with each new program the rules are becoming more and more stringent as well as complex. The idea behind the tougher terms of each succeeding program is to reward early disclosure and induce taxpayers to enter a voluntary disclosure program as soon as possible.
The 2012 OVDP came into existence less than half a year after the tremendous success of the 2011 OVDI (which also came two years after a very profitable 2009 OVDP). It is obvious that the IRS considered the existence of such voluntary disclosure programs a vital part of its international tax compliance efforts.
As expected, 2012 OVDP came in with tougher terms (for example, the highest penalty category is 27.5% instead of 25% as it was under 2011 OVDI rules), closed some 2011 OVDI loopholes and created a more complex and detailed set of rules. However, 2012 OVDP also has some unique features.
The most prominent of these features is that there is no official end to the program – this is the very first time in the history of the voluntary disclosure programs. At the time, the IRS warned that it can end the program at any time, creating a great sense of uncertainty and urgency for the taxpayers who wish to enter the program.
Why the IRS Created the 2012 OVDP
The most obvious reason (and the most repeated one in various articles by commentators) for why the IRS wants a voluntary disclosure program like 2012 OVDP in place is money – these programs brought in billions of dollars to the U.S. treasury. While this is an important reason, I believe that the reasoning behind the 2012 OVDP is much more complex.
In addition to bringing more money to the cash-starved U.S. government and allowing people to become tax-compliant with the understanding that their penalties will be definite and limited, there are two other primary reasons behind the 2012 OVDP and all other similar voluntary disclosure programs. First, the voluntary disclosure programs have a tremendous collateral impact on the overall international tax compliance. The collateral effect is reflected not only in assuring that the persons who go through the voluntary disclosure are likely to continue to comply with U.S .tax laws in the future, but also in the tremendous publicity of the program and the U.S. tax laws.
However, the most curious collateral product of the 2012 OVDP is the fear that induces wider tax compliance and more entrees into the voluntary disclosure program. It seems paradoxical that a voluntary disclosure would create this apprehensive feeling, but it is very logical once you understand that this is not a fear of the 2012 OVDP itself, but the terror of seeing widespread compliance which singles out the non-compliant taxpayers more and more with each new OVDP participant.
The second reason behind the voluntary disclosure programs is information gathering. Each 2012 OVDP participant brings a treasure trove of information about where they keep their money, the level of complicity by foreign banks, the particular foreign and domestic advisors involved in promoting international tax non-compliance, and other valuable information. This information allows the IRS to establish the overall patterns of non-compliance (both geographic and with respect to particular individuals and organizations), identify the next investigation targets and amass evidence for future prosecutions.
IRS is currently sitting on a mountain of data and it is inevitable that this information will be used in the future against non-compliant U.S. taxpayers and their foreign advisors. Already in 2012, we observed aggressive IRS moves in Liechtenstein and Israel as well as engagement of over 50 jurisdictions around the world regarding FATCA compliance. My prediction is that this trend of expanded enforcement into other countries will continue in 2013 and will result in larger number of prosecutions.
What is the Benefit of 2012 OVDP for U.S. Taxpayers
The 2012 OVDP does not only benefit the IRS, but also certain U.S. taxpayers. The benefit is at least three-fold. First, for certain U.S. taxpayers 2012 OVDP is the only way to avoid tremendous penalties and criminal prosecution by the IRS. Equally important is the fact that a taxpayer enters the OVDP program with an ability to calculate(with reasonable degree of certainty) the total cost of resolving all offshore tax issues. However, the decision to enter the OVDP must be made after all of the facts are analyzed and the taxpayer is aware of the consequences of entering the 2012 OVDP.
Second, while generally very rigid, the 2012 OVDP program has a certain degree of flexibility built into its penalty structure. The number of penalty categories and the various rules of the program allow international tax attorneys to determine the best mode of the voluntary disclosure and develop the strategies to implement this particular voluntary disclosure scenario.
Finally, 2012 OVDP allows international tax attorneys to determine the alternative voluntary disclosure ways. For example, Q&A #17 officially supports the long-standing unofficial policy of the IRS that no FBAR penalties are likely if there is additional U.S. tax liability as a result of voluntary disclosure. Moreover, the very fact that 2012 OVDP delineates certain analytical categories places additional tools for strategy development in the hands of the attorneys who seek alternative ways of bringing U.S. taxpayers into full compliance with U.S. tax laws under the existing legal structure outside of the 2012 OVDP.
Contact Sherayzen Law Office for Help with Voluntary Disclosure
If you have undisclosed foreign account or foreign entities, contact Sherayzen Law Office for help with your voluntary disclosure. Our experienced international tax firm will thoroughly analyze your case, assess your FBAR liability as well as other applicable penalties, identify the options available in your case, and work with you every step of the way until your voluntary disclosure is finished. We have helped taxpayers around the world to do various types of voluntary disclosures, including the official Offshore Voluntary Disclosure Programs and Initiatives.