In order to bring back into the system the non-compliant taxpayers with undisclosed foreign assets, the IRS created various offshore voluntary disclosure programs. The voluntary disclosure programs have been part of a wider effort to stop offshore tax evasion, which includes enhanced enforcement, criminal prosecutions and implementation of third-party reporting via the Foreign Account Tax Compliance Act (FATCA). Recently, the IRS shared the statistics regarding the success of its three latest and most voluntary disclosure programs: 2009 OVDP, 2011 OVDI and 2012 OVDP (recently updated to become the 2014 OVDP).
Results for All Three Programs
The outcome of the three voluntary disclosure programs is indeed impressive. Overall, the three voluntary programs have resulted in more than 45,000 voluntary disclosures from individuals who have paid about $6.5 billion in back taxes, interest and penalties.
Let’s take a closer look at each program.
This was the first of the “troika” of the latest voluntary disclosure programs. The IRS announced the 2009 Offshore Voluntary Disclosure Program (OVDP) in March 2009. It offered taxpayers an opportunity to avoid criminal prosecution and a settlement of a variety of civil and criminal penalties in the form of single miscellaneous offshore penalty. It was based on existing voluntary disclosure practices used by IRS Criminal Investigation.
Generally, the miscellaneous offshore penalty for the 2009 program was 20 percent of the highest aggregate value of the unreported offshore accounts from 2003 to 2008. Participants were also required to file amended or late returns and FBARs for those years.
In the 2009 OVDP the IRS received 15,000 disclosures prior to the October 15, 2009 closing date. It resulted in the collection of $3.4 billion in back taxes, interest and penalties. It also led to another 3,000 disclosures after the closing date.
No doubt that the success of the 2009 OVDP was made possible by the IRS victory in the UBS case in August of 2008 and the action it started to take to follow-up on this victory. The UBS case became the turning point in the offshore compliance for U.S. taxpayers because the victory was achieved over one of the largest banks in the world in the country which was considered to be the most formidable fortress of bank secrecy for centuries.
While the 2009 program was the first of the post-UBS voluntary disclosure programs, the 2011 Offshore Voluntary Disclosure Initiative (OVDI) was the program that established the offshore voluntary disclosure programs as one of the main pillars of U.S. voluntary tax compliance. The 2011 OVDI was announced in February of 2011 and lasted until September 9 of that year (originally, it was supposed to close on August 31, 2011, but the IRS extended the deadline to September 9).
Generally, participants of this program paid a 25% miscellaneous offshore penalty on the highest aggregate value of unreported offshore accounts from 2003 to 2010. In addition, some participants were eligible for special 5% or 12.5% penalties, but there were very strict requirements to qualify for this treatment.
The 2011 OVDI was extremely popular. It drew 15,000 disclosures and resulted in the collection of $1.6 billion in back taxes, interest and penalties for the 70 percent of cases that were closed that year.
After analyzing the results from the two prior voluntary disclosure programs and reflecting on the best way to induce tax compliance (while intensifying international tax enforcement and looking forward to the implementation of FATCA), the IRS created a new 2012 Offshore Voluntary Disclosure Program (2012 OVDP) in January of 2012 and 2014 OVDP now closed.
In constructing the 2012 OVDP rules, the IRS drew on its experience from the experience from the prior voluntary disclosure programs, revised the terms of the 2011 OVDI program and made the 2012 OVDP permanent until further notice. Under the 2012 OVDP, participants paid a penalty of 27.5 percent of the highest aggregate balance or value of offshore assets during the prior eight years. The 5% or 12.5% penalties remained in effect for certain taxpayers. This 2012 program has drawn 12,000 disclosures since its inception.
2012 Streamlined Option
In June of 2012, the IRS expanded its voluntary disclosure programs beyond 2012 OVDP and added an option to the existing disclosure program that enabled some U.S. citizens and others residing abroad to catch up on their filing requirements and avoid large penalties if they owed little or no back taxes. This option took effect in September of that year.
2014 Changes to Offshore Voluntary Disclosure Programs
In June of 2014, the IRS announced major changes in the 2012 offshore account compliance programs. As a result of these changes, the taxpayers now currently have to analyze up to five different voluntary disclosure paths. The more prominent changes to the voluntary disclosure programs include: new 2014 OVDP with the double-penalty structure of 27.5% and 50%, major enhancement of the Streamlined Foreign Offshore Procedures, introduction of the brand-new Streamlined Domestic Offshore Procedures with its new 5% penalty structure, slightly modified Delinquent FBAR Submission rules, and slightly modified Delinquent Information Return Submission rules (which partially incorporates now the statutory Reasonable Cause exception).
The changes are anticipated to provide thousands of people a new avenue to come back into compliance with their tax obligations.
Contact Sherayzen Law Office for Professional Advice Regarding Your Offshore Voluntary Disclosure Options
If you have undisclosed foreign accounts and other foreign assets, you are likely to face very steep penalties if the IRS discovers your non-compliance. This is why it is prudent to consider your voluntary disclosure options as soon as possible.
Sherayzen Law Office is a firm that specializes in international tax compliance and offshore voluntary disclosures. Our experienced international tax law firm can offer professional advice with respect to your voluntary disclosure options and conduct the entire offshore voluntary disclosure for you. Contact Us to Schedule Your Confidential Consultation Now!