Offshore Voluntary Disclosure Program 2012: Impact of Form 8938

The announcement by the IRS of the opening of the new Offshore Voluntary Disclosure Program (OVDP) on January 9, 2012 (now closed) came as a surprise to most tax practitioners, especially since the 2011 OVDI just ended on September 9, 2011. Yet, if one analyzes the number of new developments in international tax compliance over the past several years, then the surprise of the announcement of a new offshore voluntary disclosure program is greatly reduced.

One of these latest developments is the new Form 8938, which was born out of the passage of FATCA (Foreign Account Tax Compliance Act). In this article, I will analyze some of the key aspects of the interaction between Form 8938 and OVDP 2012.

Link between OVDP 2012 and Form 8938

In an earlier article, I already described the main features of the OVDP 2012. In announcing the OVDP 2012, IRS cited several reasons for announcing the new voluntary disclosure program for U.S. taxpayers with offshore assets, particularly the success of the previous programs and the mountain of information gathered by the IRS which would allow it to investigate (and ultimately penalize and/or prosecute) additional non-compliant U.S. taxpayers as well as Swiss bankers. Some international tax attorneys elaborated on the IRS motivation as well as added some of their own reasoning.

Yet, among all of these reasons, most international tax attorneys completely omitted even mentioning the new Form 8938. Yet, in my opinion, Form 8938 is likely to play a very important role in driving additional U.S. taxpayers toward OVDP 2012.

Form 8938’s Impact on Foreign Asset Disclosure Structure

The main reason for Form 8938‘s potentially profound impact on OVDP 2012 participation lies in the nature of Form 8938.

As I explained in an earlier article, Form 8938 is a fundamental tool for the IRS to identify the scope of international tax non-compliance of a given U.S. taxpayer. It is very important to understand the reason why Form 8938 is so useful for the IRS. It is not only because Form 8938 now requires a taxpayer to disclose more information, but, rather, because Form 8938 connects various parts of a taxpayer’s international tax compliance including the information that escaped disclosure on other forms earlier. This summary, in turn, allows the IRS to identify the overall scope of a taxpayer’s noncompliance in an efficient manner. Moreover, compliance with Form 8938 may lay the foundation for an IRS investigation of whether the taxpayer has been in compliance previously.

Compliance With Form 8938 May Force Taxpayers to Enter a Voluntary Disclosure Program

This ability by the IRS to discern whether the areas of actual or potential non-compliance in current as well as prior years puts previously non-compliant taxpayers in a highly uncomfortable position.

For example, suppose that taxpayer T was previously non-compliant with respect to reporting his foreign bank accounts because he did not know anything about the FBAR. Since Form 8938 is filed together with the tax return, T will have to go through a voluntary disclosure of some type because failure to file Form 8938 at this point is likely to turn his previous non-willful non-compliance into a willful one.

Similarly, suppose T was did not report his ownership of a business entity because he classified the entity as a partnership (assuming at this point that it is not a “controlled partnership”) instead of as a corporation. Prior to Form 8938, it was unlikely that the IRS would challenge this classification because the partnership ownership was never disclosed. However, with Form 8938, T will have to disclose his partnership ownership drawing IRS attention to the classification issue. T will have to consult Sherayzen Law Office in order to figure out what is the best course of action to deal with this dilemma.

Thus, as the examples above demonstrate, Form 8938 is likely to have a profound impact on the number and depth of voluntary disclosures as taxpayers are forced to re-evaluate their tax compliance strategies.

It is important to emphasize that the impact of Form 8938 on your particular situation should be analyzed separately by an international tax attorney. This article can only provide a very general background, because the exact strategies, including the optional enrollment into OVDP 2012, will differ from situation to situation.

Contact Sherayzen Law Office for Legal Help With U.S. Tax Compliance Issues

If you have any questions with respect to Form 8938, OVDP 2012, and any other international tax compliance issues, contact Sherayzen Law Office. Our experienced international tax firm will guide you through the complex web of international tax requirements, identify potential problem areas, create a plan of action to deal with these problems, and implement a plan while providing zealous ethical IRS representation.