New Offshore Voluntary Disclosure Program for 2012

Yesterday, the IRS started the Offshore Voluntary Disclosure Program (2012 OVDP), which is a modified continuation of the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI).  The IRS will also release a new FAQ and provide additional details of 2012 OVDP on its website in the coming months.

2012 OVDP comes on the heels of last month’s IRS announcement that it was close to settling tax evasion charges against eleven Swiss banks.  These settlement agreements are reported to require institutions to disclose the names of account holders and possibly even prior correspondence between the account holder and the institution.   It seems that the IRS is hoping that the publicity of possible settlements with Swiss banks will encourage more taxpayers to come clean about their foreign accounts.

2012 OVDP is substantially similar to 2011 OVDI.  For a review of 2011 OVDI, please see our prior posts.  The primary differences are highlighted below.

First, 2012 OVDP employs the same penalty structure as 2011 OVDI except for taxpayers in the highest penalty category. 2011 OVDI provided taxpayers with a safe harbor from criminal prosecution and streamlined civil penalties provided that taxpayers fully disclose offshore assets and income.  Participants were required to pay back taxes and penalties on the unreported amounts of income and sometimes the assets generating that income.  Lastly, participants will avoid criminal penalties.  Under 2012 OVDP, participating taxpayers will incur a 27.5% penalty, which is 2.5% higher than the standard 25% penalty.  The reduced penalties for 12.5% and 5% remain unchanged.

Second, 2012 OVDP has no end date, but the real deadline is a  taxpayer’s foreclosure from participating in the program once a taxpayer becomes subject to an IRS examination or criminal investigation.  However, the IRS cautions that the terms of the 2012 OVDP could change at anytime.

Third, 2012 OVDP allows taxpayers who “came clean” after 2011 OVDI closed to participate in 2012 OVDP.  The benefits are streamlined penalties and an assurance that criminal charges will not be pursued for eligible participants.