2012 OVDP Updates and New Streamlined Procedure for Low-Risk U.S. Taxpayers Abroad
Various initiatives for voluntary taxpayer disclosure of offshore financial accounts and tax compliance have been made available since 2009 by the Internal Revenue Service (IRS) and recently several additions have been issued.
Observation: For prior information on the currently available 2012 Offshore Voluntary Disclosure Program (2012 OVDP) covering offshore accounts disclosure and tax compliance, please see our Alert dated March 15, 2012
Updates to the 2012 OVDP
The 2012 OVDP is substantially similar to the 2011 disclosure program, but with some important differences, for instance: there is no set deadline to apply, the maximum penalty is 27.5% and the terms of the program can change without advance notice.
The current program has been updated effective June 2012 to include new procedures to allow resolution of certain issues relating to foreign retirement plans, such as late elections permitted by treaty for the deferral of current income earned by a foreign retirement plan.
In addition, recent IRS guidance consisting of 55 Frequently Asked Questions (FAQs) and accompanying answers has been posted to the agency's website. These include matters such as:
- Penalties or limited eligibility under the 2012 OVDP for all or certain taxpayers or defined classes of taxpayers;
- The voluntary disclosure period covered: for calendar year taxpayers, the most recent eight tax years for which the filing due date has already passed, but not including current years for which non-compliance has not yet occurred;
- Which entities are eligible to participate in the 2012 OVDP;
- Confirmation that so-called “quiet” disclosure – by filing amended returns and paying any related tax and interest for previously unreported offshore income without otherwise notifying the IRS – still permits the taxpayer to enter the 2012 OVDP;
- No penalty imposition for failure to file delinquent Foreign Bank Account Forms (FBARs), Forms 5471 and Forms 3520 if these do not involve underreported tax liabilities and the taxpayer has not previously been contacted regarding an income tax examination or a request for delinquent returns;
- Exclusion from the 2012 OVDP of certain taxpayers with accounts at specified financial institutions, due to U.S. government actions already commenced with those financial institutions; and
- Closure of a so-called “offshore loophole” by excluding from 2012 OVDP eligibility taxpayers who failed to notify the U.S. Department of Justice of their appeal of a foreign government's disclosure of tax information.
Observation: The FAQs further clarify steps for application to enter the 2012 OVDP, including contact addresses, what forms are needed to be filed, how the anonymity process works, how to request an extension, and how to calculate the penalty.
New Streamlined Procedure for Low-Risk U.S. Taxpayers Residing Abroad
Starting September 1, 2012, so-called "low-risk" nonresident U.S. taxpayers can take advantage of streamlined filing procedures outside the 2012 OVDP, with their applications reviewed on an individual basis.
Observation: To be eligible for the streamlined process, a taxpayer must:
- Not have resided in the U.S. since January 1, 2009,
- Not have filed a U.S. tax return for 2009 or later, and
- Not owe more than $1,500 in U.S. tax on any of the specific returns being submitted to the program.
Taxpayers utilizing the streamlined procedure must file delinquent tax returns, with appropriate related information returns such as Form 3520 or Form 5471, for the past three years and delinquent FBARs for the past six years. Payment of taxes and interest, if applicable, must be remitted along with the delinquent returns.
Observation: Amended returns – as opposed to delinquent initial returns – submitted through the program are treated as high risk and subject to examination, except where relief is being sought solely to elect deferral of income from certain retirement accounts in a timely manner.
Taxpayers must also submit a signed Questionnaire consisting of 20 yes/no questions regarding eligibility, financial accounts, tax advisors, tax position and other matters.
- For a copy of the Questionnaire,please log on to www.irs.gov/pub/irs-utl/non-resident_questionnaire.pdf,
- Once a taxpayer has participated in the streamlined process, participating in the 2012 OVDP is not permitted.
- A taxpayer currently or formerly enrolled in the 2012 OVDP may discuss with the assigned agent the applicability of the streamlined filing procedure. If the situation seems better suited to streamlined filing, the IRS may either facilitate a transition out of the OVDP into streamlined filing or consider re-opening the case to review and adjust penalties previously assessed.
For more information or to discuss how these programs may apply to your situation, please contact your tax advisor.